The tangled web that liability weaves

Jonathan Faurie, FAnews Journalist

“I’ll see you in court!” is a phrase famously coined by Americans, who come from an infamously litigious society. In the US, you can get taken to court for anything. Allianz Global Corporate & Specialty (AGCS) reports that the financial services industry is not immune from this. Since 2009, an estimated 200 entities and individuals have been charged with misconduct. This includes 89 CEOs, Chief Financial Officers and other senior executives. This is particularly a concern when it comes to directors and officers (D&O) liability.

The current landscape

AGCS adds that tightening regulations, emerging technologies, increasing shareholder activism, intensifying class action litigation activity, escalating merger objections and initial public offering activity are among the many challenges facing corporate directors and officers. There is also the rise of regulator activism.

Managers face a growing threat from legal and regulatory liabilities which could result in costly investigations, criminal prosecutions or civil litigation, putting the company’s assets, and their own, at risk.

The situation in Europe

In the UK, there are several key issues worrying executives beyond the potential implications of Brexit. These include the possibility that executives could face prosecution in future for offenses including fraud and money laundering carried out by staff.

The focus on personal accountability is notable in Germany. The German market is typified by internal liability claims, where the company sues executives for wrongdoing or compliance failings. Around 80% of German D&O claims seen annually by AGCS are for such cases.

In the rest of the world...

In the US, the number of securities class action filings is rising, potentially on course for its highest total for 12 years.

In addition, at current pace, merger and acquisition related filings in federal courts could double the annual numbers observed in the last four years. Meanwhile, the “Yates Memo” is a renewal of the government’s commitment to policing corporate wrongdoing and rewarding whistle blowers, a trend also taking root outside of the US.

Regulatory scrutiny is also increasing across the United Arab Emirates, where a new law sets out the basis on which liability can be found against directors, while in South Africa, more frequent use of class actions may also expose directors to more claims.

In Latin America, and Brazil in particular, D&O insurance take-up has increased, with recent high-profile corporate scandals related to corruption practices resulting from lengthy criminal investigations.

What’s worth noting is that of the costliest twenty D&O losses, over 50% is down to noncompliance with laws and regulations.

Emerging risks

Data protection rules around the world are becoming increasingly tough as government agencies bolster cyber security.

This significantly impacts businesses; penalties for non-compliance are increasingly severe. A serious cyber incident can result in reputational and financial damage, as well as regulatory action. In more extreme cases a cyber-security breach could cause a company’s share price to drop.

In future, it may be possible to claim substantial damages from directors if there has been negligence in any failure to protect data or a lack of controls.

There is currently uncertainty around the issue of directors’ cyber liabilities but it is likely that someone will make a successful argument that a director was negligent or had not paid sufficient attention to cyber security in future.

The director’s minefield

There are a wide range of scenarios in which a director could be considered negligent, such as a fund transfer fraud or where a vulnerable network is comprised, leading to significant business interruption, property damage or loss of intellectual property.

Directors’ cyber exposures are likely to grow further with increasing reliance on technology. Technology, data and algorithms can become corrupted. For an analyst using predictive models to advise customers, this could open up liabilities.

Editor’s Thoughts:
As you can see, this web is very tangled indeed. And like with cyber liability, it may take one major incident where an offending director will be made an example of by the courts before interest is attracted to this on a major scale. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.