ML Covered - December 2024

Welcome to the December edition of ML Covered, our monthly round-up of key events that are relevant for those dealing with Management Liability Policies covering D&O, EPL and PTL-type risks.

Liquidator granted permission to disclose bank statements to an assignee to pursue a cause of action

In Asertis Ltd & Anor v Melhuish & Ors [2024] EWHC 2819 (Ch), the High Court granted permission for a liquidator, who had assigned his claims against former directors, to disclose bank statements obtained under section 236 of the Insolvency Act 1986 (the Act) to the assignee.

Background

On 2 January 2020, Solstice (SW) Limited (the Company) entered liquidation. The Liquidator made an application under section 236 of the Act for the production of various documents including bank statements. The Liquidator identified an overdrawn employees' loan account, unjustified withdrawals of funds and diversions of funds to the personal accounts of two former directors. The Liquidator later assigned these claims he had identified to Asertis Limited (Asertis).

On 25 January 2023, Asertis sought remedies against the Respondents under the assigned causes of action. The Respondents objected to Asertis' use of the bank statements obtained by the Liquidator under section 236, arguing that they had not given consent for their use in the proceedings. The Liquidator provided there was a public interest in his duty to realise assets for the benefit of creditors and that the claim could only be evidenced by the bank statements and therefore must be provided to Asertis. The Judge directed Asertis not to rely on the bank statements until making an application to court to determine its entitlement to do so. The application was subsequently made.

Application

The court granted the application, ordering that the material obtained should be made available to Asertis to enable the free flow of information necessary for the purpose of satisfying the burden of proof at trial.

The court confirmed that the judgment was consistent with the intention of Parliament to provide an officeholder with the ability to sell causes of action that would benefit an insolvent estate. An officeholder would be hampered in obtaining the best price if he could not disclose information material to the assessment of the cause of action.

However, the court balanced these rights by ordering that the bank statements should be redacted to hide personal information and disclose only the fact of the deposits into the account. On the issue of permission, the court noted that it was "for the office-holder to decide whether to seek permission to provide confidential information to a prospective assignee or assignee" and that the assignee must then decide whether the court's permission is required to use any confidential information. The court ruled that whether permission is required is dependent on the specific facts of each case but that 'permission will be the usual course.'

In this case, the court ruled that it was right that permission was sought.

Key Takeaways

There are a growing number of claims being brought against former directors of insolvent companies with many of these claims being assigned from liquidators to litigation funders. The decision more clearly sets out the procedural requirements for how liquidators can use documents obtained under Section 236 of the Act.

In particular, the judgment confirms that claims can be effectively assigned while still respecting confidentiality obligations. However, the court makes it clear that an assignee still does not inherit all the rights of the assignor and that in most cases court permission will be required before company documents are disclosed.

To read the case, please click here. 

The Employment Rights Bill: Next Steps

Last month, we covered the Employment Rights Bill and its key proposals. This month, we discuss the accompanying Next Steps to Make Work Pay (Next Steps) document focusing on section 3, which sets out the measures that the government plans to deliver outside of the Employment Rights Bill. The delivery of these measures is anticipated from autumn 2024 onwards. 

Non-legislative delivery

The government plans to deliver reforms through means other than legislation, for example, progressing the Right to Switch Off through a statutory Code of Practice.

• Other non-legislative delivery includes:
• removing the age bands for a living wage;
• supporting workers with a terminal illness through the Dying to Work Charter;
• modernising health and safety guidance;
• enacting the socio-economic duty;
• ensuring the Public Sector Equality Duty provisions cover all parties exercising public functions; and
• developing guidance on menopause and general health and wellbeing for employers.

Delivery of these commitments will occur alongside the Employment Rights Bill’s passage and beyond Royal Assent.

Equality (Race and Disability) Bill

Further measures will be delivered through the government’s Equality (Race and Disability) Bill. These include:

• extending pay gap reporting to ethnicity and disability for employers with more than 250 staff;
• extending equal pay rights to race or disability;
• ensuring that outsourcing of services can no longer be used by employers to avoid paying equal pay; and
• implementing a regulatory and enforcement unit for equal pay with involvement from trade unions.

A draft bill will be published during this parliamentary session for pre-legislative scrutiny.

