corporate fraud and wrongdoing,27perhaps the strongest moral descrip- tor in private law looks set to be stripped out of UK company law. The same charge cannot be levelled at UK financial regulation. As the last chapter showed, considerable disciplinary force has been given by the FSA to the requirement that approved persons act with integrity when carrying out controlled functions.
are clear, she must take all reasonable steps to ensure that her firm co- operates with the pensions review and effects it in a compliant manner.
That will most likely entail the payment to individual investors of large amounts of compensation, something that is not necessarily in the best interests of the company’s shareholders, such interest being what she is first and foremost bound to consider in her position as a director of the company. Although an argument could be made that it is in the long-term interests of the company’s shareholders to maintain a “clean”
regulatory reputation this is tenuous at best and would be irrelevant, Bamford points out, to the case of an insurance company that is closed to new business and is in run-off.
Although there have been no challenges based on breaches of direc- tors’ duties to the large amounts of compensation payments paid out in the last few years of retail financial services companies’ funds in re- lation to personal pension, mortgage endowment and, most recently, spilt-capital investment trust business, Bamford argues that individu- ally approved persons who are also company directors would be in less jeopardy from such challenges if company law provided a specific safe harbour from suit for breach of duty for actions taken by a director in compliance with obligations under the Financial Services and Markets Act 2000.
Such a safe harbour would also protect the directors in the second hypothetical example he gives of a large banking group where the di- rectors of the holding company are also directors of three subsidiaries, a deposit-taking company (Company A), a futures trading company (Company B) and a fund management company (Company C). Com- pany B has made disastrous speculative losses and is technically in- solvent; it owes£350 million to Company A which in turn has net liabilities of an equivalent amount to UK retail depositors. Company C is uninvolved with its sister companies and has a small net worth and an excellent business reputation hitherto. Now that the facts have emerged the directors of the holding company have received a valuable offer for the share capital and business of Company C. What are the directors of the holding company to do? For they are also directors of each of the three subsidiaries since the group has a matrix management struc- ture and their responsibilities as approved persons fulfilling significant
influence senior management functions are clear. They are to unwind the mess the group is in as a whole as it is currently constituted, and they are to do so by giving priority to the achievement of the regula- tory objectives of FSMA, which of course include protection of the UK depositors at risk (in Company A) and broader systemic confidence in the financial system.
Such a course of action would point them in the direction of selling Company C on condition that the buyer inject sufficient funds into Company A to meet the shortfall in liabilities to depositors. However, as directors of the holding company their obligations are to its share- holders to realise the holding company’s assets (i.e. Company C) and to leave the depositors in Company A to their fate. If their obligations un- der the Approved Persons regime are in fact to have the practical effect of this kind of veil piercing in situations such as this then, Bamford ar- gues, it should specifically state that in any conflict between an approved person’s obligations (which are considered by the FSA in the context of the broader regulatory responsibilities of the group as a whole) and her duties as a director of an individual company (which are considered by company law in the context of duties owed to that company’s share- holders and to no other interests), that compliance with the Approved Persons regime under FSMA is to preclude any action for breach of a director’s duty in company law.
In a previous formulation the Draft Statutory Statement of Directors’
Duties had provided that none of the general principles by which di- rectors are to be bound “authorises the contravention by a director of any prohibition or enactment imposed on him by or under any other enactment or rule of law”.31That was a long way short of being even an implied safe harbour of the type that Bamford would like to see made ex- plicit and has in any event been removed from the latest version of the Draft Statement. The latest version simply states that the general duties incumbent on company directors are to have effect in place of certain common law rules and equitable principles governing directors but shall be interpreted in the same way, and applied with regard to those rules
31Clause 19(3) Draft Companies Bill, DTI White Paper (July 2002), Cm 5553.
and principles.32But what happens when regulatory rules and preferred regulatory outcomes cross over and conflict with these general duties?
Black has provided some perspective to this question in her recent examination of the potential for what she terms “collisions” between regulatory rules and common law or equitable principles and uses sev- eral examples drawn from a financial services and markets context.33 She reminds us that the Law Commission did examine one such prob- lematic collision in its 1995 report on “Fiduciary Duties and Regulatory Rules”34in which it examined the ways in which courts might resolve such juristic overlap and potential conflict. The Commission preferred a “hybrid model” of conflict resolution. Under this model the courts would allow for some degree of recognition by common law (rooted as it is in efficacy and certainty of private ordering, the traditional concerns of private law) of regulatory rules’ very different genesis and concerns and would seek to adapt common law rules in light of these.
Black likens this to the familiar devices through which common law has always reached out to and imported from other norms of ordering.
