4 Th AIDA EUROPE CONFERENCE Civil Liability Working

4 Th AIDA EUROPE CONFERENCE Civil Liability Working Party The Effectiveness of D&O Insurance and Bankers’ Liability by Dr Adolfo Paolini University of Buckingham and DACBeachcroft LLP 13 th September 2012

Risk Management in Banking “ If you open the vaults of a bank, you may think you would know what you would find there. You would be wrong. What is really there, hidden behind the stacks of currency, is the bank’s inventory risk. ” Allen L & Saunders A in The Oxford Handbook of Banking, OUP 2012 at 90

Risk Management in Banking • • Liquidity Management Asset Management Liability Management Capital Adequacy Management

Directors of Financial Institutions • • • BCBS “ … the board should take into account the legitimate interest of shareholders , depositors and other relevant stakeholders. . ” OECD: Duty of Loyalty “. . . to act in the interest of the company and shareholders” Companies Act 2066 ss 170 -177 Shareholders cannot recover for reflective loss. Prudential Assurance v Newman Industries/Impossibility to sue as member of a Class /Class Action. Civil Liability to third parties is unlikely: Williams v Natural Life Health Food Ltd. Criminal Liability /Tort of Deceit/Fraud was found on a director personally: Standard Chartered Bank v Pakistan National Shipping Corporation

Scenario: Sub-Prime Lending/CDO’s & CDS’s • Sub – Prime Lending • Over the Counter Derivatives (OTC) • Collateralised Debts Obligations (CDO’s) • Credit Default Swaps ( CDS’s)

D&O: Directors v. Company CA 2006 s 174: Monitoring and Supervising Sub-Prime Lending Negligence? Levels of Speculation Were Almost Reckless Lehman Brothers: Repo 105 /108 (off balance sheets products) sales or liabilities? • D&O does not cover wilful misconduct • Side ‘C’ cover and the effect of Stone & Rolls v Moore Stephens and Safeway Stores v Twigger • •

D&O: Directors v. Investors Civil Liability/Misrepresentation 1. Hedley Byrne/ Caparo Industries v Dickman • Assumption of Responsibility: Williams 2. Reliance on Financial Advice 3. Contractual and /or Statutory Financial Advice

D&O: Directors v. Unsophisticated Investors • Who are they? • FSA principles of Business ( PRIN 9): “reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment” • Bank/Customer Contractual Relationship • FSMA 2000 s 150: private and non-private customers • Director’s Personal Liability?

D&O: Directors v. Sophisticated Investors • JP Morgan Bank (formerly Chase Manhattan Bank) v Springwell Navigation Corp • IFE Fund SA v Goldman Sachs International • Peekay Intermark Ltd v Australia & New Zealand Banking Group Ltd • Titan Steel Wheels v RBS • D&O substantive cover: Liability cannot be ascertained

LIBOR Twist • • • Interest Rate Manipulation Derivatives Market relies on LIBOR rates Intentional / Wrongful Act D&O: Public Policy to deny cover Defence Cost Cover still available for investigations.

Conclusions • Company v Directors: D&O cover for breaches of the duty of care, skill and diligence • Director v Unsophisticated investors: D&O unlikely to cover / only exceptionally • Directors v Sophisticated Investors: D&O unlikely to cover/ not reliance defeats the claim • LIBOR: D&O/ failure to monitor/ intentional manipulation may defeat the claim

Thank You Dr Adolfo Paolini adolfo. paolini@buckingham. ac. uk apaolini@dacbeachcroft. com