Blog: Accountability in banking: new rules for senior managers



Peter Alderdice
Peter Alderdice

An ineffective system of governance for the financial sector is to be overhauled next year, writes Peter Alderdice.

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, but instances of regulators holding to account those who run our financial institutions have been few and far between.

When the finger of blame for the demise of RBS and HBOS was pointed at the then Sir Fred Goodwin and Sir James Crosby in the aftermath of the global financial crisis, it was the removal of their knighthoods through the honours system which was used to censure them – by any measure an unconventional approach to enforcing prudential regulation.

Put simply, 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 their 2013 report on 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 which 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 which involves a risk of serious consequences for the firm itself or for other businesses or interests in the UK.

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 in relative terms to the size of the firm that it could jeopardise its safety and soundness – are also included on the list, even if they report to the CEO or another senior manager.

Under the rules being introduced, 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 the senior manager’s responsibilities.

If a regulatory breach occurs in an area of the firm’s activities for which the senior manager is responsible, the senior manager 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 which cause a financial institution to fail.

The goal of the new regime is to affect 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 here.

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.

  • This article was originally published in the May 2015 edition of CA Magazine. Peter Alderdice is an associate at Shepherd and Wedderburn, you can view his profile here.