Worldwide: FI And D&O International Review - April 2015

Last Updated: 24 April 2015
Article by Clyde & Co LLP

It is often said that where the US goes, others are likely to follow ...

Our article on trends and developments in the US will therefore be of interest to all FI and D&O specialists regardless of connection to US exposures. Certainly two of the themes highlighted, the data breach environment and regulatory aggression, are key issues in the UK and elsewhere. Within the UK, a core plank of the approach to the regulation of financial institutions has been a focus on individual responsibility, and we pick this up in two of our UK articles.

It can also prove instructive to look at how the US has grappled with certain policy issues (subject to the necessary caveats) where a paucity of case law exists in the UK and elsewhere, and with this in mind we will continue to watch how the issue of cover for disgorgement and restitutionary payments develops.

As we have developed our global FI and D&O practice, we have increasingly advised insurers on key liability and coverage issues from a multi-jurisdictional standpoint, taking into account legal, regulatory, policy and cultural distinctions that exist, and we continue to believe that both we, the market and legislators and regulators can learn much from the experiences and approach in other jurisdictions. Certainly, legislators looking at the reforms to corporate governance required in Singapore appear to have been much influenced by the UK approach when looking at codifying directors duties as we examine on page 13. Likewise, we comment on how the regulators in the Middle East may apply the concept of "credible deterrence".

As highlighted on page 15, the Insurance Act 2015 is finally with us. However, the UK is not alone in overhauling the insurance laws in England and Scotland. Whilst the reforms in Spain we have reported on in previous editions continue to make their way through the legislative process, we report on seismic changes to Argentina's contract law rules.

The Americas

Letter from America (2015 Edition)

Ned Kirk, Partner, New York

Ill-gotten gains, hackers and Robocop as well as the U.S. Supreme Court's continuing interest in securities class action litigation; the US landscape is never dull. This article takes a look at some of the trends that emerged in 2014 and what may be on the horizon in 2015.


Following the numerous sizeable and highly publicized data breaches taking place in 2014, including at Target, Michaels, Ebay, JP Morgan and several other banks, Home Depot and, of course, Sony Pictures, there can be little doubt that cyber risks are a major concern for US regulators, lawmakers and corporate America. The cost to prevent, respond and mitigate against cyber attacks is significant and rising, and the common view is that it is not a matter of if, but when, a company will be targeted by hackers.

Cyber risks are, perhaps unsurprisingly, under increasing scrutiny by federal and state regulators in the U.S. In 2015, we can expect more regulatory actions against companies that have incurred a data breach.

Companies that have a data breach must comply with a complex web of regulations. 46 states and the District of Columbia currently have notification laws that apply in the event of a data breach, and which states' laws will apply is determined by the residence of the individual whose information was taken. In addition, a number of federal statutes apply in this area and new federal legislation is expected this year. All this means that companies must often navigate through multiple laws following a data breach and may be subject to exposure for failing to properly comply with applicable regulations.

Public companies and their directors and officers (D&Os) may also face exposure to regulators if they fail to properly address and disclose cyber risks in their public filings. The sufficiency of cyber disclosures has already been the subject of an SEC guidance issued in October 2011 regarding when a public company is required under current rules governing SEC filings to disclose cyber risks to the company's operations, liquidity and financial condition. The SEC's guidance specified what a company should disclose regarding known and potential cyber risks, including a description of its relevant insurance coverage. A company's failure to follow this guidance could lead to regulatory action.

In addition to regulatory action, companies and their D&Os may face an increasing amount of shareholder litigation following a breach. At least for the near future, shareholder lawsuits will likely be in the form of shareholder derivative actions brought on behalf of the company against its D&Os.

To date, a number of cyber-related derivative actions have been filed, including cases against Target and Wyndham D&Os. In those cases, shareholders allege that the D&Os breached their fiduciary duties of care and loyalty, and wasted corporate assets by failing to take reasonable steps to protect customer information, implement sufficient controls and caused the company to conceal breaches from investors and customers. If the D&Os failed to implement sufficient systems and consciously oversee the company's operations, they could be found liable for harm to the company.

