Regulation  

Tightening the noose

Tightening the noose

Innocent? Prove it. That is the weight of responsibility facing directors and senior personnel in banking and investment firms from March 2016.

By reversing the presumption of innocence, the new approved persons regime will take accountability to new heights in UK banks, building societies, credit unions and investment firms, collectively referred to as ‘relevant firms’.

The new regime is probably one of the biggest policy shake-ups undertaken by the financial services regulators – the Prudential Regulation Authority and the FCA – as they move to strengthen accountability within firms both at a personal and firm level. The changes reflect recommendations of the Parliamentary Commission on Banking Standards and amendments to the Financial Services and Markets Act 2000 brought about by the Financial Services (Banking Reform) Act 2013. The new statutory and regulatory system will grant enhanced powers to both regulators for taking enforcement action that include criminal sanctions against individuals and firms.

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The new framework signifies a progressive tightening of the existing approved persons regime which already requires the pre-approval by the financial regulators of directors and key control managers, and which was extended in 2010 to those having ‘significant influence’ in running the affairs of the firm. The new accountability regime has one principal aim – to change behaviour and corporate culture.

Being able to hold individuals to account has been the thrust of the approved persons regime since it was introduced at the start of the new millennium in response to lessons provided largely by the collapse of Barings. The 2008 financial crisis however identified flaws in the regime which frustrated regulatory response that included identifying and holding individuals to account. By introducing the concept of ‘presumption of responsibility’ in the new regime, however, the PRA and FCA expect to drive changes in the behaviour of key decision-makers and those who could do significant harm to the firm, thus posing risks to the objectives of the regulators.

The new accountability regime will consist of two sub-regimes and a new set of Conduct Rules:

• A Senior Managers Regime which requires firms to allocate a range of defined responsibilities to individuals who will be subject to regulatory approval and vetted regularly for fitness and propriety; this will involve setting out statements of responsibilities and a ‘governance map’.

• A Certification Regime which requires relevant firms to assess the fitness and propriety of employees ‘who could pose a risk of significant harm to the firm or any of its customers’.

• A set of new Conduct Rules which will apply to those governed by both sub-regimes.

Many would regard the new regime to be overly draconian but as relevant firms recover fully from the bruises of the financial crisis and work to restore public confidence, they are on the back foot with their defence. We are where we are. A relevant firm’s defence will involve a more conscious approach than ever before to running its affairs and exercising competent oversight over those they have entrusted to do the job. Many would observe that this belies good management, and much can be said of the need to return to the basics of good governance and stewardship.