Longer-term reforms

Certain reforms have been labelled by the government as 'longer-term', meaning they could take many years to progress through Parliament. These reforms include: reviews of parental and carer leave, the ability to raise collective grievances, examining issues relating to TUPE and the implementation of the much-anticipated single 'worker' status. This would create a single status of ‘worker’ in which people are either employed or self-employed, replacing the UK’s current three-tier system.

Sexual harassment and Non-Financial Misconduct

Sexual harassment

In our October and November editions of ML Covered, we explored the new legal obligation under the Worker Protection (Amendment of Equality Act 2010) Act 2023, which requires employers to take reasonable steps to prevent sexual harassment at work. The provision came into effect on 26 October. On 12 November, the Equality and Human Rights Commission (EHRC) released guidance for employers in the hospitality industry, though they noted that the principles could be adapted to other sectors. The guidance includes a sample checklist, an action plan and monitoring logs for employers. This follows the earlier publication of technical guidance and an eight-step guide by the EHRC before the duty came into force.

The checklist covers three main areas for employers to consider:

• Communication with staff;
  
  
• Changing the work environment to make it as safe as possible; and
  
  
• Putting in place policies and procedures to ensure sexual harassment is promptly identified and appropriately addressed.

Employers can use the action plan to record any actions required to integrate the checklist into their working practices. This may include updating policies, raising awareness, and providing support to staff on when and how to use the checklist effectively. The EHRC recommends maintaining a monitoring log after each shift to track the checklist's usage and identify any necessary adjustments. A more detailed log should be completed quarterly to assess the overall effectiveness of the employer’s strategy.

Non-Financial Misconduct

The Financial Conduct Authority (FCA) issued a consultation paper last year relating to Non-Financial Misconduct (NFM), in which NFM was defined as encompassing behaviour such as bullying, discrimination, sexual harassment, use of illegal drugs, violence or intimidation. The FCA's consultation paper includes proposals to incorporate NFM into three key parts of the FCA handbook and regulatory framework with a view to being able to investigate and take enforcement action against employees and firms in relation to NFM:

• Its Code of Conduct;
  
  
• Its Fitness and Propriety test for employees and senior managers; and
  
  
• The suitability threshold conditions which firms must meet to be or remain authorised by the FCA.

Last month, the FCA published a survey, asking 1,028 regulated financial services firms (including insurers, intermediaries, banks and brokers) about recorded incidents of non-financial misconduct in 2021, 2022 and 2023. The survey found that:

• The number of reported non-financial misconduct incidents increased over the 3 years surveyed;
  
  
• Bullying, harassment and discrimination were the most reported types of non-financial misconduct across all sectors;
  
  
• Disciplinary or ‘other’ actions were taken in 43% of cases;
  
  
• Violence and intimidation more often resulted in disciplinary actions compared to other types such as discrimination; and
  
  
• Discrimination had the highest percentage of incidents resulting in the complainant signing either a settlement or confidentiality agreement.

The FCA is considering the feedback on its consultation paper and intends to publish its finalised policy on diversity and inclusion in the financial sector - including tackling NFM - around year-end 2024. Policy Statements on the remaining Diversity & Inclusion proposals will follow in 2025.

The Mansion House speech – 'megafunds' on the horizon

The pensions industry was in the spotlight at the Chancellor's Mansion House speech on 14 November 2024.

The headline development is the proposed creation of 'megafunds' similar to those in Canada and Australia.  The Chancellor's key measures include plans to:

• Impose minimum size requirements on multi-employer Defined Contribution (DC) schemes (requiring £25 billion or potentially £50 billion of assets under management); and
  
  
• Merge the 86 Local Government Pension Scheme (LGPS) funds into 8 pools by March 2026. Whilst the 86 funds hold about £400 billion, the assets are generally regarded as being poorly deployed, in part due to each administering authority having to appoint its own solicitors, actuaries, consultants and investment managers.

The incentive behind consolidation is that larger funds may be able to operate at a lower cost (i.e. they can benefit from economies of scale) and they can also make bigger and potentially higher-yielding investments (such as investments in infrastructure, start-ups and private market assets) to secure a better return for savers.

The government is consulting on the minimum size for DC schemes; the consultation notes that research suggests that the benefits of scale start to be realised at around £25 billion, but the government suggests that real benefits come into effect when funds reach over £50 billion. The government is also consulting on the number of default funds that each provider may operate.

