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Asia Pacific – Game Changing Moments; Interesting Times Ahead.

3 June, 2014


Legal News & Analysis – Asia Pacific 


2013 was the year of the regulator, with significant changes to the structure of the financial services regulatory regime in the UK, new powers and a number of high profile enforcement actions. Couple this with the potential effects of proposed reforms and the next few years look set to be interesting for both insureds and insurers. 

New Regulators, New Muscles To Flex

In the UK, 1 April 2013 heralded a new financial order as the Financial Services Authority (FSA) was replaced by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA). The regulatory framework was also strengthened by the introduction of new powers to support regulatory objectives and help them target specific practices. At the time there was concern about giving the FCA power to make temporary product interventions, and the introduction of super-complaints and mass detriment references. Although these new powers have not yet been utilised to any great extent, they are certainly areas for further development in the next 12-18 months and have the potential to be powerful early response tools. At the time of going to press the FCA published its first warning notices against two bankers for LIBOR manipulation. By publishing early warning notices the FCA also aims to promote early transparency of enforcement proceedings. 

Large regulatory fines for LIBOR manipulation were also a significant feature of 2013 (RBS – GBP 87.5m; ICAP – GBP 14m; Rabobank – GBP 105m), as they were during 2012 and it seems likely that more will follow during 2014. 

Holding Senior Management To Account


In October 2013, the FCA’s Director of Enforcement confirmed that the FCA will continue the FSA’s work in focusing on improving the prospects of holding senior management to account. It will be helped in this by the new framework for individual approvals and conduct set out under the Financial Services (Banking Reform) Act 2013 (Banking Reform Act) which received royal assent on 18 December 2013. It incorporates recommendations made by the Parliamentary Commission on Banking Standards in their June 2013 report entitled “Changing Banking for Good” including:


  • A new Senior Managers Regime (SMR) to replace the Significant Influence Function of the current regime. The SMR will apply to banks, building societies, credit unions and PRA-authorised investment firms (in order to capture investment banks which do not have deposit taking permissions). It will not apply to insurers


  • A new individual criminal offence of ‘reckless misconduct in the management of a bank’. The conduct can include the taking of a decision on behalf of a bank, or failing to prevent a decision being taken. In either case, the individual must be aware that the decision may cause the bank to fail. Further, the Act sets out the circumstances in which a bank will be considered to have failed. The criminal offence will be limited to individuals covered by the SMR working within banks and building societies, but not credit unions. The maximum sentence will be seven years in prison and/or an unlimited fine. It remains to be seen how this new criminal offence will work in practice as it raises significant legal and practical difficulties. For instance the higher burden of proof for criminal offences will need to be met, and whilst certain decisions may in hindsight appear reckless, it will be more difficult to prove the same taking into account only the considerations available to the senior person at the time. However, the government and regulators have made it clear that this offence will be reserved only for the most serious of cases and, so, it seems unlikely that we will see a prosecution any time soon

The focus on senior management responsibility is not just a financial markets issue. The Department for Business Innovation & Skills (BIS) July 2013 Discussion Paper entitled “Transparency and Trust: Enhancing the Transparency of UK Company ownership and increasing Trust in UK business” seeks to make directors and officers more directly responsible. It outlined a range of proposals to enhance transparency of UK company ownership and increase trust in UK businesses including: granting authority to sector regulators, such as the FCA, to disqualify directors, giving the court the power to make compensatory awards against directors in favour of creditors at the same time as making a disqualification order and granting liquidators and administrators the right to sell or assign fraudulent and wrongful trading actions to creditors or possibly a third party. BIS is still analysing the consultation feedback so the outcome of the Discussion Paper is not yet known, but on the last day of the consultation, Business Secretary Vince Cable announced his intention to push for legislation of the proposals set out in the paper.


If enacted, these proposals are likely to impact the volume of fraudulent or wrongful trading claims pursued against directors. The frequency of disqualification proceedings may also increase. Directors may look to their D&O policy to indemnify them for any additional liability they might personally face. 


An increased focus on corporate and senior management responsibility can also be observed in other jurisdictions. 

Hong Kong and India have both seen a complete overhaul of their company laws. The new Companies Ordinance in Hong Kong allows the indemnification of directors for the first time (excluding criminal fines or penalties imposed by regulatory bodies and defence costs of criminal and civil proceedings where the director is convicted or judgment made against him). 

In the new Indian Companies Act, 2013 D&O insurance is accorded statutory recognition, directors’ accountability and the quantum of penalties is increased and the concept of class action suits is introduced. The provisions under the 2013 Act will be phased in. Straightforward definition clauses and some other sections became operative in September 2013, but it is not clear when the provisions relating to D&O insurance will be in force.

