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Fund Executives Run for Cover as Regulators Toughen Up

Directors of British asset managers are protecting themselves against new regulation that puts the onus on individuals for corporate failings.

U.K. fund executives are buying extra insurance due to concern that British regulators intend to pursue individuals when asset managers break the rules.

U.K. fund managers are protecting themselves ahead of new regulation called the “senior managers and certification regime,” created to raise professional standards by holding senior individuals accountable for their conduct. British bankers have been subject to these rules since 2016, and they’re expected to apply to fund managers next year.

“There has definitely been an uptick interest from senior board members, not just in the level of protection but the nature of protection,” Francis Kean, executive director of FINEX Global at Willis Towers Watson, said in an interview. “In the past 18 months, I have done more board presentations than in the past five years.”

Kean’s comments echo a GP Strategies report published last week that said managers are increasingly taking out personal insurance. The SMCR, along with other regulations arising after the 2008 financial crisis, such as the Bribery Act of 2010 and the forthcoming bill called the Criminal Finances Act 2017, are driving an uptick in interest in insurance policies that offer increased financial protection for directors and officers, according to insurance brokers and lawyers.

The U.K. is making it easier to prosecute individuals when companies break the rules, said Claire Lipworth, a partner at law firm Hogan Lovells since April. Lipworth, who was previously chief criminal counsel at the U.K.’s Financial Conduct Authority, said the SMCR helps regulators identify the person responsible for failings within companies.

To shield against potential investigations, fund management executives are taking out coverage that will pay for legal fees from the moment a regulator makes its first enquiry, according to insurance brokers. They also say fund managers are increasing their directors and officers coverage, which protects directors solely from the financial consequences of a legal claim.

“Directors and officers of financial services firms have never before been under so much pressure to be held accountable for their actions and this pressure has led to a real need for an adequate D&O insurance policy,” Jamie Kennell-Webb, commercial and financial client executive at Miller Insurance Services, said in an email.

Edward Brennan, head of business development at rival broker Howden agrees, saying the SMCR has pushed individuals to “make sure the coverage they have in place covers them, increasing their limits if it doesn’t.”

While company directors are feeling the heat, the FCA warned in March that it would still continue to pursue companies guilty of wrongdoing, despite the new rules aimed individuals. The FCA did not immediately respond to a request for comment.

Lipworth said the change in regulatory approach from British financial regulators follows a 2015 memo by then U.S. deputy attorney general Sally Yates. The so-called Yates Memo said that holding individuals accountable was essential to deter “corporate misdeeds.”

“One of the problems that prosecutors had with criminal liability is that they found it difficult to find out who was responsible for the decision-making,” said Lipworth, adding that the SMCR “makes the evidence trail much easier to follow.”

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