However, shareholders will face a number of formidable hurdles in pursuing derivative actions. For example, the business judgment rule protects a director's informed and good faith decision unless there is no rational business purpose. Also, shareholders must first make a demand that the board take action against the D&Os and show bad faith if that demand is declined. These are difficult standards for shareholders to meet in many cases.

In a recent decision in the Wyndam derivative action, the court found that the board's refusal of a shareholder's demand was protected by the business judgment rule. The board had implemented a cyber security program before the breach, and it had made an informed decision to reject the shareholder demand. Thus, at a minimum, D&Os must implement sound reporting and control systems regarding cyber risks to avoid liability following a data breach.

The plaintiff securities bar certainly has its eye on cyber risks, but to date there have been few securities class actions following a cyber breach. This is likely because in most cases, there has not been a statistically significant stock drop after disclosure of a breach. However, as cyber attacks increase in number and severity, and the markets begin to better understand and appreciate their impact on public companies, stock prices may react more strongly to such news and investors may sue.

US Business Litigation Trends

During 2014, the US economy strengthened, the stock markets rose and business litigation receded to numbers not seen since well before the subprime/credit crunch crisis in 2007-2008. The number of new filings as well as average settlement amounts decreased for most types of business lawsuits.

The 170 new securities class actions filings in 2014 was slightly above the 167 cases filed in 2013, which is well below the average annual filings of 189 since 1997. The average settlement in such actions also dropped significantly from $55 million in 2013 to $34 million in 2014. It is important to keep in mind, however, that there were almost twice as many public companies in the US in 1998, so it is actually more likely now that companies trading on a US exchange will be sued.

There were no new major filing trends in 2014, and previous trends such as Chinese reverse mergers and subprime lawsuits, appear to have run their course.

The number of new shareholder derivative actions also fell to 164 in 2014, which is well below the annual average of 233 over the past 10 years. The number of derivative settlements is also down substantially, although we have seen some noteworthy settlement payments in the past few years, including a $275 million payment to resolve the Activision shareholder action in December 2014.

While the litigation picture therefore looks fairly rosy by US standards, there are a number of trends to watch which could significantly increase FI/D&O exposures, particularly if the economy and stock markets take a turn for the worse, as they are bound to do.

First, the number of foreign companies sued in US courts continues to go up, despite the U.S. Supreme Court's 2010 ruling in Morrison v. National Australia Bank, which held that that the U.S. securities laws do not apply extraterritorially to so-called F-cubed plaintiffs. Plaintiffs continue to target companies issuing American Depository Receipts in the US markets, and Chinese and European companies were a particular focus this past year.

Another trend to watch is the potential rise in IPO securities class actions. The number of US IPOs in 2014 was higher than since 2000 (at the end of the tech bubble). We might be seeing the same kind of irrational exuberance in the markets that led to a record number of 309 IPO securities class actions in the early 2000s. If a company's share price falls after an IPO, investors may sue, as they did following Alibaba's September 2014 US IPO. These types of cases often have a lower pleading standard and may be harder to dismiss at an early stage.

More positively, fee-shifting provisions in corporate bylaws could have a dampening effect on shareholder derivative lawsuits by requiring non-prevailing parties in intra corporate lawsuits to pay attorneys' fees and costs. However, we may see new legislation that limits or precludes such provisions this year.

Finally, the US Supreme Court continues to take an active interest in securities class actions and has issued a number of decisions favorable to defendants in the past few years. In June 2014, however, in Halliburton Co v Erica P John Fund Inc., the Supreme Court declined to overturn the fraud on the market doctrine and the presumption of reliance for 10(b) misrepresentation cases. This decision has not been the "game changer" defendants had hoped for, and it has had a relatively limited impact to date. However, a March 2015 decision in Omnicare Inc. v. The Laborers District Council Construction Industry Pension Fund could have a more significant impact on claims brought under Section 11 of the Securities Act of 1933, which may be on the rise due to the increasing numbers of IPOs. In Omnicare, the Court vacated a ruling (with the effect that the judgment was rendered void) that a Section 11 plaintiff need only allege that an opinion was "objectively false", regardless of the issuer's understanding at the time the statement was made. That court held that a statement of opinion in a registration statement may not support Section 11 liability merely because it is ultimately found incorrect, and an issuer may be held liable under Section 11 for an opinion in a registration statement if the issuer did not hold the professed belief or failed to disclose material facts about the basis for the opinion that rendered it misleading.

