50 Predictions: Directors’ & Officers’ and Financial Institutions
Published 1 September 2016
Directors face increasing exposure to innovative shareholder actions
While historically shareholder actions against directors in the UK have been limited, as directors owe their duties to the company and not to the individual shareholders, the legal landscape is changing and the potential for directors’ exposure is expanding. What would have appeared an impossibility in the UK a few years ago, may seem a little less far-fetched today. Recent times have seen several high profile financial scandals including RBS and Tesco, which have involved serious allegations being made by shareholders against both companies and their directors.
The shareholders in both RBS and Tesco are represented by specialist claimant law firms and backed by litigation funding. The shareholders are respectively pursuing (different, but similar) novel claims against the directors for alleged breaches of the Financial Services and Markets Act. The increased presence of litigation funders, working with specialist claimant law firms, prepared to explore innovative claims against directors, has resulted in a growth in shareholder claims in other jurisdictions. If the claimants are successful in the RBS and Tesco cases, we are likely to see greater numbers of such actions in the UK as well.
Bribery and anti-corruption measures are a minefield for directors and officers
Over the last few years, many countries have increased efforts to reduce the economic impact of bribery and corruption, with new anti-bribery laws and mechanisms for reporting concerns to law enforcement agencies. Domestically, these efforts are now bearing fruit and have had time to bed in, but the government may broaden its powers further still by introducing new ‘failure to prevent’ criminal offences to tackle economic crime.
Attention is now turning to international convergence and an increased co-operation between relevant agencies. For directors of international businesses the exposure to potential investigations or proceedings will inevitably increase. For any enterprise that has not already reviewed its anti-corruption compliance framework, its directors should be aware that they are operating in a minefield. Insurers should become increasingly attentive when providing cover to directors of global businesses, working with clients to understand the extent of their exposures.
The obligation to appoint whistleblowing champions puts the issue firmly on board agendas
New rules introduced in 2016 for many financial institutions oblige them to appoint a ‘whistleblowing champion’. The new whistleblowing rules require firms to establish, implement and maintain appropriate arrangements for disclosure by whistleblowers. The whistleblowing champion must be a senior manager or director and will be responsible for the effective introduction of systems by September 2016. It is likely that, where a system fails, regulators will focus on the role played by the whistleblowing champion, resulting in individual responsibility for regulatory breaches. Guidance from the Chartered Insurance Institute recommends reviewing appropriate ethics codes, or putting them in place if they do not yet exist. As well as placing new demands on insurers as regulated entities, this may also potentially lead to an increase in claims against directors, and insurers will expect to see strong, positively enforced codes of ethics in place.
Deferred prosecution agreements will see an increase in prosecution of senior managers and directors
Deferred prosecution agreements (DPAs), first introduced in February 2014, have got off to a slow start, with the first reported DPA (Serious Fraud Office v Standard Bank Plc) receiving court approval in November 2015. However, the second DPA was reported in July 2016 and reports suggest that there is a queue of companies interested in negotiating terms with the Serious Fraud Office. No individual prosecutions followed in the UK as a result of the Standard Bank DPA, although the Statement of Facts filed with the DPA identified potentially corrupt behaviour of individuals based in Tanzania, where investigations have commenced. The process of negotiating and gaining court approval of a DPA encourages firms to highlight the roles played by individuals, who then are at obvious risk of personal prosecution. As more DPAs are likely, so therefore are increased numbers of resulting prosecutions of senior managers and directors.
Directors will be held to account for cyber attacks
Despite an already alarming frequency of serious cyber attacks on businesses, claims against directors and officers have to date remained low. It is likely, however, that with increased severity and business interruption losses in the wake of an attack rising, attention will begin to turn towards the culpability of directors with responsibility for IT security. We have historically seen retrospective interest from regulators in the actions of financial institutions following breaches with the potential to severely impact the financial markets. As a result, many firms will now have a dedicated board member with responsibility in this area, who will be in the firing line should an attack occur.
Key developments in 2015/16