UK: FCA provisional decision to fine and ban former NED of financial firm for failing to disclose conflicts of interest

The FCA has published a notice of its decision to fine a former non-executive director (NED) of two mutual societies £154,800, and to ban her from performing any role in regulated financial services.   The FCA considers that she breached the requirement to act with integrity by recklessly, and in breach of her fiduciary position as a NED, failing to recognise and disclose conflicts of interest.   The findings are contested, and have been referred to the Upper Tribunal (the Tribunal), but an application for orders to prevent publication of the Decision Notice and of particulars of the reference in the Tribunal's register was unsuccessful.

Boards of financial firms should take note that the case squarely raises conflicts identification and management and basic corporate governance as priority issues:

“The position of NEDs is critical to the effective functioning of a board and to maintaining the confidence of customers. Because of the nature of their role, NEDs are more likely to have a portfolio of appointments and are likely to find themselves having to manage conflicts of interest more frequently than their fellow directors. NEDs need to manage scrupulously their conflicts of interest and to observe basic corporate governance principles.”

The factual background on which the FCA relies

Angela Burns is an experienced professional in the UK investment industry and the chief executive of her own investment consultancy business. Shortly after completing a consultancy project for a US-based investment manager ("the IM") in 2006, she asked IM for an opportunity to turn her proposal into a UK business.  That proposal was not taken up, and in September 2008, Ms Burns put forward a proposal outlining consultancy work she could perform for the IM.

Ms Burns was approved by the regulator to perform a CF2 non-executive director role at Marine and General Mutual Life Assurance Society (“MGM”) in January 2009, and at Teachers Provident Society (“Teachers”) in May 2010.  She resigned from both roles in May 2011.

When Ms Burns became a NED and chair of the investment committee for MGM, she wrote to the IM explaining her new roles, and renewed her request for consultancy work, also suggesting that she would be pleased to act as NED for the IM.  She did not inform MGM or Teachers that she was seeking work from IM, even though during her tenure as a NED and chair of the investment committees at both mutual societies, she suggested that each consider using the IM.  Furthermore:

• Ms Burns participated in Board decisions which resulted in MGM placing a £350m mandate with the IM; she told the CEO of MGM that there was "no prospect" of her working with the IM; and some time later, she forwarded an email from MGM on a subject of some sensitivity to the IM.
• Ms Burns recommended the IM as one of several firms to be included in a tender process for a £750m mandate with Teachers (the IM was the preferred candidate).  She did not update the declaration of interest she had executed with Teachers, but sent the IM an email, which on its face appeared (and was taken by IM) to be a request for payment of a 10% fee in respect of the previously awarded MGM mandate, and the potential Teachers mandate, and of a further £20,000 to undertake a NED role for the IM.  The IM withdrew from the tender process after receipt of the email.

Ms Burns apparently considered that although she had aspirations of working for the IM, there was "no traction" in the discussions and therefore there was nothing concrete to disclose to MGM or Teachers (other than her previous work with the IM, which she had already disclosed).  Her comment to MGM about there being no prospect of working with the IM was based on the failure of the IM to respond to the 2008 proposal.  There was no real, sensible possibility of a conflict as the interests were too remote, being contingent on third parties and entirely prospective. 

She characterised her email request to the IM (which was not disclosed to MGM or Teachers) not as a demand for payment of fees, but rather as a proposal or "mere preparatory steps to develop a relationship", effectively an attempt to resurrect the discussions about future work which had effectively stalled in 2008.  She also argued that there was clear evidence that she had not played any inappropriate part in the selection process, and that MGM had benefitted in its dealings with the IM because of the past relationship between Ms Burns and the IM.

The FCA's (provisional) findings

The FCA's Decision Notice cites the duties imposed under relevant legislative provisions (s.177 of the Companies Act 2006, and s.63 of the Building Societies Act 1986 as extended to the Friendly Societies Act), the fiduciary nature of Ms Burns' position as director, and contractual obligations which applied to her through the internal policies of MGM and Teachers, to establish the "high" obligations against which a failure to make full disclosure should constitute a breach of integrity.

Although the FSA acknowledges the evident regard held for Angela Burns by others in testimonials given on her behalf, it takes the view that the purpose of disclosure is to give others the opportunity of considering what effect, if any, the disclosure has - the issue is the interest of the other party - not the judgement of the person in, or possibly in, conflict nor the reaction itself of the person to whom the disclosure is made.

Ms Burns was aware of the need to declare conflicts of interest.  In the absence of clear evidence that she continuously and consciously considered her position and came to the view that there was no conflict, the FCA has concluded that she closed her mind to the issue and in so doing, acted recklessly.   Ms Burns did apparently make reference to various difficult decisions involving judgement calls (based on her long experience in the sector), but the FCA's conclusion of recklessness seems to be based on her failure to discuss her position with anyone else to resolve any uncertainty as to whether her communications amounted to a disclosable interest. 

Clearly, the FCA's view has been heavily swayed by the somewhat less than transparent statement made to MGM about there being no prospect of her working for the IM, and the email which the IM took to be a request for a payment and a NED role in return for Angela Burns using/having used her positions at the Mutual Societies to facilitate the placement of investment mandates.  It is also unfortunate that Ms Burns’ representations appeared (at least to the FCA) to have failed to acknowledge the interests of MGM and Teachers, even though it is plain that Teachers, at least, were denied the opportunity of working with their preferred supplied, the IM - so both "lost out". 

