Ever since Nick Leeson brought down Barings Bank in 1995, regulators in the UK have been struggling to put in place an appropriate regime for holding senior managers to account. The UK’s first attempt, the Approved Persons Regime, which lasted ten years, was found wanting in the light of the financial crisis. Warren Buffett once said: “Only when the tide goes out do you discover who has been swimming naked”. The financial crisis exposed some shocking behaviour, from reckless decision making to outright illegality. The reputation of financial services nosedived as case after case of systemic failings was uncovered, all arguably caused by a lack of accountability of those at the top. The UK regulator’s response has been the Senior Managers and Certification Regime, which has been heralded as a gold standard. Only time will tell whether it can deliver what it aims to achieve.

Fast forward a decade from the start of the financial crisis, and a shift in regulatory focus from the institution to the individual is apparent. Scrutiny on the responsibilities and accountability of senior management within financial services is increasing across the globe, with particular parallels between what is happening in the UK and Asia. 89% of senior managers and compliance officers we spoke to worldwide for our new report agreed that scrutiny has increased since the financial crisis. Encouragingly though, we’ve also found that the new rules are largely accepted, rather than challenged, driven by a belief that senior management accountability is good for business. In particular, there is a feeling that the increased scrutiny has improved governance and attitudes towards setting culture.

To understand the impact of the rules around senior management responsibilities, we conducted online research and in-depth qualitative interviews with Executive Directors, Senior Management and Heads of Compliance. This spanned the four countries under our spotlight: the UK, Singapore, Hong Kong and the US.

Senior management embrace the scrutiny

Nearly all the senior managers surveyed felt regulatory scrutiny on them had increased. Their awareness of the rules is extremely high. 88% of participants told us they are “aware” or “very aware” of the rules around senior management responsibilities in their primary jurisdiction. It is also encouraging that 50% believe the level of regulatory scrutiny is about right. Another one in ten feel it is actually too low. There is a sizable portion - just over one in four - who think the level of scrutiny is too high, but on the whole this represents a positive reaction to the steps taken by regulators over the last decade.

Business leaders feel that the increased scrutiny on senior management has positive implications for corporate governance, setting a precedent for principled behaviour and an ethical culture within the workplace.

An example of this is the changing relationship between Compliance Officers and leadership teams, which according to business leaders has vastly improved. Jonathan Polin at Sanlam UK told us that “the compliance framework and leadership is kept much closer than it has been in the past. Not only do we need to have it as part of a cultural change for the industry, but we need to show the audit trail in our discussions that we are reviewing all the aspects the regulator would require us to do.” Across many jurisdictions, Compliance Officers are often required to take part in Board meetings. According to one interviewee this is particularly the case in the US, although it is worth noting that mutual fund Compliance Officers in the US report to the Board, not to management.

In the UK, under MiFID, Compliance Officers are required to report to the management body, on at least an annual basis, on the implementation and effectiveness of the overall control environment for investment services and activities, on the risks that have been identified. The compliance function must also report on an ad-hoc basis directly to the management body where it detects a significant risk of failure by the firm to comply with its obligations under MiFID.

In our report, ‘Held to Account’, we explore the approach being taken by regulators across the world’s four leading financial jurisdictions - the UK, US, Hong Kong and Singapore. We examine the similarities and differences between the regimes, the reactions of those subject to the regimes, and highlight the following potential unintended consequences of the increased emphasis on senior management:

1. There is emerging evidence that, if left unchecked, a brain drain away from the top echelons of financial services will develop. Alongside the increased scrutiny, there is the potential for mistakes and errors to stay with individuals for the duration of their career. This fear of being punished could put future management candidates off taking senior roles within financial services firms.
2. Chief Compliance Officers are not typically risk takers, but the best Chief Executives do tend to push boundaries. Without the right balance of personalities at the top of an organisation, firms could struggle to compete and may suffer as a result.
3. While this study does not specifically examine the approaches being taken to senior management responsibilities in all EU member states, it is worth noting the UK regime is home grown and goes way beyond the requirements of any EU directive or regulation. This is particularly relevant in the context of the UK’s competitive position arising from its planned departure from the EU. Will the UK regime be seen as a standard to be admired and emulated - or a step too far?
4. Differences between the approaches adopted by various regulators could significantly increase the burden on individuals charged with global responsibilities. A reluctance by individuals to be subject to more than one regulatory regime could drive businesses to manage their affairs more along jurisdictional lines rather than product or service lines. This may not be in the interests of those that they serve.

Business leaders accept that increasing levels of personal responsibility has been the right thing to do. But our research has exposed some potential side effects which, if left unchecked, could have significant consequences for firms to operate effectively and successfully. Because of the role financial services play in the wider economy, these risks could have broader impact.

There is no silver bullet solution to address these issues. But there are steps which senior management and regulators can consider to stop them overshadowing the many positive aspects of greater personal responsibility and accountability.

Plan now for tomorrow’s senior managers

Our research found evidence that some of tomorrow’s senior individuals will decide against taking senior roles, put off by the level of accountability on their shoulders. Businesses can start to mitigate this risk now by preparing for the issues that will likely make the next generation of leaders think twice. Effective succession planning for particular roles will be critical, but another consideration is investing in training and education for junior and middle managers. Demystifying some of the responsibilities that come with senior roles may reduce the proportion who think such jobs are not worth the potential risks.

Bring compliance and Boards closer together

Our research shows that the relationship between Boards and compliance has never been more important. A consideration for all firms is to bring compliance heads in to Board meetings, or go further and make the role a Board appointment. This will give the CCO insight into the way senior teams discuss and decide on critical issues which has to be good for effective governance. Ultimately, it should help compliance departments produce better management briefings that do more than simply provide the facts on updates from the regulator, and answer the question senior management want answered above all others: ‘what does this mean for me?’.

Use regimes as a calling card for businesses who see well established rules as a draw

Our research has found that for a significant cohort of business leaders, clearly defined and well-established rules around senior management responsibilities enhance a location’s attractiveness as a place to do business. Regulators should consider ways in which promoting their regimes can be apositive factor in attracting firms and investors to their jurisdiction, in order to reduce the risk that the perceived strength of the regime is a deterrent.

Nobody wants to see a repeat of the behaviours that led to the biggest global economic downturn since the Great Depression. So it is reassuring to see that leaders accept and understand why scrutiny of their responsibility and accountability is higher than ever. We must also be alert to unintended consequences that could put people off taking senior roles in future, or damage competition. The long-term impact on global financial services could be profound if we are not.

To read our full report ‘Held to Account’ click and download it here.

For further information, please contact: [email protected]