UK: Enquiries, Investigations and Examinations

Last Updated: 11 August 2004
Article by Francis Kean

In particular, to what extent can you as a director call upon it as a resource to fund the legal costs associated with your personal representation in circumstances where your position and that of the company on whose board you serve may be in conflict? Bear in mind that you may need specialist advice in responding to the investigation, which may (and hopefully will) never lead to an actual proceeding. So if some form of proceedings is the event which triggers cover that may not assist. As UK D&O claims become more the rule than the exception, these questions are (or ought to be) asked more and more frequently.

Whether you are a purchaser or a provider of D&O insurance, the two basic ingredient needed to answer these questions are the same.

  1. a basic understanding of the procedures and processes most typically associated with official examinations, enquiries and investigations in the UK; and
  2. an appreciation of the way in which the particular D&O policy in question will respond.

With respect to the second of these questions. It is beyond the scope of this article to address specific questions of coverage. What we can say based on experience is that the extent of cover varies considerably from policy to policy and that in some cases there may be a difference between the extent of cover which D&O carriers intend to provide and that which is in fact provided.

In this article (and in part two which follows in the next edition), we instead attempt to answer the first of the two questions by summarising the powers of the following five key UK regulatory and statutory bodies to commence investigations or the like into the activities of specified individuals who may be directors or officers of companies.

  • The Financial Services Authority
  • The Office of Fair Trading
  • The Environment Agency
  • The Department of Trade & Industry
  • The Health & Safety Executive

FINANCIAL SERVICES AUTHORITY

The Financial Services and Markets Act 2000 ("FSMA") has created and vested regulatory authority in the Financial Services Authority ("FSA"). The FSA is the single statutory regulator across the banking, financial services and insurance industries. As such, it administers a regime of enormous size and complexity. It has a budget of approximately £200 million. In this article it is only possible to provide a very broad indication of the range of FSA powers which can affect either a company, a director or an executive.

The FSA’s range of possible enforcement processes include (among many others) prosecuting FSMA criminal provisions, enforcing regulatory rules and standards, enforcing the new FSMA ‘market abuse’ regime and the Money Laundering Regulations, and the prohibition of unauthorised investment business.

FSA’s powers are frequently employed against individuals as well as to companies. For example, the FSA may take enforcement action against a wide range of ‘authorised persons’ (persons that it requires must be authorised with FSA by virtue of the work they carry out, including directors) in respect of regulatory breaches, and specifically against company directors in respect of breaches of the stock exchange listing requirements. Indeed, the FSA has recently said that it intends to concentrate more on enforcement against individuals. The FSA expects those in authority such as board directors to take personal responsibility if systemic failings in company systems are uncovered. It believes that direct action against those responsible for the breach is more likely to act as an effective deterrent. BLG has just finished advising on the first case of a director being tried for being knowingly concerned in the company’s breach of the Listing Rules. A few years ago the FSA might have been content to rest at taking action against the company alone. At the same time the regulatory demands on companies and so those within the company responsible for compliance increase. A good example of this is the recent emphasis on money laundering and the substantial fines meted out for breach1.

Types of FSA Investigation

The subject matter and types of investigation that the FSA can carry out under FSMA are as wide-ranging as the range of business and rules it polices. FSA’s powers to gather information can, however, be categorised broadly into the following four types:

  • Information gathering
  • Skilled persons report
  • General investigations
  • Specific investigations

Information Gathering:2

- FSA may require an ‘authorised person’ or ‘connected person’ to - provide specified information – although no-one else may be the subject of this power

- The FSA must first issue a written notice and (usually) give a ‘reasonable period’ for compliance.

- The information sought must be reasonably required in connection with FSA functions under FSMA.

‘Skilled Person’s Report into an Issue Reasonably Relevant to FSA’s Functions’:3

- This may be used by the FSA in a broad range of circumstances – it will often be used in support of the FSA supervisory function as well as its enforcement function.

- Importantly, professionals, such as accountants who have provided an authorised firm with services relevant to the request are under a statutory duty to assist with preparation of such a report.

‘General Investigations’:4

- The FSA may investigate the ownership or control, or the nature or conduct or state of the business (including any unregulated business), of an authorised firm (and if necessary the ‘business members’ of the same group).

- Although the nature and extent of the FSA powers depends on the particular provision of FSMA under which the investigation is instigated, the FSA will have powers to require the person who is the subject of the investigation to attend for questioning, and to provide any information required.5

- Against a person who is not the subject of the investigation, the FSA also has the power to require the production of documents.

‘Investigations in Serious Cases’:6

- FSA has wider powers in particularly serious cases – which include, for example, investigations into market misconduct, allegations of unauthorised business, and money laundering.

- In addition to the above powers, the FSA also has the power to require individuals who are not the subject of the investigation, nor authorised or connected persons, to appear, answer questions, produce documents, and cooperate generally if thought by the FSA to be "expedient" for the investigation.

- For insider dealing or market abuse investigations, the FSA has an even broader power to require any person to provide all assistance he is reasonably able to give.