Continuing Regulatory Aggression

Increasing regulatory aggression remains an enduring theme and we continue to see exposures not only with respect to the high costs involved in responding to regulatory actions, but also from follow on shareholder litigation.

The SEC's 2014 report shows that it filed 755 enforcement actions, up from 686 the year before. These high numbers are largely the result of the expanded powers and resources given to regulators in the aftermath of the subprime crisis, including the SEC's very successful whistleblower program, new technological tools to detect fraud such as the SEC's Accounting Quality Model or "Robocop" initiative, and the continuing aggressive enforcement of the FCPA, money laundering and insider trading laws.

Coverage Issues

A number of recurring coverage issues impacting claims under FI/D&O policies were addressed by US courts in 2014.

For example, recent decisions have addressed coverage for settlement payments to resolve regulatory and civil claims for disgorgement or restitution. It is well-established under US law that the return of ill-gotten gain is uninsurable under applicable public policy rules or simply does not constitute insurable "damages" or a "loss' as those terms are used in an insurable policy. In some recent decisions, however, US courts have held that coverage might be available for such settlement payments if the insurer could not conclusively establish that the payment constituted the insured's return of ill-gotten gain it actually received, rather than the insured's payment to resolve its liability for funds obtained by a third party.

Another increasingly common coverage issue is whether multiple actions or investigations are interrelated and therefore constitute a single claim in the policy period when the first claim was made. In Biochemics v. Axis, the District Court of Massachusetts held in January 2015 that there was no coverage under a D&O policy for an SEC investigation and action as the insured company was served with a subpoena before the policy period. In W.C. and A.N. Miller Development v. Continental, the District Court of Maryland found in November 2014 that a 2010 action to enforce a judgment was interrelated with a 2006 adversary action and therefore the claim was not first made in the 2010 policy period.

Further, coverage issues often arise in the context of bankruptcy actions. For example, in the MF Global bankruptcy case, a New York bankruptcy court held in September 2014 that D&O policy proceeds were not assets of the estate and therefore could be accessed by the D&Os. The court reasoned that when a policy provides direct coverage to a debtor, the proceeds are property of the estate, but when a policy covers D&Os exclusively, the proceeds are not.

Latin America

New Argentine Civil and Commercial Code and its impact on the insurance market

Lee Bacon, Partner, London

Eugenia Tripodi, Foreign Qualified Lawyer, London

On 1 August 2015 a new Civil and Commercial Code ("CCC") will come into effect introducing key modifications in the Argentine legal system. Although the Insurance Contract Law ("ICL") remains in force, the new CCC will certainly influence insurance activities in Argentina and will be relevant to all insurers including FI and D&O insurers.

In terms of scope, it is notable that the CCC is stated to apply to existing contractual relationships, and not just those entered into after the CCC is in force. Accordingly, ongoing insurance contracts will therefore be regulated by the CCC, although only in relation to mandatory provisions. Non-mandatory provisions will still be regulated by the previous code.

However, despite this express provision, it remains to be seen how the application of the CCC will be interpreted by the courts. In principle Argentine laws should not have a retroactive effect.

The new CCC introduces some significant changes as follows.

