Administrative sanctions on natural persons

Sweden

In July 2013 the CRD IV package entered into force. CRD IV contains inter alia in Article 66 rules about pecuniary sanctions on certain natural persons up to an amount of EUR 5,000,000 (the sanction rules).

The sanction rules were implemented in Sweden on 1 May 2015. Although adopted already in 2013 in the CRD Directive, the sanction rules did not raise any significant public discussion in Sweden until early spring 2015, when the bill was presented.
Following the bill in February 2015, general public discussion addressed the sanction rules in general and the consequences for the relevant individuals and the credit institutions and investment firms in particular.

The discussions in Sweden mainly touched on the following topics.

• The amount of the administrative sanctions – EUR 5 million – far in excess of amounts “normally” used in administrative sanctions and much higher than the criminal fines that could be relevant for crimes in related areas. Even a fraction of the sanction fees could mean personal disaster.
• The suitability and the competence of the Swedish Financial Supervisory Authority (“SFSA”) to be responsible for the investigation, the “prosecution” and the initial decision to impose administrative sanctions on a natural person and whether it was appropriate that the SFSA should have all these functions.
• Insurability – statements made by the SFSA that neither the firms nor the relevant individual would be entitled to take out an insurance policy to cover the possible administrative sanction.

Fear was expressed that the above would lead to a shift in the focus for the individual persons, from the interest of the credit institutions and investment firms, to considering or protecting the interest of the individual.

The sanction rules have now been in force for approximately seven months in Sweden. During that period there have been a handful of cases where well-known “professional” board members (presumably only “non-executive” board members) have left their positions in credit institutions or investment firms, citing the sanction rules as the direct reason. Currently no information is available regarding how the SFSA plans to apply the rules. Public discussion about the sanction rules has gradually ceased and the rules seem to have been accepted and added to the general plethora of financial regulatory rules related to the financial market.

Other countries

Ireland

In Ireland, the CRD IV was implemented in March 2014. The Irish legislation implementing CRD IV reflects the wording of the Directive. The CRD IV implementation was supplemented by an implementation Notice issued by the Irish Central Bank in May 2015. However, the implementation notice does not provide any additional guidance in respect of the EUR 5 million administrative sanction.

There has not been any significant general discussion about the sanction rules, nor have any high-profile individuals resigned from their appointments/positions due to the sanction rules. Regarding the insurance issue, standard board insurance usually will not provide cover due to the provision in the policies that insurance coverage does not apply in the case of negligence, willful default or fraud by the director, which – when it comes to the sanction rules in CRD IV – is a condition for personal liability.

Denmark

In Denmark, Article 66 of the CRD IV has not yet been implemented. In 2014 a committee was appointed to review the administrative penalties in CRD IV and to prepare input on how to implement it into/adjust the Danish legal system for such administrative penalties. The committee has not yet submitted its report, but the media seems to have the general understanding that Denmark will implement significant administrative penalties in order to be able to fine natural persons within the financial industry on a much larger scale. Since the sanction rules have not been implemented, there has been very little public discussion on this topic. However, such discussions may very well come once the committee has issued its report.

Finland

The situation in Finland resembles the situation in Sweden. Finland implemented CRD IV – including the sanction rules – in August 2014. The specific rules about the pecuniary sanctions have been amended and the amended rule came into effect on 26 November 2015. According to reports from the Finnish FSA, the administrative pecuniary penalties are primarily imposed on legal persons. In some cases, however, the penalties can also be imposed on natural persons within the company’s management. There is no information about discussions on whether it would be possible to provide insurance coverage for the sanctions.

The sanction rules – which provide for administrative sanctions that are much stricter than any fines that a general court would impose as a criminal sanction for a much more serious offence – caused general discussion when they were first introduced, but there is no ongoing public debate about the specific rules of CRD IV at this time. It is possible that there will be more information available after the regulation comes into effect.

England

In the UK, the parts of CRD IV of interest for this article were announced (not implemented) by HM Treasury, the Prudential Regulatory Authority (PRA) and the Finance Conduct Authority (FCA) in October, with an indication that the new rules would come into force on 7 March 2016. The creation of the senior managers’ regime, certification regime and new conduct rules are a significant milestone in UK regulatory reform, as is the creation of a new criminal penalty for making a decision that causes an institution to fail. The PRA and the FCA can fine or sanction senior managers (such as senior bankers and senior investment managers) for misconduct that occurs in their areas of responsibility and this is designed to give UK financial regulators stronger powers to hold to account senior managers whose misconduct causes their institution to fail. Under the new criminal offence, such persons, if convicted, can face up to seven years in prison.

As a result of the new rules, the concern, as reported in the UK national press, is whether some individuals would be willing to hold the position of senior manager. There are indications that not all current senior individuals are comfor- table with the scope of the new rules and some have resigned from their positions or indicated that they will step down.

The UK regulators originally proposed that senior mana- gers would face a ‘reverse burden of proof’; namely, that they have to prove that their conduct did not lead to or contribute to the failure of their institution. Following widespread resistance to this from industry, this aspect has been dropped. Other areas of contention remain the focus of discussions between industry and UK regulators, which may lead to modification of some of the rules.

In the UK, there is generally no distinction between the fiduciary duties owed by executive and non-executive directors and that, combined with the extent of involvement by non-executives on the one hand, and executives on the other, in day-to-day management, could result in nonexecutives feeling that they are not in a position to hold a senior manager position and to discharge their duties properly and effectively. Non-executives are unlikely to be able to claim ignorance as a defense against regulatory sanction or criminal prosecution.

The new rules will not have retrospective effect and since they are not yet in force, there have been no sanctions or criminal prosecutions in the UK under the new rules, but regulators have made it clear that they will take a tougher line in the future with senior managers who they think have engaged in misconduct and who have caused or contributed to the failure of their institution.

Concluding remarks

Obviously we can now foresee a change in the climate regarding responsibility for rule breaches in the capital market. Board members in banks and investment firms are not the only ones who will be potential subjects of sanctions from the authorities. As can be seen in another article in
this Report, similar rules have also been proposed for board members and managers in fund management companies. In addition, newly decided amendments to the Transparency Directive contain rules regarding sanctions for board members in listed companies and other entities that have breached rules regarding obligations to publish certain transactions in shares issued by listed companies (“flagging rules”).

If – and signs point in this direction – the actual rules have the effect that competent board members decide to leave their positions, there is a risk that the good intentions of the new rules will instead have the opposite effect on management of the companies mentioned above.