Regulatory Pressure To Settle 

There has been increased regulatory pressure for firms to settle with ‘early intervention’ being a new plank in the FCA’s approach. This approach creates two coverage pressure points for both insureds and insurers.

Insurability Of Fine And Penalties

During the calendar year 2013, the FSA/FCA imposed fines totalling just over GBP 474m. To protect the deterrent effect of active fines there is a statutory prohibition on insurance for FSA/PRA fines, and since 2011 on firms paying fines imposed by the FCA/PRA on (current or former) employees, directors or partners or those of an affiliated company. 

Who Pays For Regulatory Investigations?

There are likely to be arguments about what an official investigation means and when it occurs for the purposes of triggering recovery of any costs arising out of regulatory investigations. The issuing of an Enforcement Order by the FCA used to be a recognisable trigger event but this may never occur in this climate of early intervention and there is often a blurring of lines as to when a supervisory matter becomes an enforcement matter. Will a letter from the FCA have the same effect? There is also the issue of the costs of internal investigations that a firm undertakes in an attempt to prevent FCA involvement, or the costs of a Skilled Persons Report under the new FCA regime, which will now be borne by the company and not the FCA.

Defence Costs – That Old Chestnut

Under English law there is no implied right to recover defence costs under an indemnity insurance policy, it will depend upon the wording of the policy. However some jurisdictions have legislation that may affect recoverability – s9(1) of the Law Reform Act 1936 in New Zealand and s6 Law Reform (Miscellaneous Provisions) Act 1946 in Australia. Recent case law in New Zealand and Australia on the interpretation of this legislation has raised the issue of who has the priority claim over the insurance pot under a D&O policy where there is insufficient money to cover both anticipated defence costs and possible compensation payments to third parties?


The New Zealand Supreme Court in Bridgecorp Limited v Peter David set the cat among the pigeons again when it favoured the claimants’ statutory charge over the insurance money to the directors & officers claim for defence costs. The payment of defence costs under the D&O policy in question could therefore be ex gratia or in excess of policy limits. However, the Supreme Court left open whether, in addition to meeting the charge, an insurer must also pay defence costs, even if that means that the insurer may be liable for more than the limit of indemnity under the policy.

Earlier in 2013 the New South Wales (NSW) Court of Appeal in Chubb v Moore was asked to consider whether a statutory charge could effectively prevent an insurer from advancing defence costs to an insured (making any such advancements, in effect, a voluntary payment). Ultimately, the Court answered this question on grounds of territoriality, holding that no charge under the Act could arise over any money payable under a D&O policy where proceedings were instituted outside NSW. An application for leave to appeal to the High Court of Australia has been filed, but for now there is a clear divergence between the NSW Court of Appeal and the New Zealand Supreme Court. 

Although both the Bridgecorp and the Chubb v Moore decisions are very much about the application of specific legislation provisions peculiar to those countries, given the increasingly global nature of companies and consumers these decisions do have wider interest.

Regulatory Tools – Deferred Prosecution Agreements And Civil Settlements


In the UK, from 24 February 2014 the Serious Fraud Office (SFO) and Crown Prosecution Service (CPS) will be able to enter into Deferred Prosecution Agreements (DPAs) with corporations (but not individuals) they are investigating for certain types of economic crime, such as fraud, money laundering, bribery and a number of specific offences under the FSMA. As the FCA is responsible for investigating and prosecuting the FSMA offences that can be dealt with by way of a DPA, it seems likely that it will also be given the power to enter into DPAs in the future. 

The Director of Public Prosecutions and the Director of SFO have published a code of conduct which provides guidance as to when and how DPAs are to be used. However, it seems clear that a DPA will be subject to certain conditions, which may include payment of a fine, payment of compensation, and co-operation with future prosecutions of individuals. If the conditions are not honoured, the prosecution can be resumed. Any financial penalties imposed as a result of a DPA are unlikely to be insurable (and if FCA imposed will not be covered as a result of the statutory position noted above). However, where an investigation concerns both an entity and individuals, the proposed system seems geared to drive a wedge between company and individuals, making a coordinated defence more challenging.


Cyber Risks 

Any company or institution that handles, collects and stores personal and/or financial information and/or uses technology to do so should ensure it understands both its obligations in relation to data security, and the risks associated with complying with these obligations.