  • The CCC recognises both adhesion and consumer contracts. In adhesion contracts, only one party is in control of the drafting (in the case of insurance contracts this is the insurer). As insurance contracts are regulated by the Argentine Superintendence of Insurance, they can only be drafted as adhesion contracts. However, they will also be considered consumer contracts under the CCC if the insured procures the cover for his own benefit or his family or social group.
  • Insurers must be aware that adhesion contracts will now be subject to more rigorous regulation preventing abusive terms, even when not in a consumer context. In effect, clauses that refer to documents or information not provided to the insured; distort obligations of the insured; extend the rights of the insurer, or are simply not "predictable", will be deemed unwritten and struck out.
  • In relation to consumer insurance contracts, when in doubt, the interpretation that is more favourable for the consumer will prevail. Accordingly, the Argentine Consumer Protection Act must be carefully analysed when writing insurance contracts.
  • The CCC provides that contractual and non-contractual civil liability claims will be subject to a three-year limitation period, leaving behind the traditional distinction which applied different rules. Whilst a one-year special limitation period for insurance contracts under the ICL remains in force, the new three-year period will be relevant to inwards liability claims and potential subrogation. The previous legislation established a ten-year limitation period for contractual claims. The CCC contains a transitional period, so that ongoing claims will be now time-barred after three years from the CCC's effective date, unless the prior applicable term ends before hand. Thus the limitation period for existing claims may be significantly shortened.
  • The new CCC introduces the application of compound interest, which was previously prohibited. Therefore insurers may be best-served in seeking to resolve claims much more quickly, to reduce exposure to higher payments. This is especially given that the timescale for litigation in Argentina is often very long. Nevertheless, it is worth noting the CCC gives judges the power to reduce interest if the average cost of similar transactions is disproportionally exceeded.
  • Another noticeable incorporation for professional liability insurers is that the concept of loss of chance is now expressly mentioned among the recoverable damages. Whilst this concept has been recognised by the Courts for many years; it is now on a codified basis.
  • Foreign currency obligations will be considered to be obligations to deliver amounts of goods instead of sums of money, as is currently the case. As a result, an obligation due in foreign currency may be payable in its equivalent in Argentine pesos.

In conclusion, given the magnitude of the changes the CCC introduces and the continuing discussions regarding its application, it will be crucial to pay attention to its further interpretation by the Argentine Courts. It is certain that this new legislation represents a considerable change of perspective and a new era in the Argentine market.


More accountability in the banking sector?

James Cooper, Partner, London

Laura Chicken, Senior Associate, London

In the wake of the LIBOR scandal, a Parliamentary Commission on Banking Standards was created to conduct an inquiry into professional standards and culture in the UK banking sector and to make recommendations for legislative and other action.

The Commission's June 2013 Final Report 'Changing Banking for Good' was scathing, with the Chairman commenting that: "trust in banking has fallen to a new low" and "a lack of personal responsibility has been commonplace throughout the industry. Senior figures have continued to shelter behind an accountability firewall".

Key recommendations included:

  • A new Senior Persons Regime, replacing the Approved Persons Regime
  • A new licensing regime underpinned by Banking Standards Rules to ensure those who can do serious harm are subject to the full range of enforcement powers
  • A new criminal offence for Senior Persons of reckless misconduct in the management of a bank, carrying a custodial sentence
  • A new remuneration code
  • A new power for the regulator to cancel all outstanding deferred remuneration for senior bank employees in the event of their banks needing taxpayer support

Following these recommendations, amendments were made to the Financial Services and Markets Act 2000 (FSMA) through the Financial Services (Banking Reform) Act 2013 to replace the Approved Persons Regime for banks, building societies, credit unions and investment firms. As a result, the Prudential Regulatory Authority (PRA) and Financial Conduct Authority (FCA) jointly consulted on a new regime for individual accountability (Strengthening accountability in banking: a new regulatory framework for individuals), with the FCA publishing 'near final rules' in March 2015.

The new framework comprises two regimes: the Senior Managers' Regime (SMR); and Certification Regime (CR), together with revised Conduct Rules, with the aim of encouraging individuals to take greater responsibility for their actions and to make it easier for firms and the regulators to hold individuals to account.

