The collapse of the financial sector in 2008, its aftermath and resulting enquires into the notoriously bad behaviour of the banking industry has seen the FCA impose fines of unprecedented size on convicted offenders. These fines were expected to ensure that institutions would pull-up their socks and abide by the rules. In some way, however, it seems that for some institutions, these fines were viewed more as a side-cost of doing business, than as an actual penalty. Bad behaviour has not gone away and the public does not feel that justice was seen to be done. The protruding theme highlighted with scandals is the lack of individual accountability.
Enter the Senior Managers Regime… A replacement of the Appointed Person’s Regime (commonly accepted to be unsatisfactory by the authorities). The new regime is now assigning specific responsibilities to certain specific senior individuals in key positions throughout the banking hierarchy. This starts on March 2016… and with the political ill will that exists for alternative fund managers, it could be expanded to the asset management industry. Be aware…
This new Regime does not just offer a new name, but a host of increased responsibilities and sanctions. Unsurprisingly, the sanction that has raised most concerns is that of the possibility of criminal sanctions for the reckless mismanagement of a firm. Not only may individuals find themselves facing criminal prosecution, they will also find themselves having to defend their actions from the moment they are subject to an accusation to prevent imprisonment. The new stance imposed through the Senior Managers Regime introduces the presumption of guilt and the onus is then on the individual to demonstrate that they did everything reasonable to prevent an business failure. This is a complete reversal of the traditional innocent until proven guilty position that defendants usually acquire. Determining that reasonable steps were taken will be based on various considerations including the size, scale and complexity of the firm, the individual circumstances including what knowledge the individual had or ought to have had, the individual’s expertise and competence, what alternative steps could have been taken, as well as their own set of responsibilities and the appropriateness of any relevant delegations made. Further, in order to evidence that appropriate action was taken in spite of a material failure occurring, an audit trail must be maintained. An individual’s freedom from imprisonment may now rest in the quality of evidence maintained which would reflect the proper process of review and decision making. No doubt this will increase reliance placed on IT systems and any regulatory technologies employed. But to be sure that this works on the day, regulated institutions will have to work out what form of evidence and governance should be recorded and for how long to protect them later… this requires regulatory knowledge, systems knowledge, but also a sense of the evidence required in litigation.
Practically, although the criminal sanctions are there and available at the FCA’s discretion to penalise an individual’s misconduct, the FCA have echoed that it is not their desire to have to use such methods of enforcement. If the defending individual avoids criminal liability, however, the civil penalties available are also rather serious and will affect an individual’s future within the financial profession. An individual may face large personal penalties, suffer public censure, and have their approval for holding a particular function withdrawn. They can even be banned from holding a regulated position for life. Although these sanctions may appear strong and vast, some of these replicate those that have been in place in other professional industries for a long time; solicitors and doctors have faced the possibility of being struck off from practicing for example.
The new Regime just recognises the damaging economic effect that gross-misconduct can have on commerce and consumers and seeks to appropriately guard against any wrongdoing. It is hoped that through senior individuals taking on greater and more defined responsibilities, they will engage in more targeted oversight which will help instill the desired compliant culture in the relevant business. Such a culture is anticipated to help restore the consumer’s faith in financial services. Conversely, it has been advocated that the only winners from the Regime may in fact be the professional indemnity insurance industry… or indeed compliance consultants…
Individuals that are not deemed to be senior managers, but who still hold positions that take material risks which could cause significant harm to the business are covered under the adjoining Certification Regime. These individuals are subject to annual certification by the firm to ensure that they remain fit and proper alike senior managers, to carry on their duties. They do not require the same external FCA approval as a senior management function. These individuals do not face criminal liability like senior managers do, however they may still have civil sanctions imposed upon them.
It is not clear how persons in positions of responsibility will deal with defending themselves. Other than demonstrating that rules are now followed, and that they are not breaching them, training seems to offer a basic first line of defence. As such this Regime will make it even more essential to ensure that individual personnel is adequately trained and so on an ongoing basis.
The Regime is also applicable to non-executive directors under certain circumstances. After much consultation and debate, it has been determined that some non-executive directors fall within the stipulated senior management functions and therefore will also be held explicitly accountable for boardroom decisions. However, only some non-executive directors have been determined to be caught under this new Regime. The chairman, senior independent director and the chairs of the risk, audit and remuneration committee will be subject to the high standards imposed by the Senior Managers Regime. Most of the non-executive directors will on the other hand evade this. The divide will probably cause a two-tier structure and there are questions being raised as to whether this will improve the continuing effectiveness of a board’s operational function. It is not clear for example how much weight will be placed on the board’s collective decision when in reality one senior manager will be taking on the responsibility for such a decision, according to the new Regime.
Preparations for the Senior Managers Regime are well underway and it becomes effective as of 7 March 2016. The new rules have brought with them new levels of administrative compliance required to document the different functions within the firm. It is now necessary to map out responsibilities and to prepare statements of responsibilities for individuals carrying out senior management functions. The PRA has set out a list of prescribed responsibilities that are required to be allocated throughout a relevant firm’s senior management and the FCA have detailed key functions that it believes are likely to apply to most firms. Senior managers must be identified by their respective firms and the FCA should be notified of such by 6 February 2016. Individuals that are already approved will be grandfathered through.
Across the pond in the USA, there is a lot of interest in the regime being promoted by the UK. The SEC have publically endorsed the Senior Managers Regime, recognising that they do not have a similar system in place at present to punish individuals that allow or fail to stop material business failures on their watch. The Senior Managers Regime is recognised as being pioneering in its rigorousness.
The Senior Managers Regime is not just catching the attention of those directly affected by it from March 2016. A Bank of England governor noted in June 2015, that the rules would likely be extended to cover many asset managers and other financial institutions. It has not yet been publicised exactly how or when these rules will be extended, but there is much discussion as to whether these rules could be transposed into the asset management space.
Jerome Lussan, founder and CEO of Laven Partners recently spoke at a Compliance Science panel conference alongside other industry specialists from banks, consultancies and asset management companies. The panel considered the Senior Managers Regime in a broader financial services context, and here the panel acknowledged the impact such a Regime would have on small to mid-sized businesses. It was largely acknowledged across the spectrum of panel members that this Regime is progressive whilst onerous, and that there is an overwhelming likelihood that business professionals who would be caught by the Regime may feel the need to either step back or as Jerome Lussan pointed out slow down, so as to pay more attention to the decisions that they will or will be deemed responsible for. Whilst the latter should lead to a better financial industry, the panel wondered if this would remove the heist that may be needed to work in the fast-paced and competitive financial industry. One of Jerome Lussan’s concluding remarks hypothesized over the predicted effectiveness of the Regime; ‘will the Regime avoid another scandal, no; but it should reduce its likelihood.’
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