RegulationJul 30 2014

Regulators propose strengthened senior managers regime

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The Financial Conduct Authority and Prudential Regulation Authority have today (30 July) published two joint consultation papers aimed at improving individual responsibility and accountability in the banking sector.

These changes include a new approval regime for the most senior individuals whose behaviour and decisions have the potential to bring a bank to failure, or to cause serious harm to customers, and introducing new rules on remuneration to strengthen the alignment between long-term risk and reward in the banking sector.

The PRA and FCA proposals include introducing a new senior managers regime which will clarify the lines of responsibility at the top of banks, enhance their ability to hold senior individuals in banks to account, and require banks to regularly vet their senior managers for fitness and propriety.

Last October the FCA responded to the Parliamentary Commission on Banking Standards report by backing government proposals for a new senior persons regime, but added it would be in addition to, and not replacing, the approved persons regime.

In terms of accountability, the consultation also included a certification regime requiring firms to assess fitness and propriety of staff in positions where the decisions they could pose significant harm to the bank or any of its customers, and a new set of conduct rules, taking the form of brief statements of high level principle setting out the standards of behaviour for bank employees.

As mentioned this morning, the PRA published final rules on clawback, which come into force from next year and introduce a seven-year minimum period for clawback from the date of award.

The accompanying joint consultation paper on remuneration includes a requirement for firms to defer payment of bonuses for a minimum of five or seven years depending on seniority, enhancements around bonus recovery from senior management if risk management or conduct failings come to light at a later date, and strengthening of the existing presumption against discretionary payments where banks have been bailed out.

Andrew Bailey, chief executive of the PRA, said: “The combination of clearer individual responsibilities and enhanced risk management incentives will encourage individuals in banks to take greater responsibility for their actions.

Martin Wheatley, chief executive of the FCA, added: “Today’s consultations mark a fundamental change in the regulators’ ability to hold individuals to account, which is what the public expects of us.”

Those wishing to contribute to the consultation have until 31 October and the regulators aim to publish final rules in early 2015.