OFFICE OF FAIR TRADING

The Office of Fair Trading (‘OFT’) is central to UK competition law enforcement:

  1. Action taken by the OFT is the primary means by which the civil prohibitions of the Competition Act 1998 ("the Competition Act") are enforced.7
  2. Since June 2003, the OFT has also been responsible for enforcement of Part 6 of the Enterprise Act 2002 (‘the Enterprise Act’). This creates a criminal offence by individuals, punishable by up to 5 years imprisonment, in cases of horizontal price- fixing or market-sharing arrangements between companies ("the cartel offence").8

Infringements of the Competition Act (which are not criminal) are therefore committed by companies, whereas criminal offences under the Enterprise Act are committed by individuals.

OFT investigations of these kinds are capable of affecting company directors or officers in the following ways (amongst others):

COMPETITION ACT INVESTIGATIONS

Grounds:

- The OFT requires ‘reasonable grounds for suspecting’ that a prohibition has been breached in order to conduct an investigation, and therefore before any powers may be exercised (albeit this is a fairly low threshold).9

‘Requests for Information’:

- The OFT may require any person (not just a person suspected of a breach of a prohibition) to produce any document or information it considers ‘relates to any matter relevant to the investigation’.10

- This power must be exercised by notice in writing, which must include various prescribed information, including details of the subject-matter and purpose of the investigation.

Dawn Raids’:11

- The OFT has the right to enter ‘any premises’ in connection with an investigation (although this will normally exclude domestic premises), and in certain circumstances may do so even without prior notice (although certain prescribed information must always be given to the occupier at the time of entry).

- Any person present on the premises may then be required to produce any document considered relevant to the investigation and to provide an explanation of it.

- Individuals may not, however, be required to answer questions going beyond this. If, for example, individuals are suspected of having committed a criminal offence, questioning should be under caution, following an opportunity to obtain legal advice.

Sanctions:

- A person may commit a criminal offence by refusing to comply or co-operate with the OFT’s exercise of these powers, for example by:

  • not responding to a request for information;
  • knowingly or recklessly supplying false information;
  • destroying or concealing documents;
  • refusing entry to premises; or
  • obstructing any requirement imposed upon any person present at the premises.

Directorship Disqualification:

- Although Competition Act infringements are not punishable against individuals, the OFT is also responsible for disqualification proceedings against directors, which they may invoke where appropriate in connection with such infringements.12

ENTERPRISE ACT INVESTIGATIONS

Grounds:

There must again be ‘reasonable grounds for suspicion’ that a cartel offence has been committed before any powers become exercisable.13

Powers:

- The OFT may by notice require the person under investigation to answer questions on any matter,14 or to produce documents that appear relevant to the criminal investigation.15

- This power may also be exercised against any other person whom the OFT has reason to believe has relevant information or documents.16

- There is no equivalent ‘dawn raid’ provision, but the Court may grant a warrant under certain circumstances to permit the OFT to enter premises where ‘there are reasonable grounds for believing’ there are documents present on the premises that the OFT otherwise has the above power to require to be produced.17

Sanctions:

- In addition to the basic cartel offence itself, there are additional criminal offences that may be committed by way of sanction against an individual for failing, without reasonable excuse, to comply with any requirement of the OFT imposed pursuant to exercise of the above powers, for example:18

  • to make a false statement;
  • to conceal or destroy relevant documents; or
  • to refuse to permit entry under warrant.

CONCLUSION

In part 2 we look at the powers of the Health & Safety Executive, the Environment Agency and the Department of Trade & Industry, further bodies with power to call for examinations and enquiries which involve individuals, and try to draw together the threads common to these types of investigation. In the meantime, and at the risk of stating the obvious, it is worth pointing out that (although they may vary enormously in size, content and subject matter) investigations tend to be commissioned in order to establish what has occurred. In other words, they are quite distinct from prosecutions, claims and proceedings (which are typically the next phase in the process) when specific allegations against individuals are put and tested. It follows that at the outset no specific ‘wrongful acts’ are necessarily identified, and the attendant coverage implications are often overlooked.

Footnotes:

1 See D&O Liability Review, Issue 33, Autumn 2003 re: FSA’s prohibition on insurance in respect of fines and penalties.

2 Section 165, FSMA.

3 Section 166, FSMA.

4 Section 167, FSMA.

5 Sections 170-176, FSMA.

6 Section 168, FSMA.

7 The various industry-specific regulatory authorities also enjoy the same Competition Act enforcement powers as the OFT within their respective areas of responsibility: e.g. OFTEL (telecommunications); OFGEM (gas and electricity); OFWAT (water); and ORR (railways).

8 Section 188, Enterprise Act. (Given their nature, investigations into cartel offences may also be carried out jointly with the Serious Fraud Office.)

9 Section 25, Competition Act.

10 Section 26, Competition Act.

11 Section 27(1), Competition Act (‘investigation without a warrant’).

12 Sections 9A – 9E, Company Directors Disqualification Act ("CDDA") 1986 (creating a new ‘competition disqualification order’ that may be imposed by the Court on a director).

13 Section 192(1), Enterprise Act.

14 Section 193(1), Enterprise Act.

15 Section 193(2), Enterprise Act.

16 Ibid.

17 Section 194, Enterprise Act.

18 Section 201, Enterprise Act. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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