A theme to which I often return is the extent to which there is scope for divergence of interest between individuals and their employers, especially in the context of regulatory investigations. For more, see my blog, Supreme Court victory for U.K. Financial Conduct Authority spells trouble for senior managers.
The reason I continue to highlight this risk is because it is often insufficiently understood by senior managers until too late and can give rise to significant damage to personal reputation. The consequences can be particularly unfortunate for the individual if their interests are sacrificed as the price for reaching a settlement with the regulators. As Lord Neuberger, former President of the Supreme Court put it in the Macris case:
“, …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.”
This risk of damage to reputation is intimately connected to the degree to which an individual, faced with criticism in a public report, is given an opportunity to respond to such criticism prior to publication of the report. That process has become known as “Maxwellisation.” (Robert Maxwell first went to court to establish the right in the 1970s in connection with a report into problems at Pergamon Press, one of his companies).
The principle which underlies this practice is one of fairness, but its observance had led to long delays in the publication of regulatory reports. This includes the Financial Conduct Authority’s (FCA’s) report into management failings at HBOS, which took 38 months to produce, of which 14 were taken up with seeking responses from those who were the subject of criticism! The Treasury Select Committee found this delay unacceptable and commissioned its report, A review of Maxwellisation.
One of the key findings of the report is that if, during the evidence gathering stage of an inquiry, someone has already been given the opportunity to respond to the substance of a criticism that may be made against them, there is no need to give them a further opportunity to respond pre-publication.
But what about the rights of the individual in this process? What if the criticized organization is given the relevant opportunity, but not all the individuals caught up in the backwash of the investigation are afforded the same right? Much depends on the statutory framework against which the report is produced.
In Macris, for example, section 393 of the Financial Services and Markets Act 2000 existed expressly to allow these rights to be exercised for warning and decision notices issued by FCA, although that turned out to be of little comfort to Mr. Macris in the end. For more on that, see my blog, Seeking cover in the new senior managers’ regime.
Individual redress for damage to reputation
What happens where, for example, the FCA issues a supervisory notice or some other type of communication to which section 393 rights do not attach? An example of this is a case that went before the Upper Tribunal called UK Innovative TI Ltd. (UKITI) versus FCA.
It seems the FCA mistakenly issued a supervisory notice against a regulated entity, Stargate Capital Management, in which reference was also made to an unregulated company and its director. Since the company in question only had one director, there could be no doubt as to his identity.
The inference in the notice was that UKITI and its director were carrying out unregulated investment activity in the U.K., which would be a criminal offense. The notice was picked up by Citywire before the FCA amended it to refer instead to “Firm Y.” UKITI and the director referred the case to the Upper Tribunal on the basis that they had both been prejudiced.
The Tribunal decided it had no choice but to strike out the case on the basis that neither of the claimants had any statutory right to pursue a remedy against FCA because such rights did not attach to supervisory notices. In a sense that was the end of the case but the Judge did go on to say this:
“As far as any common law right that Mr. Stamp and UKITI might have which arises out of the (Maxwellisation) principle established in the Pergamon Press case referred to above is concerned, again since this Tribunal only has jurisdiction over such matters as are given to it by statute, and as it has been given no jurisdiction in this regard, any remedy in relation to any alleged breach of those rights must be pursued through the courts and not this Tribunal.”
So the director in question was in effect being told by the Tribunal that there was nothing it could do other than seek legal advice as to the prospect of successfully holding FCA to account for damages suffered as a result of any alleged breaches of the fairness principle.
Law, regulation and practice in the area of individual rights and public authorities is a minefield for which there are no clear maps and to which new mines can be added without warning. Consequently, there is no way in which directors can predict with any certainty which regulatory regimes are scrutinizing them and under what circumstances. Nor can they know (without access to expert legal advice) what tools are at their disposal to defend their reputations and to enforce their rights and remedies if necessary.
With that in mind I propose the following three-pronged TIP:
1. Take responsibility
Don’t assume that the company/your employer will always and in all cases be there and willing to stand foursquare behind you provided you have not done anything “seriously wrong.” Many regulatory investigations take place years after the events which gave rise to them often at a time when you are no longer in post. Your interests and those of your employer may not always coincide.
2. Inform yourself
When it comes to liability protections in the form of insurance and indemnification take the opportunity to form a view as to what “good” looks like long before there is any hint of trouble. For example, do you have the ability to take advice and/or bring proceedings to protect your reputation as well as defend claims either at your employer’s expense or that of your directors and officers (D&O) insurers? Often it is only claims against you and investigations in which you are a target that are covered. (As a start, perhaps seek answers to the 10 questions listed in our Regulatory Liability Protection checklist).
3. Prepare to negotiate
This applies to some extent to your directors and officers liability insurance protection, although this is usually purchased on your behalf by your employer. Perhaps it applies more to your entitlement to indemnification from your employer. A good starting point here is to understand that, contrary to the assumption often made, directors have no statutory entitlement to any form of indemnification from their companies.
Companies “may” indemnify their directors for a lot of things but are not obliged to do so. The issue is determined by negotiation and usually incorporated in the contract of employment (or terms of engagement for non-executive directors). The breadth, duration and generosity of these indemnification agreements vary widely. In what circumstances do you have the right to seek independent legal advice as to your own personal position?