Grey Matters ethical dilemma: A little local difficulty - the CISI verdict

All is not what it would initially seem for a non-executive director when he eagerly takes on the role.

Derek, a compliance specialist with many years practical experience is pleased when he is invited to become a non-executive director of Comeco, a small private company that trades in agricultural futures. This is his first directorship and represents something of a change of focus for him, but he is hopeful that it may be the first step on the path to more such opportunities.

Before accepting the position, Derek receives an in-depth briefing about the company from Lawrence, the Managing Director with whom he develops positive chemistry and quickly decides to seize the opportunity.  It appears that Lawrence has been closely involved in developing the firm’s systems and documentation and it seems clear to Derek that he is the driving force behind Comeco.

Shortly after  attending his first Comeco  board meeting, Derek becomes vaguely aware from informal discussion amongst his new colleagues that Lawrence may be experiencing “a little local difficulty” with the regulator concerning another, apparently unconnected business with which he is associated.

Derek wonders whether to raise the subject, about which his colleagues appear not to have any detailed knowledge, nor to be particularly concerned. But as the ‘new boy’ he decides that he will say nothing, not wishing to raise the subject directly with Lawrence who is, quite clearly, the dominant figure in the business. As part of an expansion strategy, which was one of the ostensible reasons for inviting Derek to join the board, Comeco wishes to diversify its activities, which will require additional regulatory authorisation and Derek is responsible for overseeing this at board level.

Following informal discussion with the regulator about the extension of the firm’s authorisation, Derek is concerned to learn that this may be difficult if Lawrence remains a Director of Comeco, as it  appears  that Lawrence has interests in another, apparently unrelated business, which is under regulatory scrutiny.

On reflection

On learning this, the Directors of Comeco, meet to discuss this unexpected problem, without Lawrence being present. While considering what they might do to gain regulatory permission, Derek reflects that he should have satisfied his earlier curiosity about the nature of Lawrence’s ‘difficulties’.

 After lengthy discussion, which contains very little tangible information about Lawrence’s interests outside Comeco, the directors conclude that the only obvious way forward is to ask Lawrence to resign from Comeco.  Accordingly, the Chairman raises the subject with Lawrence and suggests that, given the potential regulatory interest in his other activities, he should either resign from Comeco, or resign from these other activities.

After an initial attempt to bluster his way out of this apparent ultimatum, Lawrence  retreats to his large country house and nothing is heard for some days until he suddenly faxes in his resignation from Comeco, without comment.  Comeco duly notifies the regulator of Lawrence’s resignation as a director and consequent de-registration as an Approved Person of Comeco.  Following this, the directors are very pleased when Comeco’s application for further authorisation is approved.

Nevertheless, Derek gets a sense that some of his fellow directors continue to have contact with Lawrence but there is nothing he can really put his finger on and, as they were all colleagues previously, perhaps it is not surprising if personal contact continues.

An unexpected development       

One morning, Mary, a fellow director asks Derek if he has seen the story about Lawrence and a firm called Beehaven, which is running in a number of papers. Beehaven appears to be the name of the other firm with whom Lawrence was associated while MD of Comeco.  The article mentions a notice published by the regulator in which Lawrence and Beehaven  are censured and fined for some significant rule breaches, including the adequacy of their client documentation. 

Derek is shocked at these revelations and  worries whether Comeco may have similar  weaknesses, bearing in mind Lawrence’s central role in the development of the firm’s client documentation and systems.  Derek raises his concerns at the next Board meeting but is assured by his colleagues that, to date, there have been no significant problems, with any systems or documentation and that he should not worry unduly.

A coincidence, or perhaps not?

On completion of a busy and successful year, Comeco  is subject to a scheduled regulatory visit. Things progress well until the regulator begins to review Comeco’s client documentation and after several days of the regulator digging through files it becomes clear that all is not well. It transpires that they have found some serious flaws in a number of key client documents, including Comeco’s terms of business.

Equally worrying is an allegation by the regulator that, despite his resignation, Lawrence appears to have an ongoing involvement with Comeco, to the extent that he may be in the position of acting as a shadow director. Although Derek is unaware of any specific working relationship between his colleagues and Lawrence, he does recall his earlier unease that Lawrence’s departure was not as final as it appeared. The regulator indicates that it is minded to commence disciplinary proceedings against Comeco as a result of the discovery of the problems with the firm’s client documentation and the continued involvement of Lawrence.

Derek is now seriously concerned at this latest development and again reflects upon his own actions as a director since joining Comeco.

The CISI verdict

The dilemma was published in the Review digital edition, with members invited to register their favoured response from four options and leave supporting comments in a survey on the CISI website.

The Institute received nearly 100 responses and the great majority of these (90%) felt that option B, in which Derek offers to oversee an urgent investigation into those areas of Comeco for which Beehaven (Lawrence’s other firm) had received regulatory censure.

A further 9% felt that he should resign immediately on the basis that the situation at Comeco was not what Lawrence had led him to believe.

One respondent felt that Derek should approach the regulator on behalf of Comeco in order to give himself the opportunity to avoid blame if problems were subsequently identified at Comeco.

The Institute’s view is shared with the majority. Derek needs to use the skills for which he believes he was hired  to try to identify and redress any weaknesses within Comeco that he may have overlooked or not looked for while Lawrence was running the firm.

Resignation would be an appropriate action if Derek honestly felt that he had done everything that he should have, whilst Lawrence was running Comeco and that Lawrence had deliberately concealed his activities. If a subsequent regulatory review takes place and Derek is criticised for failing to do things that he should have or made himself aware of things that should have been his responsibility, then resignation may certainly be appropriate at that time.


Published: 11 Aug 2014
  • Insight
  • The Review
  • integrity and ethics
  • Grey Matters
  • Ethics
  • dilemma
  • A little local difficulty

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