Nevertheless, the FCA accepts in the Decision Notice Ms Burns did not act deliberately or dishonestly.  To move from this conclusion to a finding of lack of integrity seems to be something of a new departure for the FCA, whose guidance on APER statement of Principle 1 (integrity) refers to conduct that is deliberate.  Indeed, the Annex to the notice refers to APER 4.1.3E (deliberately failing to disclose the existence of a conflict of interest in connection with dealings with a client), yet the FCA expressly found that Ms Burns had not acted deliberately, but recklessly - and predicates that finding on the absence of clear evidence rather than on the balance of probabilities based on the evidence. 

The FCA does then slightly hedge its bets by going on to suggest that if Ms Burns did consider her position in this respect, her judgement fell short of the standards expected of a non-executive director in her position, which would constitute a breach of Statement of Principle 2 (due care, skill and diligence).  However, a finding involving lack of integrity plainly carries serious reputational implications - and provides a clear foundation for a permanent ban.

It will be interesting to see what findings and recommendations the Tribunal makes on the matter referred to it when it comes to determine the merits. 

Issues to consider

In the meantime, there are some points which NEDs of financial firms may wish to ponder:

• Separate email addresses: Ms Burns used the email address of her own business in her communications for each of the Mutual Societies - having separate email addresses for each role would have made the dividing lines between her various roles a little clearer, and could have helped to avoid an inadvertent mixing of personal and NED business.
• Caution in marketing on the basis of an existing NED role: Going forward, NEDs in regulated firms may wish to give careful thought to the manner and contexts in which they highlight their NED role - the FCA is critical of Ms Burns' conduct in leveraging on her positions in her approaches to the IM - with the benefit of hindsight, and in the absence of full disclosure to the firms for which a NED role is already being performed, an email to a client highlighting the FSA’s renewed emphasis on the requirement for the boards of financial firms to have appropriately experienced NEDs, asking whether the client had appointed one or more NEDs, and noting that as an approved NED, this would be a role the NED would be pleased to provide for the client, may have been a bridge too far, at least in this case.
• When in doubt, disclose: A NED with a portfolio of appointments will have more interests to consider, and for a professional person maintaining a number of appointments, everyone may be a potential client, making the dividing line between acceptable contact and unacceptable contact sometimes difficult to discern - where there is doubt, the simple rule is: ‘Disclose always’.

Publication of the Decision Notice

Where the FCA issues a Decision Notice which is referred to the Tribunal, the relevant FSMA provision, the FCA's policy and the Rules provide that – save in exceptional circumstances where the applicant can produce “cogent evidence” of real unfairness causing “a disproportionate amount of damage” if publication were not prohibited –  the Decision Notice should be published and the Tribunal proceedings should be in public.  

The FCA's proposed policy on the publication of details of warning notices, set out in CP13/8, indicates that the main circumstances in which the FCA would not publish details on the grounds that publication would be unfair to the person with respect to whom the action was proposed to be taken are where publication could materially affect their health, result in a disproportionate loss of income or livelihood, prejudice criminal proceedings to which they are a party or give rise to some other equal degree of harm.  In relation to unfairness in a case involving livelihood, the example provided focuses on whether bankruptcy or insolvency would result.

The Tribunal considered that destruction or serious damage to livelihood is at a higher level than embarrassment or reputational damage, but that some damage is to be tolerated because of the importance of the open justice principle.  Publication should be prohibited where its impact individual concerned is so severe that it outweighs that principle.  The evidence should establish that there is a significant likelihood of such damage or destruction occurring.

(1) The Tribunal accepted that there was a significant possibility, but not a significant likelihood, that Ms Burns' one existing client would terminate the contract if it learned of the Decision Notice, but bearing in mind the current level of activity under the contract, that client might equally terminate the contract in any event.

(2) There was no certainty that Ms Burns regardless of publication would be in a position to win other work over the next twelve months.

(3) In the worst case scenario, therefore, there would be a loss of income during the period the reference took place, but Ms Burns would not be destitute as she has other assets to fall back on.  This would equally be the situation if the client terminated the existing contract for any other reason.

(4) If the reference is successful, there would be a reasonable prospect of Ms Burns being considered for further work from previous clients and contacts. Consequently, the overall result would be that her consultancy business would have been put “on hold” whilst she pursued the reference but would be capable of being revived.

(5) There are no other individuals, such as employees whose position would be adversely affected as a result of publication.

The scale of the business concerned, the uncertainties in its future prospects in any event, the prospects for reviving it after the determination of the reference, and the fact that the financial impact would not leave Ms Burns insolvent or destitute led the Tribunal to conclude that the applicant had failed to satisfy it that the evidence showed that the impact of publication on Ms Burns is so severe that it outweighs the strong presumption that publication should be permitted.  The bar for rebutting that presumption is plainly a high one where there are no potential adverse impacts on other individuals. 

However, the Tribunal gave Ms Burns the opportunity to discuss the regulatory proceedings with her existing and potential clients and contacts to minimise the impact of publication, and stressed that the FCA should take adequate steps when publicising the Decision Notice to ensure that it was clear that the decision was provisional and being challenged in the Tribunal.  Dismissal of the applications was conditional upon compliance with those principles.