Regulation watch: the Economic Crime and Corporate Transparency Act

One regulatory change that should demand UK risk managers’ attention is the Economic Crime and Corporate Transparency Act (ECCTA).

This act introduces a new corporate offence for failing to prevent fraud, which will come into effect later this year or early 2025.

What does it mean for organisations?

Companies will be held liable if criminal activity is carried out for their benefit without adequate fraud prevention procedures in place.

The ramifications for directors and officers (D&O) are significant, as insurers will scrutinise a company’s policies and procedures when assessing and underwriting risks.

Without robust fraud prevention measures, businesses may experience increased claims against their directors and officers.

They should prioritise implementing comprehensive policies to mitigate the risk of fraudulent activities.

“The ECCTA has really crept up on our customers and insurers alike, and there is a real danger of it falling between some cracks when it comes to insurable loss.”

According to Steve Bear, executive director at Gallagher, this particular piece of legislation deserves significant focus from risk managers and the boards of directors at the companies they look after.

He says: “Whilst ESG (particularly environmental) will continue to grab headlines if you speak to many D&O insurers, they will tell you that regulatory actions are driving loss costs.

“The ECCTA has really crept up on our customers and insurers alike, and there is a real danger of it falling between some cracks when it comes to insurable loss.”

He adds: “D&O policies commonly exclude claims against the company itself and successful allegations of fraud, and whilst crime policies can be purchased, the lack of first-party loss (if anything the company may have actually benefited) makes it a tough area of coverage.”

Listing reforms and director disqualification

The pipeline of regulatory changes also includes significant reforms in listing regulations.

The Financial Conduct Authority (FCA) has relaxed specific rules to make London a more attractive location for companies to go public.

While this is a positive development for the economy, it raises concerns about companies listing prematurely, potentially leading to investor losses and subsequent legal actions.

Any company considering going public must ensure their D&O and professional indemnity insurance are properly structured to address the associated risks.

“We’ve seen multiple examples of tax liabilities following individual directors beyond the confines of a corporate veil” 

Furthermore, the Finance Bill 2024 includes provisions to tighten existing laws and create new strict liability criminal offences for promoters who fail to comply with stop notice obligations.

The bill also empowers HM Revenue and Customs (HMRC) to initiate director disqualification proceedings against directors involved in promoting tax avoidance.

“We’ve seen multiple examples of tax liabilities following individual directors beyond the confines of a corporate veil,” Bear explains.

“Clearly, everyone and every company must pay their taxes, but when a director becomes individually liable, often due to bankruptcy, having the correct level of coverage to step in is vital.”

Coping with uncertainty and assessing D&O insurance

The dynamic regulatory landscape often brings uncertainty, and businesses must develop strategies to cope effectively.

Embracing a proactive approach to regulatory changes is crucial. This includes staying informed about pending legislation, engaging with industry associations and legal experts, and assessing the potential impact on the organisation’s risk profile.

“Conducting a comprehensive assessment of D&O insurance coverage is essential”

A critical aspect of managing regulatory risks is evaluating the volume of potential claims resulting from directors failing to ensure compliance with new legislation.

Bear emphasises the importance of directors and officers understanding the implications of regulatory changes on their responsibilities and the potential consequences of non-compliance.

He concludes: “Conducting a comprehensive assessment of D&O insurance coverage is essential to ensure adequate protection against potential claims and associated legal costs”.