Despite all the talk about personal accountability at board-level by politicians and regulators, there have been very few instances of prosecutions or enforcement against the senior managers of banks and other financial institutions. So, is there really any reason for concern?
One clear illustration of the Financial Conduct Authority’s (FCA’s) intent in this area is the latest set of figures showing the number of investigations opened against individuals — which nearly trebled from 62 in 2015 to 152 in 2016. This suggests that the recent statement by Mark Steward, Director of Enforcement and Market Oversight at the FCA, that: “For swift justice, based on early detention, the regulator must be involved at an earlier stage in the process than firms might wish…” was not an idle threat.
It should be noted that the spike investigations is not directly related to the implementation of the senior managers regime, but has more to do with what Jonathan Davidson, the FCA’s Director of Supervision, termed in a recent speech, “The Accountability Regime.”
What protections are available?
It might be thought that well-advised senior managers who are either currently in post, or are contemplating assuming a new role, would inevitably want to consider the suite of protections available in the event their conduct is called into question. Perhaps “suite” is too grand a word in this context. The only two protections traditionally available to directors are directors’ and officers’ (D&O) liability insurance and company indemnification (although new insurance products are entering the market tailored to the need among senior managers from time-to-time to take early and independent legal advice).
It’s certainly true there’s an uptick in interest among senior individuals as to which personal liability protections are open to them. At the same time (and with a few notable exceptions), there’s some reluctance to really get to grips with the ins and outs of this topic. Part of the explanation for this may be that the threat level is still not seen as sufficiently high by individual senior managers. After all, there have been very few cases of individuals being led off in handcuffs.
Another explanation for this lack of interest is perhaps the surprisingly common, but sometimes flawed assumption among senior managers that, provided they haven’t been dishonest, they can expect their employers to look after them and undertake the necessary due diligence on their behalf to ensure that the liability protections which they enjoy are indeed up to the job.
The problem with this assumption comes when the interest of the individual and the employer begin to diverge. Often this tension, or divergence of interest, is only discernible after a serious regulatory and/or liability issue has arisen. Typically what happens in such a situation is the employer will wish to navigate a course through dangerous waters as quickly and safely as possible, with minimum damage to its reputation. The individual, on the other hand, will naturally be more concerned to protect his or her personal liability exposure and reputation. The problem becomes particularly acute when the conduct of the individual is subject to scrutiny long after he or she has left the firm, as is often the case.
In the now famous so-called London Whale case, an international investment bank was fined £137m in relation to rogue trader losses occurring in 2012 and in its final notice, the FCA made reference to the bank’s “CIO London Management.” Achilles Macris, who was at that time, the International Chief Investment Officer, complained that although the notice didn’t name him, when looked at in its proper context, he was “identified” and should therefore have been given an opportunity to make representations to the FCA as to his innocence. The case proceeded all the way up to the Supreme Court but Macris lost. As the president of the Supreme Court put it in his judgment:
The interests of the addressee of a notice who is accused of failings, and those of a third party such as an employee of the addressee, who may be identifiable as responsible for, or implicated in, the alleged failings, are by no means necessarily aligned. Thus, it may well be that an employer would want to try and curtail any publicity about the alleged failings by quickly negotiating and paying a penalty, even if there may be grounds for challenging the allegation in whole or in part. But this may often not suit the employee, who might well feel that, in the absence of the Tribunal exonerating him, his reputation, and therefore his future employment prospects, could be severely harmed or even ruined.
Most senior managers will lead productive, well-remunerated professional lives and will never be unfortunate enough to find themselves caught up in a major regulatory investigation. That said, the passage quoted above still ought to give this majority pause for thought. The reality is that neither D&O liability insurance nor indemnification provide senior managers with complete blanket protections.
In the case of D&O insurance it is, a) not usually a resource dedicated to board members and b) is not available in circumstances where directors may feel they have the need for independent legal advice in the absence of a claim or enforcement activity by regulators. In the case of indemnification (particularly in circumstances where the individuals have left the company) they cannot be sure (no matter how comprehensive their indemnity is) that it will always and in all circumstances be honored by the firm. As the Chinese proverb has it: “When the boat is in the middle of the river, it’s too late to patch the leaks.”