A key issue that remains up in the air is whether the government will encourage or force these larger funds to invest in UK assets. Whilst the Chancellor of the Exchequer, Rachel Reeves, has ruled out mandating funds to make domestic investments for now, Pensions Minister Emma Reynolds has more recently noted the possibility, explaining that any requirement to push a higher allocation into UK assets would be "left to the second bit" of the pensions investment review – the basis for doing so is apparent from the statistics which show that around 4.4% of UK pensions are invested in domestic equities (lower than the 10.1% global average) and just 2% of DC schemes assets are invested in private market investments such as unlisted British equities and infrastructure.

The changes are relevant to PTL insurers with a potential decreasing pool of DC arrangements pushed towards solutions like master trusts.  The potential that the government could legislate to prescribe investment in UK assets may cause problems for trustees having to comply with their duty to invest scheme funds as if it were their own whilst also having to comply with minimum investment percentages in UK assets set by the Government (if for example there are concerns about the returns of the latter).

Pension cyber incidents rise

Research undertaken into data published by the Information Commissioner's Office (ICO) has revealed an increase in the number of reported cyber incidents in the pensions industry for the 2023/24 financial year (1 April to 30 March), with 284 in total.

ICO data reveals that cyber incidents relating to the pensions industry peaked in the second quarter of 2023, with 242 reported incidents in that quarter alone.  In responding to this analysis, the ICO explained that the higher volume of reports in the second quarter of 2023 followed the cyber-attack on Capita earlier that year.  The ICO added that "whilst we endeavour to respond to all personal data breach reports as quickly as possible, our response times can be slower than we'd like when dealing with larger volumes".

The Capita incident serves as a reminder for trustees that they will need to be increasingly vigilant and guard against the risks of cyber-attacks, particularly given the large amount of personal data held by schemes, and also consider the contractual arrangements they have in place with third parties holding data (including responsibility for costs of cyber incidents). The risk to schemes is arguably elevated as schemes connect to the Pensions Dashboard.  PTL insurers will want to take note when considering coverage for loss under PTL policies and whether that includes the costs of dealing with data breaches.

TPR issues Compliance and Enforcement Policy for CDC Pension Schemes

The Pensions Regulator (TPR) has unveiled its new compliance and enforcement policy for collective defined contribution (CDC) pension schemes. The policy outlines TPR's risk-based regulatory approach and provides a clear framework for how it will supervise these schemes.  The key aspects include:

• Authorisation and supervision - CDC schemes must be authorised by TPR to operate. To gain authorisation, CDCs must have the right people, systems and processes, continuity plans and financial support to safeguard members.
  
  
• Annual evaluation reports - as part of its supervisory role, TPR will provide CDC scheme trustees with an annual evaluation regulatory report. This report will summarise TPR’s evaluation of the scheme, the intended supervisory intensity, key risks observed, expected actions, and the planned engagement timetable. The intensity of supervision will be adjusted based on the scheme’s risk level.
  
  
• Risk notices and corrective actions - TPR now has the authority to issue pause orders and risk notices. A pause order is aimed at limiting the range of activity trustees can undertake during the pause order period. A risk notice will be issued if it believes a CDC pension scheme is not being effectively managed, governed, or funded. These notices will require trustees to plan and implement corrective actions and may be issued where there are concerns about a scheme breaching its authorisation criteria, serving as a precursor to more severe actions like de-authorisation.
  
  
• Consequences of non-compliance - trustees and administrators must actively co-operate with TPR. Failure to do so could result in the de-authorisation of the scheme.

TPR’s new compliance and enforcement policy for CDC pension schemes represents a significant step in ensuring these new schemes are well-managed and secure for savers. Trustees of CDC schemes – which are likely to increase in number over time once multi-employer schemes are permitted – will need to understand and adapt to these new regulations to ensure compliance and PTL insurers should note the potential risk to investigation costs.

TPO orders trustee to repay £9.7m into schemes

The Pensions Ombudsman (TPO) has ordered a former company director - Ankur Vijaykumar Shroff - to repay over £9.7m into two pension schemes (Uniway and Genwick) following an investigation by the Pensions Dishonesty Unit (PDU).

Shroff had invested £13.5m of the schemes’ funds into high risk, overseas investments in his capacity as sole director of Ecroignard Trustees Ltd. TPO became involved after some members raised concerns about a lack of information around investment performance and an inability to take benefits or transfer funds.