Senior Managers' Regime

Broadly speaking, the new SMR for individuals will require firms to allocate a range of responsibilities to individuals and to regularly vet their fitness and propriety. In particular:

  • The FCA and PRA have specified 27 'Key Functions' and 20 'Prescribed Responsibilities' which must be allocated to Senior Managers undertaking 18 defined Senior Management Functions (replacing the previous 'Significant Influence Functions' (SIF)).
  • As well as Board members, a number of other individuals will require approval as Senior Managers. These may include:

    • heads of key business areas meeting certain quantitative criteria
    • individuals in group or parent companies exercising significant influence on firms' decision-making
    • where appropriate, individuals not otherwise approved as Senior Managers, but ultimately responsible for important business, control or conduct-focused functions within the firm
  • Senior Managers must be approved by the PRA and/ or FCA depending on the Functions being undertaken. Approvals may be conditional, time-limited or varied by the regulator
  • The responsibilities of each Senior Manager must be documented in a 'Statement of Responsibilities'
  • Firms will also be required to set out their governance and reporting structure into a 'Responsibilities Map'. Firms must confirm annually that there are no gaps within their allocation of responsibilities
  • A 'presumption of responsibility' is introduced, placing an evidential burden on Senior Managers to demonstrate that they took 'reasonable steps' to prevent or stop regulatory breaches in their designated area of responsibility – or face individual sanction.

Certification Regime

The CR seeks to complement the SPR, applying to employees in the banking sector who fall outside of the SPR, but nevertheless whose actions or behaviours could seriously harm a bank, its reputation or its customers. In summary:

  • The CR introduces a new class of Certified Persons who must be approved as 'fit and proper' under FIT.
  • Certification is undertaken by the firm itself, not the regulators.
  • PRA Certified Persons include anyone classified as a 'Material Risk Taker' or as undertaking a 'Significant Harm Function' at the firm
  • FCA Certified Persons include functions that were previously SIF, customer-facing roles subject to qualification requirements (e.g. retail investment advisors) and anyone other than an approved Senior Manager who supervises or manages a Certified Person
  • Firms must assess and certify whether an individual is fit and proper on an annual basis or when there is a change in role
  • The FCA's assessment of fitness and propriety is broadly based on existing FIT Handbook requirements. The PRA is planning to replace FIT with a broadly similar Supervisory Statement

Conduct Rules

While the substance of the Conduct Rules (C-CON) is broadly similar to the existing Statements of Principle and Code of Practice for Approved Persons (APER); it is intended that C-CON will apply to a broader range of persons in order to achieve cultural change within firms:

  • The PRA Conduct Rules will apply only to Senior Managers and individuals within the PRA's certification regime
  • The FCA Conduct Rules will apply to all employees other than those who perform a role that it not specific to the financial services business of the firm (e.g. secretaries)

Furthermore, a key difference between the old APER and new C-CON is the reversal of the burden of proof placed on Senior Managers. This presumption of responsibility has generated much comment in the press. Previously, regulators would have to prove that a SIF was knowingly concerned in a contravention, or behaved in a way contrary to the principles for such an approved person. In future, the onus will be on the Senior Manager to evidence that s/he had taken such steps as a person in his or her position could reasonably be anticipated to take to avoid the contravention occurring or continuing.

What next?

Both the PRA and FCA are due to publish policy statements and final rules in spring/summer 2015 for the SM&CR. Related consultations into strengthening accountability in UK branches of foreign banks, the approach of the FCA and PRA towards non-executive directors and guidance relating to the presumption of responsibility will also close in the first half of 2015.

On 3 March 2015, the government announced that the new SM&CR will start on 7 March 2016, with transitional documentation to be submitted to regulators by 8 February 2016. The SMR and CR will also apply to UK branches of foreign banks from March 2016.

7 March 2016 will also mark the entry into force of Section 36 of the Financial Services (Banking Reform) Act 2013 which includes a new criminal offence relating to decisions taken by senior managers of banks, building societies and PRA-regulated investment firms that cause a financial institution to fail.

Insurance considerations

For D&O Insurers, the changes to be introduced will undoubtedly be of interest. On the one hand, the requirements for better internal controls and documentation could lead to fewer claims over time, but on the other we could see more investigations against Senior Managers in the short term.

Attestations on the rise

Laura Cooke, Partner, London

Simon Parslow, Associate, London

Figures published recently by the Financial Conduct Authority ("FCA") show that the use of attestations by the FCA is on the rise. We examine their use and impact.

