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Major reforms will impact on Directors and Officers (D&O) insurance

Major reforms have been proposed for UK audit and corporate governance which could have a significant impact on Directors and Officers (D&O) insurance.

They are put forward in a white paper on ‘Restoring Trust in Audit and Corporate Governance’ issued by the UK Department for Business, Energy and Industrial Strategy and include a new watch dog - the Audit, Reporting and Governance Authority (ARGA) to replace the Financial Reporting Council (FRC).

The proposals provide the audit regulator with investigation and enforcement powers into breaches by directors of statutory duties for corporate reporting. They are designed to maintain the UK’s reputation for high standards of audit and corporate reporting.

As a result of these proposals directors of companies subject to UK laws, should review their insurance policies to ensure their insurance coverage will accommodate the proposed reforms.

The increased regulation and enforcement powers of ARGA could, potentially, be costly for companies as D&O insurance would usually cover formal investigations but may not cover a pre-investigation phase.

The intention to hold directors personally accountable rather than the board as a whole may also have other significant ramifications.  D&O policies usually contain conduct exclusions for deliberate or reckless conduct of a director.

The most stringent reforms and sanctions are aimed at Public Interest Entities (PIEs), predominantly main market listed companies which are already subject to additional regulatory auditing measures.

The White Paper seeks to expand PIEs to large private companies and AIM-listed companies with more than 2,000 employees or a turnover higher than £200m and assets above £2bn or the second option of companies with over 500 employees and a turnover of more than £200m.

The proposals include:

  • The introduction of a new watch dog - the Audit, Reporting and Governance Authority (ARGA) - to replace the FRC. ARGA will have investigation and civil enforcement powers to hold to account directors of large businesses for breaches of their duties in relation to corporate reporting and audit.
  • Changing responsibility from the collective board to personal liability of individual directors for new reporting and attestation requirements.
  • Proposing to create a new stand-alone audit profession with wide reach and a clear public interest focus covering all forms of corporate reporting beyond financial statements focus.
  • Requiring companies to set out their approach to audit through publication of an audit assurance policy to be voted upon by shareholders.

Sanctions for PIE directors are proposed to include fines, orders to mitigate breach and in severe cases prohibition on acting as a PIE director. The Government is also considering the scope for its measures to be introduced in stages or after a transitional period for measures with the most significant impact on directors.

 It is expected that they will apply to premium listed companies first and then to other PIEs after two years.

W Denis Insurance Brokers has a dedicated ProFin team, which specialises in Management Liability Insurance, including; Directors & Officers Insurance, Trustees Liability Insurance, Public Offering of Securities Insurance, Corporate Liability Insurance as well as other types of Professional Liability Insurance. To discuss this further with an expert at W Denis, please make arrangements with Richard Bowdidge on 0203 713 3982 or at Richard.Bowdidge@wdenis.co.uk

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