Regulatory compliance experts are split on what the Financial Conduct Authority’s approach to early enforcement of the new senior managers regime is likely to be.
Under the rules, which came into force on Monday (7 March), directors of financial institutions will be made more accountable for the actions of their staff.
The regime is being extended to include all financial advice firms, but no specific date has yet been confirmed by the regulator.
Ronald Gould, Europe chairman for Compliance Science and a former senior adviser to the Financial Services Authority, said he was not expecting “big enforcement efforts” from the FCA so soon after implementation, suggesting the regulator will give firms “a bit of time to bed in”.
“The FCA is implementing the new regime under interim leadership with a new CEO not due to start for a few months yet.
“So it is less likely we will see a big, high profile use of senior managers regime anytime soon. I expect the FCA will be looking ahead from here.”
He added: “I expect thematic and supervisory visits will be actively including questions relating to both the rules and the behaviour of individuals with respect to those rules. The results of that work will emerge later.”
Another ex-FCA man, now a consultant at Bovill, Prem Griffith, agreed there was likely to be a “honeymoon period” for firms to implement the “nuts and bolts” of the new regime.
However, he also suggested the regulator could look for an early opportunity to hold an individual to account with the new powers.
“There will certainly be internal pressure to demonstrate the new powers, so I think we may see the FCA go for an easy win to generate some headlines.
“Then they may also look to tackle a more borderline case in order to test out the appeals process and establish a precedent with the Upper Tribunal, getting a clear steer for where to draw a line in the sand.
“It will be interesting to see the risk appetite on these cases,” he added.
Michael Ruck, senior associate at Pinsent Masons, said the FCA could move to act on past bad behaviour under the news rules.
He said: “The underlying standards and principles set by the FCA have not altered and therefore I would expect to see an increase in enforcement action against individuals, not based upon a statement of responsibility, which is only a recently created document, but upon previous failures to meet relevant standards where the regulator is implying almost a presumption of responsibility which is a key tenet of the new regime.”
Martin Bagshaw, a consultant at Leathwaite, said as the FCA have come in for criticism before over a failure to investigate and prosecute individuals since the financial crisis, it is now likely to push through enforcements with the new powers.
“I suspect they may look to follow up with individuals at some of the big banks that have slipped through previously. The lines of accountability are now much clearer, so obfuscation will be much harder now.”
I think we may see the FCA go for an easy win to generate some headlines. Bovill’s Prem GriffithThe FCA declined to comment any further on how it would enforce the regime than they did in a statement made on 7 March.
Acting chief executive Tracey McDermott pointed out the regulators are also applying the fundamental principles of the regime to its own senior staff.
“By building on our existing framework of accountability, we will further bolster the transparency with which we are run, and reinforce the standards to which we hold ourselves,” she stated.
Her successor and current Prudential Regulation Authority chief executive Andrew Bailey, said that at the heart of the new regime is one very simple principle - you can delegate tasks but you cannot delegate responsibility.
“This means that senior managers at banks and insurers should know what they are responsible for and can be held accountable for failings in their area,” he added.
Last summer, the FCA attempted to allay fears by setting out the circumstances it would seek to apply the new regime and the steps that senior staff should take to rebut it.
After initial fears the final rules, published in July 2015, may cause a two-tier system between those financial advisers subject to the new certification regime because they are employed by banks, and those who remain subject to the approved persons regime because they work for advisory firms, HM Treasury said in October it would extend the senior managers regime to toughen up the approved persons regime.
However, while the Treasury has removed the reverse burden of proof proposal - which critics claimed would have imposed a ‘guilty until proven innocent’ burden on top executives - Mr Ruck previously suggested the industry should not breathe too much of a sigh of relief at this U-turn from initial proposals.
Vicky Kubitscheck, non-executive director at Hampden & Co and compliance director at Police Mutual Group, wrote a report on the FCA’s change in approach at the end of January.
She stated it may not be a coincidence that the regulator called off its review of the culture in banks at the end of last year. “It has decided instead to engage individually with firms – to encourage cultural and process change from within and also to review their penalty policy – agreeable or not, this could signal a change in the regulator’s approach.”
peter.walker@ft.com