An attestation is a personal commitment given by an approved person, requested by the regulator, that a specific action has been taken or will be taken. By way of example, an individual may be required to inform the regulator if an identified risk changes in its nature, magnitude or extent. An attestation can be given by an individual, a collection of individuals, or even a firm.

Attestations are a formal supervisory tool, rather than an enforcement tool. They are part of the tool-kit used by the regulator to ensure personal accountability of senior management and can also operate to focus the minds of senior managers on specific issues identified by the regulator.

The increasing use of attestations by the FCA and the Prudential Regulation Authority ("PRA") in recent years has not been without controversy, particularly given that they are, in effect, a creation of the regulator itself with no formal statutory basis. Some have argued that attestations may skew the prioritisation of risk at firms, and that more transparency regarding the criteria for their use is needed. The regulators are required to consult on and publish guidance in respect of the exercise of their regulatory powers but guidance and consultation in respect of their use of attestations has been notable by its absence.

The FCA has now responded to these concerns by publishing some clarification (in the form of an exchange of letters with the FCA Practitioner Panel) as to its use of attestations together with some statistics, with the first set of figures published in February this year.

FCA attestation statistics uncovered

On 13 February 2015 the FCA published for the first time the statistics regarding its use of attestations. The statistics covered attestations made in 2014 and are divided into quarters.

The figures demonstrate that there has been a sharp increase in the number of attestations throughout 2014. In 2014 there were a total of 59 attestations requested by the FCA. Of these 59 attestations, there were ten in the fourth quarter of 2013/14, six in the first quarter of 2014/5, twenty in the second quarter of 2014/5, and twenty three in the third quarter of 2014/5. So, if we compare the number of attestations in the first quarter of 2014/5 to the third quarter of 2014/5 there has been nearly a four-fold increase.

The use of attestations has been focussed on particular sectors, being most utilised in the Wholesale and Investment Management sector (twenty one), followed by Long Term Savings and Pensions (thirteen), and then Retail (eleven). In the Wholesale and Investment Management, and the Long Term Savings and Pensions sectors there was a focus on C2 firms (firms and groups with large retail customer numbers and wholesale firms with a significant market presence), whilst the attestations in the Retail sector were focussed on C1 firms (groups with the largest number of retail customers and wholesale firms with the most significant market presence). The two sectors with the fewest amount of attestations were Mortgages and Consumer Lending (eight), and General Insurance and Protection (six).

The 2014 figures show that there was generally a focus on the bigger firms (C1 or C2), compared to those in categories C3 firms (retail and wholesale firms with a medium-sized customer base) or C4 (retail and wholesale firms with a small number of customers). Of the 59 attestations in 2014, 49 were given by those in C1 or C2 firms, which equates to 83% of the total. The category with the most number of attestations was C2 which had 34, comfortably more than half of the total number of attestations in 2014. Having said this, the number of attestations in C2 firms did fall slightly from quarter two to quarter three of 2014/5. Whilst there had been a small number of attestations in C3 and C4 firms prior to the third quarter of 2014/15, in that quarter there were six attestations, which was more than the total number of attestations in the previous three quarters.

What the statistics tell us

The statistics indicate that the regulator's enthusiasm for attestations continues to grow and it is not difficult to see why attestations are such a useful and attractive tool for the FCA. Attestations are a cheap and effective mechanism for the FCA to target a specific firm about a specific issue that it is concerned about without having to become involved itself, thus allowing the FCA to utilise time and resources elsewhere.

And it is not just the FCA using attestations. The PRA recently required all branches of non-European Economic Area banks to make attestations about compliance with systems and controls.

While it is generally understood that the regulator will look to the most relevant significant influence function holder in a firm, in practice there may be more than one individual who could provide the attestation sought. This level of clarification is missing from the FCA's published data and, so, no conclusions can be drawn at present as to whether certain roles are more likely to receive requests for personal attestations than others.