TPO determined that Shroff failed to invest the schemes’ funds for a proper purpose, having concluded that the schemes were established with the primary intention of channelling money into specific, predetermined investments. It found that by facilitating this arrangement, Ecroignard and Mr Shroff had failed to invest the pension schemes’ funds for a proper purpose and Mr Schroff was found to be a dishonest accessory to multiple breaches of trust.

TPO determinations illustrate the need for members to prove causation

We have seen two complaints dismissed by the TPO on causation grounds. The first case concerned particular benefits (which the TPO found the administrator had no duty to flag before the member withdrew from the scheme) and the second concerned a pension scam and the administrator's failure to comply with due diligence rules before the member transferred out (which were found to be inconsequential based on the member's own disregard for the scam warnings actually given).  Although these complaints were made against administrators, to the extent that trustees are undertaking these activities (and in some schemes the trustees and/or employer takes on an administration role) these are helpful decisions.

Determination in a complaint by Professor M (CAS-50740-F3M5 and CAS-38376-G3P7) (19 September 2024) – alleged maladministration

The first case concerns a complaint by a member of the Universities Superannuation Scheme (USS) in relation to the administrator's alleged failure to inform the member of the loss of a late retirement factor (LRF) to his pension entitlement if he opted out of membership – the member opted out to preserve protection from the lifetime allowance charge.

In August 2015, the member was informed that the USS was changing from a defined benefit to a defined contribution structure from 1 April 2016. The member then made enquiries about his option to withdraw from the scheme before the changes were implemented. At that time, a pension sharing order was made in favour of his ex-wife and so the member requested and received a retirement benefit quotation for the purposes of the divorce proceedings.

The member left the USS and became a deferred member from 31 March 2016. Then in early 2017, the member received another quotation with a lower pension value than that previously provided. Upon contacting the administrator, he was told that he was no longer entitled to the LRF as he was no longer an active member.

The member complained on the basis the administrator had a duty to inform him he would lose the LRF (which increased his pension) on exiting the scheme. The Ombudsman determined that there was no maladministration on the part of the administrator, having found it had applied the scheme rules correctly. The Ombudsman also found that the administrator did not have a duty to explain how the LRF enhancement impacted the member on exiting the scheme, and found that the member would have made the same decision even if he had been made aware of the LRF entitlement.

This is a helpful decision confirming that administrators and trustees alike do not have a duty to warn members about the impact of their own decisions on their pension benefits.

Determination in a complaint by Mr S (CAS-78487-F8S2) (7 October 2024) – alleged due diligence failings

TPO has dismissed a complaint concerning the scheme administrator and trustee's alleged failure to carry out sufficient due diligence and notify a deferred member of potential scam warning signs before transferring his benefits to a single member small self-administered scheme (SSAS).

In March 2014, the member requested a cash equivalent transfer value (CETV) for the purposes of transferring to the SSAS. The scheme administrator provided the member, via an FCA-regulated adviser, with the CETV value and transfer documents, as well as a copy of the Pensions Regulator's Scorpion Leaflet concerning pension liberation scams. A formal transfer request was made in September 2014. The administrator subsequently conducted due diligence checks using TPR's fraud action pack checklist, during which it identified some areas of concern. The administrator called the member on two occasions warning him about the scam warning signs. During both calls, the member confirmed that he understood the risk, did not think the SSAS was a scam and wanted to proceed with the transfer. The transfer was completed shortly after, and the funds were invested in an overseas hotel property.

The member subsequently complained that the scheme's administrator had failed to follow TPR guidance, which he maintained led to the loss of his pension after his transferred benefits were invested in overseas property.

Whilst finding some procedural mishaps on the administrator's part, TPO did not uphold the complaint. The Ombudsman accepted that the administrator had failed to complete all aspects of TPR's fraud action pack checklist, including checking whether the member had been cold-called. However, the Ombudsman found that the member had been adequately informed of scam warning signs through the Scorpion Leaflet and telephone calls and on that basis, TPO concluded he would likely have proceeded with the transfer even with additional warnings.

Recent legislative changes – including the traffic light system in place for pension transfers – appear to put more of an onus on trustees to actively protect members from making bad decisions when it comes to pension transfers. However, this decision is a helpful indicator of TPR's position that trustees should be in a strong position to defend any complaint that they should have prevented a transfer taking place provided they follow TPR guidance and record the steps they have taken.