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Directors and officers

Published on 17 January 2018

In this chapter of our Annual Insurance Review 2018, we look at the main developments in 2017 and expected issues in 2018 for directors and officers.

Key developments in 2017

The UK Criminal Finances Act 2017 received royal assent on 27 April 2017. The Act’s wide-ranging provisions include two new corporate offences of facilitating tax evasion, which came into effect on 30 September 2017.

The offences relate respectively to evasion of UK tax and foreign tax.

Under the UK provision (section 45 of the Act) a corporate body or partnership commits an offence where a person with whom it is associated facilitates the criminal avoidance of UK tax, while acting in that capacity. A person is associated with a relevant entity if it performs services for or on behalf of the entity.

To make out the offence, three elements must be proved:

  1. There must be criminal evasion of UK tax by a taxpayer. This is wide-ranging and includes any offence of being knowingly concerned in, or taking steps with a view to, the fraudulent evasion of tax. It also includes the offence of cheating the public revenue.
  2. A person associated with an entity must criminally facilitate the criminal tax evasion, whilst acting as an associated person. This can be by: (a) being knowingly concerned or taking steps with a view to the taxpayer fraudulently avoiding the payment of tax; (b) aiding, abetting, counselling or procuring the commission of a UK tax evasion offence; or (c) being involved in an offence of being knowingly concerned or taking steps with a view to the fraudulent evasion of tax.
  3. The relevant entity must have failed to prevent the person associated with it from committing the act or acts of criminal facilitation.

The relevant entity has a defence if, notwithstanding the above, it can demonstrate that, at the material time, it had in place reasonable prevention procedures or it was not reasonable in all the circumstances for it to have had such procedures. The Government has issued general guidance concerning what these procedures should be, with industry-specific guidance to follow.

The provision concerning evasion of foreign tax (section 46 of the Act) is similar to the UK provision save that there must be a connection with the UK in that the corporate body must be incorporated, or carry out business, in the UK, and the relevant activity facilitating the evasion of tax must take place in the UK.

The increased exposure of corporate bodies by reason of these offences has clear implications for D&O insurers,who may need to consider enquiring as to the potential exposure their insureds have to such matters and the procedures they have in place to prevent them.

What to look out for in 2018

The Senior Managers and Certification Regime (SM&CR) is a new framework being implemented by the FinancialConduct Authority (FCA) and the Prudential Regulation Authority (PRA) in relation to regulated entities in the banking industry. A similar regime – the Senior Insurance Manager Regime – is being implemented in relation to the insurance industry.

The SM&CR is designed to replace the approved persons regime. It has operated in respect of certain entities since March 2016. The FCA and the PRA are to extend the scheme to all regulated entities, and consultations concerning this closed on 3 November 2017. The FCA and the PRA are expected to publish their policies, final rules, and implementation proposals during 2018.

A key part of the SM&CR is the Senior Managers Regime (SMR). Its aim is to improve standards of governance and,perhaps critically, to increase individual accountability. That is, among other things, it will make it easier for the regulator to hold individuals responsible for regulatory failings.

The SMR imposes a duty of responsibility on senior managers. Under the SMR, a senior manager can have action taken against them by the relevant regulator (FCA or PRA) where:

  • they are the relevant responsible manager in respect of the contravention by a regulated entity of a relevant regulatory requirement, imposed by the Financial Services and Markets Act 2000 or other sources, including EU regulation or requirements of the Treasury.
  • the senior manager did not take the steps that a person in their position could reasonably be expected to take to prevent that regulatory breach from taking place.

While it is not anticipated that the SMR will reduce the responsibility of regulated entities themselves for regulatory breaches, it does mean that senior managers, and their D&O insurers, may face an increased exposure.

Download our full Annual Insurance Review 2018 for more insights.