What the guidance tells us

In its August 2014 letter to the FCA Practitioner Panel, the FCA explained that it usually looks to utilise personal attestations in the following four scenarios:

  • Notification – Where an appropriate individual at a firm is asked to confirm that they will notify the regulator if a non-material emerging risk changes in its nature, magnitude or extent.
  • Undertaking − Where the FCA requires a firm to confirm that it will take specific action within a specified timescale to address a particular risk which is unlikely to result in material harm to consumers or a negative impact on market integrity.
  • Self-certification − Where the FCA are confident the firm can resolve the issue itself, an attestation may be requested in respect of more serious and material risks, confirming that the risk has been mitigated or resolved.
  • Verification − Where the regulator requires a firm to resolve issues or mitigate risks, together with confirmation (for example, by way of an internal audit) that those steps have been taken.

Do those targeted (and their insurers) have anything to fear from the increasing use of attestations?

There is no statutory basis for a regulator to require an individual to give an attestation. As such, an individual may, in theory, refuse to provide one. Having said this, in practice it will be difficult for a firm and the individual to resist giving an attestation without good reason as this will likely result in more significant regulatory intervention, for example by way of a skilled persons report under section 166 of Financial Services & Markets Act 2000 ("FSMA") or even enforcement action.

Whilst the interests of the individual and the firm will often coincide, this will not always be the case and, depending on the circumstances, it may be necessary for the individual to obtain separate legal advice before signing an attestation.

Once the decision has been taken to provide an attestation, the individual concerned must be careful to ensure that he understands the parameters of what is being attested to and is comfortable this can be complied with and evidenced.

Providing an attestation which turns out to be false, or which is not or cannot be complied with, could well constitute a breach by the individual of the Statements of Principle of Approved Persons ("Statements of Principle"). Of particular significance are likely to be Statements of Principle 1 (the requirement that an individual must act with integrity in carrying out their accountable functions) and 4 (the requirement to be open and co-operative with a firm's regulator and to disclose appropriately any information of which the regulator would reasonably expect notice).

Section 66 of FSMA provides that an approved person is guilty of misconduct if he fails to comply with a Statement of Principle or has been knowingly concerned in a contravention by the firm of a requirement imposed on it under FSMA. It is under this section that most enforcement action is taken against individuals. Whilst an attestation may be seen as giving rise to some form of strict liability in the event of breach, it was stressed in Pottage v Financial Services Authority, Upper Tribunal (Tax and Chancery) (2012), a key authority on the responsibility for senior management of their business, that individuals are only personally liable where they are personally culpable and it is therefore not enough that a regulatory failure occurred in an area of business for which the approved person was responsible – rather, the individual must have been responsible for the breach and the onus is on the regulator to show that a breach has occurred.

However, Pottage concerned specifically the role and duties of a CEO and no personal attestation had been given. Further, the regulatory environment has moved on since the events forming the basis of Pottage given the increased use of attestations and, following the recommendations of the June 2013 report of the Parliamentary Commission for Banking Standards, a new regulatory regime for senior managers is pending (see our article on page 6), and a key element of this is the presumption of responsibility. This means that where a firm contravenes a relevant requirement, the senior manager with responsibility for the management of any of the firm's activities in relation to which the contravention occurred is guilty of misconduct, unless the senior manager can satisfy the regulator that they took such steps as a person in their position could reasonably be expected to take to avoid the contravention occurring, or continuing. In short, the burden of proof will be reversed.

The signing of a false attestation may also open up an individual to criminal sanctions under section 398 of the FSMA, which provides that it is an offence for a person knowingly or recklessly to provide a regulator with information which is false or misleading in a material particular.

In addition to these consequences, there is of course the likely damage to an individual's professional reputation if they provide an attestation which is false or is not, or cannot be, complied with.

A breach of an attestation will likely also bring the firm itself back under the regulatory spotlight, noting that the Principles for Business impose similar obligations of integrity, openness and cooperation on the firm.

The breach of an attestation will also potentially have an impact for D&O insurers. It will depend on the wording of the D&O insurance policy whether an individual's legal costs, for example defending an investigation by the regulator into the breach, are covered. Such costs could be very substantial, particularly if there is an appeal. Cover may not be available if the individual signed the attestation knowing that it was not true.

To continue reading, please click here.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Clyde & Co
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Clyde & Co
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions