Project Verde – Impact on asset managers and insurers

By Jagdev Kenth, Director of Risk and Regulatory Strategy , Willis

Published: 22 December 2014

The Treasury Committee has published are report into the Co-operative Bank’s failed bid for 632 branches of Lloyds Banking Group which were set to be divested. Deemed Project Verde, the Treasury Committee’s conclusions on the current Approved Persons Regime are likely to result in the expedited application of the Senior Managers Regime to asset managers and insurers.

Approved persons regime

The Project Verde Report makes for compelling reading. It is the product of a high profile inquiry which commenced last June and which saw senior bankers and regulators questioned in detail.

The Treasury Committee made various observations about corporate governance and the current Approved Persons Regime. This is not the first time that shortcomings in the regime have been identified. In June 2012, the Parliamentary Commission on Banking Standards (PCBS) was established to conduct an inquiry into professional standards and culture in the UK banking sector. The PCBS reported in June 2013 that the existing Approved Persons Regime had largely failed to hold individual decision-makers to account and that they remained behind an “accountability firewall¹”. In its report, the PCBS went on to state:

“The Approved Persons Regime is a complex and confused mess. It fails to perform any of its varied roles to the necessary standard. It is the mechanism through which individuals can notionally be sanctioned for poor behaviour, but its coverage is woefully narrow and it does not ensure that individual responsibilities are adequately defined².”

The PCBS recommended that the Approved Persons Regime be replaced with a new regime to address the issue of oversight and accountability.

Senior managers regime

The PCBS recommendations were incorporated into the Financial Services (Banking Reform) Act 2013. The PRA and FCA are currently consulting on the new Senior Managers Regime which aims to introduce a strengthened regime for regulating senior individuals within banks. Several changes are proposed but the most significant and controversial has been:

• Reversal of the burden of proof - provided certain conditions are met, a person will be guilty of misconduct unless that person can satisfy the FCA that he or she took such steps as a person in his or her position could reasonably be expected to take to avoid the contravention occurring (or continuing)³.
• Criminal offence relating to a decision causing a financial institution to fail - the offence is committed when the senior manager takes a decision (or fails to prevent the taking of a decision), that leads to the failure of the firm. The offence is punishable on indictment with up to seven years imprisonment⁴.

There has been growing concern over the proposed new rules. Some feel the proposals go too far and will push people out of the industry. Two senior HSBC directors resigned earlier this month in protest at the impending changes; others may follow suit.

There is also a concern that the increased emphasis on individual responsibility may place stress on governance structures that rely on collective decision-making. Senior individuals – conscious of their own personal responsibilities and liabilities – may be less inclined to agree with the boards or senior colleagues. Senior decision makers may resort to external advice for significant decisions to ensure protection from future FCA action.

Asset managers and insurers

At the moment, the Senior Managers Regime is scheduled to apply to senior bankers only. Once it is in force, it will create a two tier system, with asset managers and insurers remaining subject to the heavily criticized Approved Persons Regime.

The Treasury Committee raised the dual regime issue with Clive Adamson, Director of Supervision at the FCA, and asked why the discredited Approved Persons Regime continued to be applied to other financial services institutions, such as asset managers and insurers. Mr Adamson did not seek to explain or justify the differences in application, but responded:

“We would have preferred the new regime to apply to all financial services firms⁵.”

The Treasury Committee was clearly concerned by the prospect of a dual regulatory regime and could not have been clearer in their conclusions and recommendations:

“While the Approved Persons Regime will be abolished for the banking industry, it will be retained for many in the remainder of the financial services industry, including insurance and asset management. Given its manifest failings, this appears hard to justify. Clive Adamson, Director of Supervision at the FCA, appeared in oral evidence to agree with this view. The Government and the regulators should at the earliest opportunity make proposals to extend the coverage of the Senior Managers and Certification Regimes to, and remove the application of the Approved Persons Regime from, other parts of the financial services industry⁶.”

The Treasury Committee’s conclusion is very important and it carries weight. It has been reached in the context of a lengthy review into serious failures of corporate governance which caused significant problems for a UK regulated bank. The Treasury Committee do not believe it is appropriate for a regulatory regime, which has been shown to be deficient, to remain in effect. The Treasury Committee wants Government and regulators to level the playing field; this will result in the expedited application of the Senior Managers Regime to asset managers and insurers a lot sooner than many had anticipated.

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