A new regulatory threat for directors of U.K.-listed companies

You are a director of a U.K.-listed company but not its Chief Financial Officer. A significant error is discovered in the financial statements going back several years, as a result of which the accounts have had to be restated.

If this had happened in the U.S., your main fear would be the virtual inevitability of a securities claim to say nothing of the possibility of an SEC investigation. In Australia, you might worry about an investigation by the Australian Securities and Investments Commission. (For a salutary tale as to what this might mean for you have another look at my earlier blog on the Centro case.) Here in the U.K., as things stand, you may have a number of less acute or immediate concerns about the prospects of proceedings or investigations.

Enter, the FRC

If, however, the U.K.’s Financial Reporting Council (FRC) gets its way, that may be set to change. In its recent submission to the U.K. government’s green paper on corporate governance reform, the FRC has asked for additional powers to sanction all listed company directors who preside over serious financial reporting irregularities.

As things stand, the FRC has two quite separate functions:

  • It is there to promote good corporate governance and to set standards for corporate reporting.
  • But it is also the enforcement authority for the accountancy and actuarial professions.

It has no enforcement jurisdiction over directors who are not members of those professions. This is the gap it is seeking to plug.

Interviewed recently by Radio 4’s Today Programme, Stephen Haddrill, the FRC’s Chief Executive said:

We think it fundamentally unfair and not in the public interest that we can pursue often quite high profile cases where we have brought prosecutions successfully… against accountants but directors… generally if they are involved in the same sort of wrongdoing, we can’t proceed against at all.

Involvement in regulatory investigations is already the number one concern for U.K.-based directors

It is not clear what sort of sanctions regime would exist, but it is likely to involve the imposition of fines.

Clues as to the aims of any such new regulatory regime can be gleaned from the FRC’s current mission statement in relation to its disciplinary powers for accountants and auditors. It describes its mission, among other things, as:

  • Providing a demonstrably fair and independent system for investigating and, where appropriate, taking disciplinary action in significant public interest cases of potential misconduct
  • Imposing appropriate sanctions where misconduct has been proved, and
  • Seeking to deter future misconduct.

The FRC has the power to decide of its own accord to investigate matters and, as is apparent from a brief perusal of its current and former enforcement cases, it is not slow to do so in high-profile cases. Given that involvement in regulatory investigations is already the number one concern for U.K.-based directors (see our survey of D&O liability and coverage issues) the extension of these FRC powers to all directors would be significant.

Upshot

That leaves the question: how likely is it? Whilst it remains to be seen how much traction the FRC’s proposal will gain, given the relentless focus on personal accountability in the boardroom, it would be rash to dismiss the FRC’s ambitions in this area.

Indeed, it may not be overstating things to suggest that although it is the Financial Conduct Authority (the FCA) with the recent imposition of the Senior Managers Regime in the regulated sector which has been grabbing many of the headlines, the extension of the FRC’s remit to enforcement in respect of directors of all listed companies regardless of industry sector may, in the long run, turn out to be even more significant.

About Francis Kean

Francis is an Executive Director in Willis Towers Watson's FINEX Global, where he specializes in insurance for Dir…
Categories: Directors & Officers, Executive Risk, Financial Services | Tags: , , , ,

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