Worldwide: FI And D&O International Review - July 2017

Last Updated: 12 September 2017
Article by Clyde & Co LLP

Most Read Contributor in UK, December 2017

James Cooper, Partner, London

We have commented in previous editions of this Review on the impact that developments in one jurisdiction can have in another. This edition is no exception: at the time of going to press, the Financial Stability Board had recently announced that it believes that the United Kingdom's Senior Manager and Certification regime is ripe for expansion elsewhere. The impact of the United States' Supreme Court decision in Morrison continues to unfold as a series of cases have debated the exact parameters of that "F-cubed" decision. Its impact can also be seen in the development of collective shareholder actions, and we examine whether "Dieselgate" will be a game changer in Germany. Development of class actions continues apace elsewhere, and we also look at proposals for a regime for claims against listed companies in Saudi Arabia.

Exposures for directors, financial institutions and their insurers continue to develop. We examine the first disqualification of a director by the Competition and Markets Authority in the UK, the rise in criminal prosecutions brought by the Australian financial regulator ASIC and the Tata-Cyrus Mistry fall-out in India. At Clyde and Co we have been tracking developments in environmental and climate change related exposures for directors, pension trustees, investment managers, and other financial services professionals and entities, and we examine developments in South Africa on this issue.

We also take a look at the insurance landscape, including proposals for consideration of the current PII arrangements for regulated firms in the UK, radical proposals and an important decision on conditions precedent in Singapore.


The first disqualification of a director by the CMA

Mark Sutton, Partner, London
Karen Boto, Legal Director, London

Financial penalties being imposed on companies for breaches of competition law is relatively common place. However, there can also be adverse consequences for the directors involved, as a decision reached by the Competition and Markets Authority (CMA) has recently demonstrated.

In December 2016, the CMA announced that it had secured its first director disqualification undertaking. This decision sends a clear message that those individuals who show disregard for the law will be punished.

The Power to Disqualify Directors

Since 2003, the Competition and Markets Authority (CMA) has had the power, under the Company Directors Disqualification Act 1986 (the Act), to seek the disqualification of an individual, for a maximum of 15 years, from acting as a company director where: (i) a company of which he is a director has breached competition law; and (ii) his conduct makes him unfit to be concerned in the management of a company.

The CMA has the power under the Act to apply to the court for an order disqualifying a director from performing certain roles, for a specific period.

Alternatively, the CMA can accept a disqualification undertaking from a director to avoid the need for proceedings. This will usually result in a reduction being applied to the period of disqualification that the CMA is prepared to accept.

Both orders and undertakings are legally binding with the result that individuals can be criminally prosecuted if they act in breach of the disqualification.

The Competition Law Infringement

Mr Aston was the managing director of an online poster supplier, Trod Limited (Trod).

The CMA commenced its investigation into a price fixing scandal, concerning posters and frames in 2015, by carrying out dawn raids at Trod's business premises and the domestic premises of one of its directors, Mr Aston.

In July 2016, Trod admitted to the cartel. In particular, that it had agreed with one of its online competitors, GB Eye Limited, not to undercut each other's prices for items sold on Amazon UK for a period of more than four years.

In August 2016, Trod was fined GBP 163,371 as a result, which reflected a discount of 20% owing to its admission of breach and co-operation with the investigation.

GB Eye Limited was granted full immunity from fines having acted as the whistle-blower under the CMA's leniency programme.

In November 2016, the CMA accepted a disqualification undertaking from Mr Aston instead of applying to the court for a disqualification order.

The undertaking provides that, amongst other activities, he will not act as a director of any UK company for five years. This was a significant reduction against the 5-10 years that the CMA were considering seeking from the court.

As GB Eye Limited was granted leniency in relation to their part in the breach, its current directors are protected from disqualification under CMA policy provided that they cooperate with the investigation and leniency process.


The disqualification of Mr Aston marks the first time the CMA has obtained a disqualification undertaking from a company director under the Act.

