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MPs warn laws for financial directors will create ‘litigation mountain’

The Financial Reporting Council and Sir David Walker have warned MPs that strict liability for directors of financial institutions could make it harder to recruit people on to boards and lead to increased litigation.

Walker was brought in to help the regulator draft a report into the failure of the Royal Bank of Scotland.

Published last December, the report says making directors accept personal financial losses if a firm gets in trouble could help strike a new balance between risk and reward in financial institutions.

Giving evidence to the Treasury select committee this week, FRC chairman Baroness Hogg said: “There is a perception you would have to be totally insane to go on the board of a company, let alone a financial institution. There is a danger if you go down this route you would make the pool rather more shallow.”

Walker said: “I would argue against it, as it would drive people away. The only thing that would be certain is there would be a mountain of litigation.”

FSC Investment Services managing director Frank Cochran says: “These people cannot be held accountable for everything that happens to a business. If there is gross misconduct on their watch, they lose their job and I think that is a big enough kick in the teeth.”

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. I sort of agree but they cannot held responsible for everything that goes on as they dont know everything that goes on. That having been said they cannot continue to get away scott-free when they are involved in decisions that turn out to be catastrophic disasters. They should be banned from holding senior posts in Financial firms again. Same goes for those who are i charge of regulators.

  2. Julian Stevens 25th May 2012 at 9:43 am

    The FSA already operates a policy of holding individuals personally liable for regulatory failures on the part of IFA firms of which they’re directors. There have already been many examples. But not the FSA (when found to have failed to fulfil their responsibilities, FSA directors get a a massive golden parachute, as seen with Clive Briault), not life offices and certainly not the banks (have any bank directors even been censured over the mass mis-selling of PPI or, before that, mortgage-related endowments? Not that I can recall. Just IFA firms.

    Yet here we read of MP’s debating, as they should, whether or not liability for individual directors should or should not be made law, whilst the FSA, it seems, is ahead of the curve, making up and imposing (highly selectively), as it goes, its own “laws”, with no regard for any sort of proper Parliamentary process.

    That’s what happens as a result of a dangerous and ill thought through item of legislation such as the FSMA 2000, which gives the regulator free rein to do whatever it likes without having to account to anybody but its own board. And the government has publicly endorsed this status quo.

    As for litigation, how can anyone, least of all an individual of limited financial means, litigate against a regulator that enjoys statutory immunity from prosecution, not to mention, even if it could be sued, virtually bottomless coffers with which to meet the fees of the sharpest and most expensive lawyers?

    It’s a rigged deck and the FSA holds all the cards. Meanwhile, Hector Sants would have us believe that the FSA has no prejudicial agenda against the IFA community. What he says and what the FSA’s actually doing don’t quite match, do they?

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