Who wants to be a non-executive director of a UK financial institution?


This is not the title of a new game show. Instead it is a question of vital interest to the regulators and stakeholders of financial institutions. That’s because, under the unitary board system, non-executives are expected to play an important role in protecting the interests of depositors, clients and shareholders.  It is not hard to list the desired qualities of such individuals, such as integrity and experience, combined with a range of relevant qualifications and skills. However, unlike the famous game show, the answer here is not so obvious. Yes, the role is likely to be interesting, challenging, stimulating and rewarding, but there are a number of sobering factors to take into account.

The risks
Here’s a non-exhaustive list:

  • Under English law, non-executive directors are held to the same standard of skill and care as their executive counterparts
  • Under English law, a director cannot delegate his or her ultimate supervisory function
  • Regulatory and operational risks for all banks are increasing, as are the cyber- related vulnerabilities they face
  • From March 2016, all non-executive directors of banks are subject to the revamped Conduct Rules of the Financial Conduct Authority
  • From March 2016, the Chairman, the respective Chairs of the Risk,

Remuneration, Nomination and Audit Committees and the Senior Independent Director will additionally be subject to personal accountability under the Senior Managers Regime

  • The FCA now has up to six years in which to bring enforcement actions against individuals, by which time they may no longer be in post.

The issues
When weighing up any offer of appointment, individuals will want to conduct their own due diligence exercises into the institutions concerned, and to negotiate carefully the terms of their appointment, including, of course, the level of their remuneration (in particular, they may wish to focus on their respective rights and obligations with respect to information sharing and document retention on termination of their appointments). They are unlikely, however, to conclude that the financial rewards of accepting a part-time appointment match the unlimited personal and reputational liability exposures which they may face in the event  of a serious claim.

That being so, well-advised individuals will inevitably wish to consider the suite of protections available to them in the event that their conduct is called into question. Perhaps ‘suite’ may be too grand a word in this context. The only two protections generally available to directors are directors and officers (D&O) liability insurance and company indemnification. Seeking professional input as to the adequacy and terms of these protections is certainly to be recommended and there is plenty to play for. But it is also perhaps worth being aware of certain inherent shortcomings in each of them.

Banks (and investment banks in particular) tend to be large complex animals, not always easily understood in terms of structures, products and services

Gaps in D&O insurance

  • D&O insurance is designed to respond to liability for claims (including defence costs) which are made or investigations commenced against directors during a particular period of insurance. As such it provides limited, if any, protection in the absence of a claim or investigation against the individual concerned
  • The insurance limits themselves are usually shared between a large group of individuals, which is rarely restricted to senior individuals (and often includes the company itself). Hence, the limits are prone to rapid depletion and even exhaustion
  • Cover is often complex and comes with built-in restrictions and exclusions
    What this means (among other things) is that D&O insurance is (a) not usually a resource dedicated to board members and (b) not available in circumstances where directors may feel the need for independent legal advice in the absence of a claim or of enforcement activity by regulators.

Gaps in indemnification
the company indemnity will be worthless in the event of company insolvency

  • a director has no automatic right to indemnity
  • such rights to indemnity as he or she may have may be further limited by:
    • statutory restrictions
    • the terms of any relevant contract (or deed poll)
    • the company’s willingness and appetite to indemnify based on its perception of the facts in each case, regardless of any contractual commitment.

What this means is that directors (perhaps particularly in circumstances where they have left the company) cannot be sure (no matter how comprehensive their indemnity is) that it will always and in all circumstances be honoured by the bank.

The problem comes when interests of the individual and the entity begin to diverge

Does any of this matter?
Despite all the fallout from the 2008 financial crisis, there have been very few examples of individual liability for corporate failures or losses. Moreover, in most cases the interests of the bank and its board are fully aligned. Quite apart from that, in order to attract and retain the right calibre and quality in their leadership teams, banks will naturally wish to offer every reassurance and resource to their boards – including the non-executives – to make them feel comfortable in discharging their roles. For so long as everyone’s interests remain aligned (and the bank remains solvent), the answer is probably that none of this really does matter too much. The problem comes when interests of the individual and the entity begin to diverge. The danger is that this tends to happen just when a serious regulatory and/ or liability issue arises. Whereas the bank will wish to navigate a course through such dangerous waters as quickly and safely as possible with minimum damage to its reputation, the individual will naturally be more concerned to protect his or her personal liability exposure and reputation.

The danger is perhaps especially acute when the conduct of the individual is subjected to scrutiny long after he or she has parted company with the bank. In a regulatory context, that may now (as a result of changes brought by the Banking Reform Act 2013) be up to six years after they have left. If adequate attention is not paid to the potential for a later divergence of interest, the risk of a lack of funding for personal liability protection may be compounded by an inability to access

the material on which any defence might otherwise be based. As the ancient Chinese proverb has it: “Make preparations before the rainfall. Don’t wait until you’re thirsty to dig a well.”

Seeking input as to the adequacy and terms of these protections is recommended

Further information
Francis Kean has 25 years’ experience as a litigation lawyer specialising in professional indemnity, financial institutions and D&O liability in the London insurance market. He was responsible for the launch of DARCstar, the first broker derived primary D&O form. It won the Insurance Innovation of the Year Award in 2012. He is the editor of a book called D&O Liability Insurance, published by The Insurance Institute of London, and is a frequent speaker at conferences and events.


About Author

The Chartered Institute for Securities & Investment is the leading professional body for securities, investment, wealth and financial planning professionals. Formed in 1992 by London Stock Exchange practitioners, we have a global community of circa 40,000 members in 116 countries and last year more than 40,000 CISI exams were sat in 80 countries, 15,000 taken outside the UK.

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