By Ms Charlotte Robins, partner, and Ms Gillian Young, associate, both from Norton Rose Fulbright Hong Kong.
On 1 May 2014, the Securities and Futures Commission (SFC) guidance on internal product approval processes for SFC-authorised products, including insurers’ investment-linked assurance schemes, became effective.
It supplements the SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structure Investment Products. Its 14 general principles deal with topics including:
• accountability;
• product design;
• fees; and
• termination/de-authorisation of products.
New products must undergo proper due diligence, including detailed assessment of the product risks and features, and approval by the internal product approval committee.
From 31 July 2014 insurers with existing SFC-authorised schemes must provide confirmation of compliance and new product authorisation applications will need to confirm that the guidance will be complied with.
Indemnification of directors under the New Companies Ordinance – D&O policy considerations
The new Companies Ordinance (CO) came into force in March 2014. Of interest to insurers providing directors and officers insurance (D&O) and to companies and directors generally, may be the clarification of the provisions on indemnification of directors by companies and associated companies.
Directors may incur personal liability in various ways. To attract suitable candidates to boards, companies often need to indemnify directors and take out D&O; to cover the directors for liability that the company is not permitted or does not wish to indemnify the directors for, and to reimburse the company for liabilities and costs incurred in indemnifying directors.
Previously a director’s right to be indemnified against liabilities to third parties was based in case law. The uncertain extent of this right has been clarified by section 469 CO which permits a company to indemnify a director for “any liability incurred” by him to a third party. However indemnification is prohibited for criminal fines; regulatory penalties; defence costs in criminal proceedings where the director is convicted, in civil proceedings brought by, or on behalf of, the company or associated companies, where judgment is against him and court relief is refused.
Although it is too early for a decision on this point, “liability incurred” to a third party could include legal costs.
“Responsible person” concept
The general prohibition on companies indemnifying their directors and officers against any liability to the company or associated companies for any negligence, default, breach of trust or duty relating to such companies remains. However, section 468(3) CO now makes it clear that a company may obtain D&O insurance for its directors and those of its associated companies.
The CO also introduces the “responsible person” concept (including a director, manager, company secretary, shadow director, other person involved in the company’s management, and a director and shadow director of any corporate director or shadow director) that authorises, permits or participates in a contravention or failure under relevant provisions of the CO or subsidiary legislation. This new concept potentially increases exposure for directors, since “responsible persons” will be liable if they authorised, permitted or participated, or failed to take reasonable steps to prevent the breach of the CO.
Insurers should review D&O clauses and exclusions to confirm what insured companies are, or are not, permitted to pay by way of indemnity. Insureds should consider potential additional liability arising from the “responsible person concept” and review their cover in respect of advancement of defence costs as companies should not do this prior to judgment.