More specifically they should already be planning for regulatory developments affecting data security due to be implemented in early 2015, namely:


  • EU Data Protection Regulation which overhauls the Data Protection Directive to establish one single data protection law across all EU member states and one single data protection authority
  • EU Directive on Cyber Crime came into force on 3 September 2013 and member states must implement it by 4 September 2015. The new Directive requires member states to strengthen national cyber-crime laws and introduce tougher criminal sanctions

In addition, the FCA has been fairly vocal about the importance of financial services firms protecting themselves and their customers from cyber-attacks.

As the market starts to appreciate the extent of potential exposures and the costs associated with these, both insureds and insurers need to review traditional policies to establish the extent of cover that may be provided and identify their need for bespoke cyber insurance. The demand for cyber policies is likely to continue to grow.

Class Actions 

2013 may be the year that a corner was turned for class actions as a number of jurisdictions have seen movement in this area.

In Australia a key concern for insurers is the increasing prevalence of class action litigation. It is clear that the existence of insurance is a key driver in the commencement of many claims. Relative procedural simplicity combined with readily available third party funding has resulted in class actions (and particularly shareholder class actions) being a major source of significant claims in Australia. This is unlikely to change in 2014.

In the UK, 2013 saw the commencement of the first ever collective action under section 90 of the FSMA against a bank (RBS) and a number of former directors in respect of alleged untrue misleading statements in and omissions from RBS’s April 2008 GBP 12bn rights issue. A group litigation order has been made and claimants must opt in. Many thousands of investors are likely to be involved. This case arguably constitutes a watershed for collective shareholder actions against companies and directors in the UK albeit much will turn on how the court manages the group action.


Investment Fund Managers

The European Union’s Alternative Investment Fund Managers’ Directive (AIFMD) was required to be transposed into national laws by 22 July 2013. It applies to Alternative Investment Fund Managers (AIFMs) of non-UCITS collective investment undertakings and encompasses a wide range of funds, such as private equity funds, real estate funds, hedge funds and investment trusts. AIFMD requires AIFMs to hold initial capital to a certain level, but then allows them to chose to cover potential professional liability risks either through holding own funds or through holding an appropriate professional liability policy. This is an opportunity for FI insurers, but they will need to bear in mind a number of potential issues such as ensuring that all the professional liability risks listed in the regulations are covered, and take into account the professional indemnity limits where a composite policy is involved. 

Financial Ombudsman Service (FOS) Awards Are Final

The current statutory limit for FOS monetary awards is GBP 150k. In a welcome development for the financial services industry, the Court of Appeal unanimously confirmed in Clark v In Focus Asset Management and Tax Solutions that a complainant who has accepted an award by the FOS may not go on to pursue legal proceedings for the same claim. In other words, FOS awards are in full and final settlement of a claim.

The Court of Appeal held that as the FOS was a ‘tribunal’, its final determinations were ‘judgments’ for the purpose of the doctrine of merger, the effect of which is to preclude a claimant from pursing a recovery in the courts in relation to the same subject matter. The High Court had already held that res judicata (the legal principle that prevents a party from being sued for the same claim twice) applied to these circumstances in the case of Andrews v SBJ Benefit Consultants (2010). However, the first instance judge in Clark disagreed, deciding that in fact a complainant should be entitled to bank the money awarded by the FOS and then pursue any further sums through the Court, essentially offering complainants a fighting fund with which to pursue insurers. One of the reasons given by the first instance judge was that the legal doctrine of merger did not apply to prevent those who had accepted favourable determinations and the maximum FOS award from claiming damages for an amount in excess of that award. This was because the functions of the FOS differed from those of a typical tribunal since, amongst other things, the FOS considers complaints, not causes of action. 

The Court of Appeal went on to state that finality of the FOS award applies:


  • Even where the FOS has awarded less than the statutory maximum award 
  • Regardless of any attempt to preserve a right for the complainant to bring subsequent court proceedings (such as the attempt which was made by the Clarks, when writing to accept the FOS award made in their case, to make it a condition of that acceptance that they remained free to bring court proceedings)

Whilst this decision brings clarity it does not bring finality in all situations. It is worth bearing in mind that FOS decisions are binding on insurers in all cases but only binding upon consumers when they have chosen to accept them. This decision therefore only applies where a consumer has accepted the FOS decision. It is entirely open to the consumer to reject the FOS decision in order to pursue the claim through the courts. In addition if the FOS decision goes against the consumer, ie the FOS finds for the insurer, the consumer can also commence litigation against insurers based on the same facts.


 Clyde & Co


For further information, please contact:


James Cooper, Partner, Clyde & Co

[email protected]


Laura Cooke, Partner, Clyde & Co

[email protected]

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