The Financial Conduct Authority (FCA) has published a Decision Notice in respect of the provisional decision by its predecessor, the Financial Services Authority (FSA), to fine a former non-executive director of two UK mutual societies, Angela Burns, £154,000 and banning her from performing any role in regulated financial services for breach of Statement of Principle 1 for Approved Persons (which says an approved person must act with integrity in carrying out his/her functions).  The FSA's decision was that she had breached the requirement to act with integrity by recklessly failing to recognise and disclose conflicts of interest and that this also put her in breach of her fiduciary duties as a non-executive director.  The lessons from this case are therefore of general application and not just confined to the financial services industry.

Background

  • In 2006 Ms Burns, who has her own investment consultancy business, completed a consultancy project for a US-based investment manager.  Shortly afterwards she approached the investment manager asking for the opportunity to turn her proposal into a UK business.  This suggestion was not taken up by the investment manager and in 2008 Ms Burns put forward a proposal outlining the consultancy work she could perform for the investment manager.
  • In January 2009 and May 2010 Ms Burns became a non-executive director (NED) and chair of the investment committee for two UK mutual societies.  As both were regulated firms, Ms Burns was carrying out a controlled function as a CF2 –non-executive director and so had to be approved by the FSA.  This happened in January 2009 for the first mutual society and in May 2010 for the second meaning, she was required to meet the FSA standards of conduct including the Statements of Principle.  She resigned both positions in May 2011.
  • Upon taking up her NED positions Ms Burns notified the investment manager of her new roles and renewed her request for consultancy work. She did not, however, inform either of the mutual societies that she was seeking work from the investment manager and, in her role as chair of their investment committees, she suggested to both that they might consider using the investment manager.  Indeed, while she was a NED and chair of the investment committees at both mutual societies, one placed a £350 million mandate with the investment manager and the other was considering placing a £750 million mandate with the investment manager.
  • In addition to her obligations as an Approved Person, Ms Burns also had duties under relevant legislative provisions by virtue of section 177 of the Companies Act 2006 (which governs the first mutual society) and section 63 the Building Societies Act (which applies to the second mutual society).  She also had contractual obligations under the internal policies of both mutual societies which covered conflicts of interest and the use of confidential and sensitive information.

The arguments

Ms Burns' view was that there was nothing concrete for her to disclose to the boards of the mutual societies (other than the original work she had done for the investment manager which she had disclosed) and that she had used her judgement, based on years of experience in the UK investment industry, in coming to this decision.  She felt that there was no real possibility of a conflict of interests as the interests were too remote and were contingent on a third party.

In the FSA's opinion, Ms Burns had a duty to disclose her interest in seeking consultancy work from the investment manager to her fellow mutual societies' directors and no such disclosure was made.  In addition it concluded that Ms Burns also used her NED positions to benefit herself.  It is clear from the evidence that Ms Burns was aware of the need to disclose conflicts of interest and the FSA states clearly that it did not believe she had acted deliberately or dishonestly.  There was not, however, any evidence that Ms Burns had considered her position in the light of the obligations she was under as a director and under the internal policies of the two mutual societies; nor had she discussed her position with anyone else to resolve any uncertainly as to whether her communications amounted to a disclosable interest.  The FSA concluded that, by not consciously considering her position or discussing her position with anyone else to resolve any uncertainty, she had acted recklessly in breach of the requirement to act with integrity required Statement of Principle 1.

Ms Burns has contested the findings and has referred the matter to the Upper Tribunal to appeal the decision and in due course both she and the FCA will present their cases. The Tribunal may uphold, vary or cancel the FSA's decision.  Her application to the Tribunal for an order to prevent publication of the Decision Notice failed, however, which is why details of the Decision Notice, which was issued in November 2012, have only recently been published.

The FSA acknowledged that Ms Burns did not act deliberately or dishonestly and in previous instances it has taken deliberate rather than reckless action to amount to a breach of the requirement to act with integrity.  It will be interesting to see whether the stricter approach adopted in this case will be upheld on appeal.

The FSA made no criticism of the mutual societies or the investment manager.

The lessons for directors

Many directors, particularly non-executives, have more than one appointment and this case emphasises how important it is for directors to consider carefully how their interaction with different companies might be viewed by others.  Tracey McDermott, Director of Enforcement and Financial Crime at the FCA states 'Because of the nature of their role, NEDs …. 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'.  While the decision in this case related to conduct as an approved person in the financial services sector, the FSA's finding that Ms Burns was also in breach of her statutory duty to declare an interest in a proposed transaction or arrangement, in the context of a possible conflict, indicates that is an area where all directors should tread carefully.  The golden rule for directors should be that if they have any doubt whatsoever whether they have a conflict, they should always disclose.