Holding bankers to account

By Peter Alderdice, Shepherd and Wedderburn

17 June 2015

Peter Alderdice explains the new rules for senior managers in the financial sector.

From the manipulation of LIBOR and forex rates to the mis-selling of PPI and interest rate swaps, the banking industry has been dogged by one scandal after another in recent years. Instances of regulators holding to account those who run our financial institutions have been few and far between, however.

When the finger of blame for the demise of RBS and HBOS was pointed at the then Sir Fred Goodwin and Sir James Crosby, it was the removal of their knighthoods which was used to censure them – an unconventional approach to enforcing prudential regulation.

The current system for ensuring individual accountability in the financial sector – the Approved Persons Regime – has been shown to be singularly ineffective. Matrix organisation structures and committee decision-making have made it difficult for regulators to pinpoint responsibility for breaches. In its 2013 report, Changing Banking for Good, the Parliamentary Commission on Banking Standards highlighted a lack of personal responsibility in the industry, with senior executives sheltering behind an "accountability firewall". But that is about to change.

The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) are overhauling the system for individual accountability, with a package of new rules coming into effect on 7 March 2016. The cornerstone of these is the Senior Managers Regime (SMR). The new regime will apply to individuals performing a "senior management function" in UK banks, building societies, credit unions and certain investment firms, though it seems likely that, in due course, the SMR will be rolled out to UK branches of firms from outside the European Economic Area too.

A "senior management function" is, broadly, one where the person in question is responsible for managing or participating in decision-making about an aspect of the firm related to a regulated activity that involves a risk of serious consequences for the firm itself or for other businesses or interests in the UK.

The goal of the new regime is to effect a sea-change in culture, forcing those at the top of our big banks to step out from behind the accountability firewall and accept that the buck stops there

The PRA and FCA have published details of the roles meeting the definition, which include (among others) the chief executive officer, chief financial officer, chief risk officer and head of internal audit, and, on the non-executive side, the chairman of the firm, and the chairs of the risk, audit and remuneration committees.

Of particular note is that executives heading up a "key business area" – one so large, relative to the size of the firm, that it could jeopardise its soundness – are included, even if they report to the CEO or another senior manager.

Firms will be required to produce "responsibilities maps" describing their internal management and governance arrangements, including reporting lines and areas of responsibility. This will feed into a "statement of responsibility" for each senior manager, which must be submitted to the regulators and updated if there is a significant change in responsibilities.

If a regulatory breach occurs in an area of the firm's activities for which the senior manager is responsible, that individual is guilty of misconduct unless they can satisfy the regulator that they took "reasonable steps" to avoid the breach. The civil sanctions for misconduct are backed up by a new criminal offence covering decisions taken by a senior manager that cause a financial institution to fail.

The goal of the new regime is to effect a sea-change in culture, forcing those at the top of our big banks to step out from behind the accountability firewall and accept that the buck stops there.

With greater regulatory scrutiny, a presumption of responsibility for breaches and the spectre of imprisonment for making a bad business decision, who would want to be a senior manager? If HR teams in banks were not already pondering the challenge of how best to retain highly skilled senior managers in the regulated financial sector, they will be now.

Peter Alderdice is an associate with Shepherd and Wedderburn. This article first appeared in the June edition of The CA magazine.


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