However, when discussing Mr Aston's disqualification, the Executive Director for Enforcement at the CMA, Michael Grenfell, said that the "business community should be clear that the CMA will continue to look at the conduct of directors of companies that have broken competition law" and stated that where appropriate, the CMA "are absolutely prepared to use this power again".

This case should therefore serve as a useful reminder to directors that breaches of the competition law will have serious consequences for them, personally, as well as their businesses.

In this case, Mr Aston was personally involved in the competition law breach. However, the CMA can also seek disqualification of directors where: (i) they had reasonable grounds to suspect a breach but did not prevent it, or (ii) they ought to have known about the breach.

This emphasises, once again, the onus placed on directors to ensure there is a culture of compliance within the companies that they are involved in.

In addition to potential disqualification, an individual director may face criminal sanctions for cartel activity.

Although, the CMA has found it difficult to obtain such sanctions (with only four individuals being sentenced since the cartel offence was introduced in 2003) the threshold of the criminal offence has now been lowered, with the subjective element of dishonesty being removed.

This may result in an increase in the number of criminal sanctions being obtained for cartel activity. However, the CMA has also confirmed that it is not afraid to exercise these powers again. There is, therefore, also a real risk of CMA using director disqualification orders to punish individuals for competition law infringement where a robust criminal case cannot be established.

Impact for Insurers

The desire to clamp down on competition law breaches may trigger more investigations (internally and external) and result in further director disqualifications.

This could lead to an increased costs exposure to D&O Insurers. Whilst any fine imposed will not be recoverable from insurers, legal costs incurred in the investigation stage, and possibly the negotiation phase, might be.

Various exclusions may also come into play depending on the actual words used in the undertakings, and any admissions made during the negotiation process.

FCA policy statement applying conduct rules to non-executive directors (NEDs) in the senior managers and certification regime (SM&CR) and senior insurance managers regime (SIMR)

On 3 May the FCA published a policy statement introducing final rules to extend the conduct rules in the Code of Conduct sourcebook (COCON) to standard non-executive directors ("NEDs") in banks, building societies, credit unions, dual-regulated investment firms (banks) and insurance firms. (The PRA refers to standard NEDs in banks and insurers as "notified NEDs"). The aim of doing so is to raise the standards of conduct and reduce future misconduct and mis-selling. Standard NEDs are those not subject to regulatory pre-approval under the senior managers and certification regime ("SM&CR"), the senior insurance managers regime ("SIMR") or the FCA-revised approved persons regimes for insurance firms. The policy statement appends the final rules which are contained in the Individual Conduct Rules (Non-Executive directors) Instrument 2017, and come into force on 3 July 2017. The policy statement flags up that those affected by the changes will need to make sure that standard NEDs receive appropriate training on COCON, and that any breaches of COCON by standard NEDs resulting in disciplinary action are reported to the FCA using form H (this applies only to banks at present). For the first reporting period, the notification must cover breaches occurring between 3 July 2017 and the end of August.


Deadline for PPI complaints introduced

Following consultation, the FCA has published a policy statement PS17/3 in which it has introduced a final deadline for making a payment protection insurance (PPI) complaint of 29 August 2019. This deadline will come into force on 29 August 2017, with policies sold after that date being excluded. In advance of the deadline, the FCA will run a two year consumer communications campaign. In addition, the FCA has made final rules and guidance following the Supreme Court judgement in Plevin v Paragon Personal Finance (2017), following which consumers may have grounds to complain regarding the amount of money providers received for the sale if the failure to disclose commission made the relationship unfair under s140A of the Consumer Credit Act 1974. There is a 50% commission tipping point at which firms handling PPI complaints should presume that the failure to disclose commission gave rise to an unfair relationship and that profit share should be included in firms' calculation of commission. Redress will be calculated as the excess commission over 50%. Firms that previously rejected complainants that are eligible to complain following Plevin will be required to write to the complainants explaining the new basis for complaining by the end of 2017. The new rules and guidance on this area will also come into force on 29 August 2017.

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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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