Board Directors fear personal ramifications of a regulatory investigation

Board Directors are increasingly concerned about the personal ramifications of a regulatory investigation, according to new research from boutique specialist (re)insurance broker McGill and Partners.

According to the research, 84% of board directors surveyed named regulatory activity as their most significant personal liability risk. In comparison, while board directors were aware of the risks to their company of a regulatory investigation just 47% said it was the company’s biggest risk exposure.

In recent years there has been a trend globally of increased scrutiny on the activity of directors and officers, with a view to holding individuals accountable for corporate wrongdoing. This has led to a greater awareness and level of concern amongst directors.

Regulatory investigations, whether for bribery or corruption, fraud, accounting irregularities, cyber issues or whistle-blower claims can result in substantial fines. These can be punitive, running into the hundreds of millions of dollars and, depending on the nature of the wrongdoing, could also result in criminal proceedings. For example, in 2021 the global aerospace company, Airbus, agreed to pay €991m to the Serious

Fraud Office (SFO) following a bribery investigation. The payment comprised a fine, disgorgement of profits and costs. This was on top of agreements with other regulators across the world resulting in an overall global settlement of €3.6bn. Defence costs for such proceedings can also be significant.

Individual directors involved in such investigations could also face fines, disqualification from roles and/or industry bodies and in the most serious cases imprisonment. On top of this directors could be find themselves the subject of investigations by multiple regulators globally, which can drive up defence costs.

According to a recent claims report from the insurer, AIG, defence costs per director for a typical SFO prosecution have doubled in recent years and can be as much as £4m per director1. While a directors’ and officers’ (D&O) insurance policy will typically cover these costs, this would not be the case on admission by or finding of guilt from the director.

Noona Barlow, Partner/Head of Financial Lines Claims at McGill and Partners: “It’s vital that directors understand what their D&O policy covers. All too often, they simply aren’t aware, and can find themselves personally liable and facing significant costs. While directors may expect their company to protect them in case of regulatory investigation, the company’s interest may no longer align with its current or former directors and therefore access to the D&O policy is vitally important.

“There are steps that directors can take to minimise the risk of being implicated in an investigation. As a priority, ensure that all business decisions are documented at board meetings, and that any objections to decisions are recorded in the minutes. The value of having a D&O policy is that it provides directors with the ability to defend themselves against charges. However, it’s vital that every director understands what their policy includes, the limits, how to access the policy and how to report a claim. To find out this information, speak to your company’s risk manager or the insurance broker.”