For example, contract law’s easy facility over the years with market practices and trade customs, or the shaping of common law rules on confidentiality by regulatory requirements on Chinese walls.35
Recent comments from the Court of Appeal on the significance to their common law responsibilities in making statements to bidders in the context of an acquisition of a target company directors’ compliance with regulatory obligations (such as those imposed by the Takeover Code and Listing Rules) lend some support to this “creative collision” thesis.36She is reasonably optimistic as to the prospect of mutual collisions between common law and regulation being creative and resulting in “mutual learning”. However, sometimes collisions will occur that require stark
32Draft Clause B10(1) and (2) Draft Company Law Reform Bill 2005 (March 2005), Part 7, DTI, White Paper, Cm 6456.
33J Black, Law and Regulation: The Case of Finance, in C Parker, C Scott, N Lacey and J Braithwaite (eds) Regulating Law (Oxford University Press: Oxford, 2004), pp 33–59.
34Law Com No 236 (London: Law Commission, 1995).
35J Black, supra, n 33, pp 46–47.
36Partco Group Ltd and Another v. Wragg and Scott [2002] 2 Lloyd’s Rep 343, per LJ Potter at p 354.
and difficult choices between private interests and public regulatory ones and the uncertainty of how to call these decisions creates real legal risk for those company directors who are faced with these choices ex ante. Interestingly, she points out that recent consultation by the FSA on the issue of conflicts of interest in investment research is silent on the effects of common law or equitable principles, leading one to conclude tentatively that Bamford’s points remain live ones.
It is of course both politically and juridically easier to leave open to the courts and the Financial Services and Markets Tribunal the question of how the legal system should rank the public law broader protections of the FSMA regime alongside the continuing private law focus of com- pany law on shareholder value (albeit now to be more “enlightened” in nature). However, it sends an unfortunate message to those in senior positions in the UK financial services industry that government and the FSA are happy to devolve upon them compliance responsibilities for the achievement of these broader policy objectives through the intro- duction of SYSC and the Approved Persons regime but is not willing to offer concomitant clarity on how these responsibilities sit alongside their pervasive responsibilities in company law. Indeed Haines and Gurney highlight this “devolution of political tension” that often comes about by the delegation of responsibility of all risks onto the regulated.37
Insurability of risks attendant to senior management positions Another anomaly as between the position of a director under general company law and of that same director in her capacity as an approved person under FSMA 2000 has arisen from the recent relaxation by sections 19–20 Companies (Audit, Investigations and Community En- terprise) Act 2004 of the prohibition on companies’ protecting their directors by way of indemnity or exemption from liability arising in respect of any negligence, default or breach of duty of trust owed the company.38 The new law permits companies to indemnify directors
37Supra, n 3.
38Section 310 Companies Act 1985.
against both legal and financial costs in respect of proceedings brought against them by third parties, but specifically excludes from the scope of such permissible indemnities any “sum payable to a regulatory au- thority by way of a penalty in respect of non-compliance with any re- quirement of a regulatory nature”.39It also permits them to indemnify directors against the costs of defending any legal proceedings as they are incurred, even if brought by the company itself subject to their repay- ment to the company if its claim against a director were to succeed.40 However, in 2004 the FSA changed its general requirements which ap- ply to all authorised firms so as to prohibit firms from taking out any insurance arrangements which would indemnify any person (including an approved person) against all or part of a financial penalty imposed by it under FSMA 2000.41 So companies regulated by the FSA may not easily provide comfort against the personal risk of large financial penalties to their senior (and indeed other) staff who are subject to indi- vidual disciplinary and enforcement action in their capacity as approved persons.
It is interesting to note that in the government’s justifications for the amendment to the prohibition in general company law on companies providing directors with indemnities it couched its arguments in terms of incentives and the need to avoid the risk of personal financial liability acting as a deterrent to well-qualified individuals accepting board pos- itions, particularly as non-executive directors.42These same arguments were put by industry respondents to the FSA’s consultation on its pro- hibition of firms’ arrangement of insurance against individual financial
39Section 309B(3) Companies Act 1985 added by s 19 Companies (Audit, Investiga- tions and Community Enterprise) Act 2004.
40Section 337A Companies Act 1985 inserted by s 20 Companies (Audit, Investigations and Community Enterprise) Act 2004.
41GEN 6 FSA Handbook, Insurance Against Financial Penalties, this rule change was the subject of FSA Consultation Paper 191, July 2003.
42Parliamentary Statements by Patricia Hewitt, Secretary of State at the Department for Trade and Industry (DTI), 7 September 2004, Hansard, and Jacqui Smith, DTI Minister on 14 September 2004, Hansard, and see Commentary at p 23 in DTI White Paper Company Law Reform (March 2005: Cm 6456).
penalties payable by directors.43They met with less of a sympathetic response in that context.