30 Dec 2019

Against the background of an increasingly unforgiving environment for directors and officers, we analyse the trends in the UK D&O market throughout 2019 and provide you with our predictions for 2020.

Trends in 2019

Ramping up regulation

In the years following the global financial crisis, the Financial Conduct Authority (FCA) focussed its attention more acutely on the actions and responsibilities of individuals, particularly those in senior management. In 2016 the FCA introduced the Senior Managers and Certification Regime (SM&CR) which effectively imposes an individual duty on those performing a 'Senior Management Function' in financial services firms to take all reasonable steps to prevent a regulatory breach from occurring. The potential consequences of breaching the SM&CR range from personal fines up to lifetime bans.

The increasing regulatory focus is borne out in the FCA's 2019 Enforcement Report, published in July 2019. As foreshadowed in our 2018 review, the report documents an increase of 60% in the number of referrals to the FCA and also an increase in the value of the fines imposed (an increase of £157.4 million); albeit the number of fines imposed remained relatively constant.

That said, it may be of some comfort to D&O insurers, and their insureds, that according to the FCA there has still only been one person where successful regulatory or criminal action has been obtained under SM&CR. This resulted in Barclays' Chief Executive, James Staley, being fined more than £642,000 by the FCA and PRA for failing to act with "due skill care and diligence" in response to an anonymous whistle blowing letter in June 2016. The FCA has stated in response to a Freedom of Information Request in July 2019 that although it had yet to take action against other SMR individuals since May 2018, it was currently investigating the conduct of 12 individuals.

Holding individuals to account

The culture of holding individuals to account and an increase in regulatory referrals has also brought about an increase in the claims made on those D&O policies. UK insurers report that the claims data for 2019 reveals both an increase in D&O claims in general (partly accelerated by an increase in litigation funding across Europe in recent years), and also a deterioration in claims development on prior years of account.

One such D&O case which reached the court in 2019 was Antuzis & Others v DJ Houghton Catching Services Limited [2019] EWHC 843 (QB) which decided that a director is not generally liable for inducing a breach of contract where they are acting in good faith. However, in this case the court held that the directors of DJ Houghton – who had knowingly exploited the company's chicken catchers by failing to pay them the minimum wage, holiday pay, or overtime – had breached s172 Companies Act 2006 (the duty to promote the success of the company), since they had knowingly acted in a way which could damage the company's reputation. They had therefore not acted in good faith as directors and were held personally liable for the company's breaches of its contractual obligations to the claimants.

On a similar theme of individual responsibility, the claimant in Popely v Popely & Others [2019] EWHC 1507 Ch argued that the defendant, although not formally appointed to the board, was a de facto director and owed fiduciary duties to the company. The court held on the facts that the defendant was not a de facto director but the case is a useful reminder that individuals may be held accountable for their actions as de facto directors. For more on this case read here.

Group actions

Shareholder class actions also remain a concern for D&O insurers given the growing litigation funding market.

However, the hotly awaited judgment in Sharp v Blank [2019] EWHC 3078 (Ch) (also known as the Lloyds/HBOS litigation) which was handed down on 15 November 2019 was welcome news to the D&O market on this front.

This was a group action by some 5,800 shareholders against five directors at Lloyds arising out of Lloyds' acquisition of HBOS in 2008. The court in this case held that the claimants must show that no reasonably competent director could have made the recommendation in question (not just that others might have had a different opinion) and failed this test. The case also failed on causation and loss. The case illustrates that, although there may still be ample funding available (for the time being) for class actions, there are still significant hurdles involved in successfully pursuing such claims to trial.

Cyber security and GDPR breaches

Cyber security and GDPR breaches remain an area of concern for directors and officers and their insurers. 370 cyber incidents were notified to the FCA between January and 27 May 2019. The concern will only have been heightened by the Court of Appeal decision in Lloyd v Google LLC [2019] EWCA Civ 1599 where the Court decided that a claim brought on behalf of 4 million iPhone users which alleges misuse of their personal data can go ahead. The decision has been seen by some commentators as a green light for mass claims against data controllers and processers which, of course, may include directors and officers. Alongside this is the potential for ICO fines and the news of the proposed ICO fine against BA serves as a further reminder to directors and officers to ensure that cyber and data security is consistently and actively managed to minimise the associated risks.

Climate change

2019 has seen the rise of climate change as a political, regulatory and investor issue. There is an interplay between the growing awareness of climate risk and directors' duties, and – flowing from this – the scope for claims under D&O policies. For more on this subject, see here.

What is on the horizon for 2020?

2019 trends and more – #MeToo

We expect these trends to continue in 2020. We are also maintaining a watchful eye on the trend in the US of directors being held to account for a failure to take adequate steps to prevent sexual misconduct. This includes, turning a blind eye to the actions of other directors, not conducting adequate background checks and not disclosing knowledge of such behaviour. In the UK, directors have similar duties to their US counterparts and are required to act in a way that they consider in good faith is most likely to promote the success of the company for the benefit of its stakeholders as a whole.

ARGA

Other developments on the horizon include the new Auditing, Reporting and Governance Authority (ARGA) which is set to replace the Financial Reporting Council. This body is anticipated to have wider powers and a wider jurisdiction than its predecessor to include the power to review directors in the context of their preparation and approval of true and fair accounts and compliant corporate reports. We anticipate that the wider regulatory remit of ARGA will lead to more investigations against directors.

Brexit

Furthermore, in the aftermath of the recent general election, directors and officers will need to ensure that their businesses are as " Brexit-ready " as possible in order to mitigate risks against them.