LIMITING SMF LIABILITY

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9 February 2022

Insurance. Not the sexiest of subjects, but please bear with me. It might save you a pretty penny.

Most advisory firms hold professional indemnity insurance to protect against FCA investigation, claims and fines, but in my experience, few supplement it with directors’ and officers’ liability cover (D&O). If you are a senior manager, this could be a costly oversight.

Since the introduction of SMCR, senior managers are held personally responsible for their actions in SMF roles and if they are found to have failed in their regulatory duties, the individual can be fined.

The fines themselves can be large (very large in some cases), without factoring in the costs of fighting the FCA through the courts, which you’re likely to want to do given the reputational damage, hence the need for insurance.

Don’t underestimate the risk

Generally, when we explain the personal liability SMF positions carry, most of our clients appreciate the benefits of protecting senior managers.

SMCR was introduced to ensure staff take responsibility for their actions, improve conduct at all levels and give advisers a clear understanding of their roles. Individual fines can be levied for a number of reasons, including:

• Unauthorised business activities
• Insider dealing
• Financial crime
• Retail behaviour

As case history demonstrates, any lies uncovered at trial can be career ending. Your integrity is destroyed and you can be prohibited from performing any regulated activity, as well as having to find tens of thousands of pounds to pay your fine – best case scenario!

Last year, a total of ten fines were issued by the FCA, three of which were to individuals. The largest was £116,000, levied for breaches of Statements of Principle for Approved Persons 1 and 7. Had the individual not agreed to resolve the matter at an early stage, this would have been increased to £165,000.

For some reason, 2019 was a bumper year for FCA fines. A total of six individuals fell foul of the regulator, most notably, Mark Owen (not the one from Take That!), who was penalised to the tune of almost £3.25 million. He was second in command at Key Data and showed no remorse until late in the disciplinary process. Crucially, this was taken into account when the level of his fine was set, as the judgement deemed his insight was belated.

Peace of mind

D&O liability insurance protects managers from claims. It pays defence costs and financial losses and covers costs arising from administrative or criminal proceedings or those incurred during investigations by the FCA or prosecutors. It will also reimburse your firm if it has paid a claim on behalf of a manager.

In addition to insuring against risk, you can assist and protect your SMFs by having robust compliance processes and procedures in place, as a minimum you should:

• Identify individuals who hold SMFs and provide them with a statement of responsibility that allocates their activity, business area and management function.
• Ensure new SMF hires have a criminal records check, full regulatory references and fit and proper (F&P) checks.
• Determine the process for new and ongoing F&P checks.

Be aware, if you are looking for ways to limit your liability, including via D&O cover, the FCA has started to crackdown on those who try to exploit company and insolvency law. It announced recently that it expects firms considering a scheme of arrangement, or other compromise, to make themselves known and has set out the information it should receive.

Each proposal will be reviewed on a case-by-case basis, to ensure regulatory obligations are being met and customers are being treated fairly. The FCA will communicate any concerns, but you should expect enforcement action to be taken if misconduct by firms or senior managers is discovered.

Hopefully, you can see why D&O cover is essential for your senior managers. By taking on SMF roles, they are putting their personal credentials and family’s financial security on the line for the benefit of your business. Premiums are not unreasonable and the peace of mind it provides cannot be underestimated.

For more information about SMF responsibilities and D&O cover, don’t hesitate to contact B-Compliant on (0161) 521 8641, visit: www.b-compliant.co.uk or email: info@b-compliant.co.uk