The Senior Managers Regime: The need for greater accountability throughout financial services
By Jérôme de Lavenère Lussan, CEO, Laven Partners
Published: 18 December 2015
Senior managers throughout the banking sector can be heard breathing a sigh of relief as the assumption of an individual’s accountability will no longer to stem from a presumption of responsibility. The magnitude of this amendment to the proposed Senior Managers Regime silences many alarm-bells that have been attracting much media and industry speculation recently. Whilst the Treasury’s announcement may have been welcomed by the banking sector’s senior managers, who must abide by the new regime by March 2016, the rest of the financial services industry is jaw dropped. From 2018 the Senior Managers Regime is now proposed to be extended across the entire financial services industry thus ensuring a comprehensive and consistent approach across the business spectrum including hedge fund and private equity managers.
The Senior Managers Regime aims to combat the notorious ‘bad behaviour’ highlighted throughout the financial crises of 2008. Subsequent financial investigations revealed the lack of specific accountability for material failures. The UK Financial Conduct Authority (FCA) initially attempted to create a shift in behavioural culture through imposing fines unprecedented in size. However, these fines were paid through corporate institutions and little remedial action followed suit to discourage and prevent the offending behaviours being repeated.
The announcement to extend the Senior Managers Regime across the financial services was foreseeable. The Bank of England noted in June 2015 that the rules were likely to be extended to cover asset managers and other financial institutions, however no precise details were alluded to at this point. The Senior Managers Regime will replace the Approved Persons Regime. The Approved Persons Regime is deemed weak and has been under attack in recent years for its acknowledged gaps and failures. It enabled firms to avoid taking appropriate responsibility over assessing the fitness and proprietary of their staff as well as allowing there to be cavities in the enforcement powers available to the regulator.
One of the most prominent instances of the Approved Persons Regime not being satisfactory was demonstrated through the investigation into Paul Flowers, former chairman of the Co-op bank. Here, Mr Flowers was appointed in an Approved Persons’ role despite a lack of senior banking experience. A safeguard was raised to counter this experience defect in the form of two deputy chairmen with relevant expertise who acted alongside Mr Flowers. Nevertheless, the appointee led the bank to require a £1.5 billion rescue injection. The inadequacies of Mr Flowers, who had been appointed following a 90-minute interview with the regulator, have been exposed further throughout the media, including for illegal drug use, public indecency as well as confusing the bank’s actual assets to be £3 billion rather than the actual figure of £47 billion. The flaws in the Appointed Persons Regime that allowed for such an appointment have been brought to the attention of the regulator and more detrimentally to the public. Consequently the Senior Managers Regime will replace the outdated and ineffective Appointed Persons Regime. This is much desired by the rule-abiding institutions to begin to regain the public’s trust in the financial services of the UK.
Senior managers across the entire financial services that held appointed positions previously will be grandfathered by 2018 into their applicable roles within the Senior Managers Regime. Approved persons below senior management level will now be captured under the Certification Regime. Here the identified staff will not hold senior functions as prescribed by the FCA and PRA, but will have responsibilities that are capable of causing significant harm to the business. These persons will no longer be subject to prior approval, but rather their firm will be required to conduct fitness and proprietary assessments and maintain annual reviews to ensure the individual’s ongoing suitability for their role. The banking sector (that are subject to both the Senior Management and Certification Regimes earlier than the rest of the industry) have been given until March 2017 to ensure that their existing staff have completed the certification process. The Senior Managers Regime and the Certification Regime methods of providing ongoing supervisory assurance are far more rigorous than the Appointed Persons Regime and will focus on continuing appropriateness.
The Senior Managers Regime has overhauled the accountability of senior members of staff. The regime assigns specific responsibilities to certain senior individuals in key positions throughout the firm’s hierarchy. Once identified, an individual’s responsibilities are functionally mapped out and documented through a statement of responsibilities. This statement alongside the functionality map will be used to determine accountability if a material failure does arise. It is deemed that these increased specifically identified accountability measures will ensure that greater care and oversight is given prior to any potentially detrimental risk-taking decisions being made. Not only does the Senior Managers Regime bring along the requirement to prescribe specific responsibility functions throughout the firm, but it also introduces greater consequences for failures that subsequently occur on the identified individual’s watch. The regulator may impose civil penalties that may affect an individual’s future within the financial profession. They may withdraw an individual’s approval for holding a specific function or they may determine an outcome that causes the individual to suffer public censure. Further the regulator is empowered to impose criminal sanctions to penalise an individual’s misconduct and their reckless mismanagement of a firm.
The introduction of criminal liability is undoubtedly the element of the Senior Managers Regime that has caused the most contention and debate to date. Until recently, a senior manager would have been under the presumption of guilt upon a business failure. This conflicted with the tradition under English law that one is innocent until proven guilty. Many senior managers felt uneasy being burdened with the presumption of responsibility and it was highlighted throughout the industry that many senior individuals would not want to take such roles. This could have prevented high-quality talent from participating in the management of the UK’s banks. Consequential solutions were already emerging throughout the industry, work-arounds such as renaming or creating new roles that did not fall within the scope of the Senior Managers Regime were being mooted as alternative methods of gaining senior management type exposure without such individuals attracting the burdensome risks.
Recognising the impracticalities of imposing this presumption upon senior managers, the Treasury have recently removed the reverse burden of proof. Although the regulator has been seen to down-play this amendment to the regime ahead of it coming into effect for banks as of 7 March 2016, the banking sector have not been shy in demonstrating their approval and their great relief. The FCA have noted that the presumption of responsibility element to the regime has received such significant industry focus that ‘it risked districting senior management within firms from implementing both the spirit and letter of the regime.’ Further, following the extension of the regime across the financial services industry, the reverse burden of proof would have been disproportionate to apply to all firms now captured under the regime, recognising that many small firms have less complex hierarchies than the large institutions that the regimes were initially prescribed to apply to.
Despite this reversal on the burden of proof, senior management will still be under the same stringent obligations to ensure that they have taken all reasonable steps to prevent a breach. Formulating that reasonable steps were taken will be based on multiple 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 the individual’s own prescribed responsibilities. In addition the suitability and appropriateness of any relevant delegations that were made will be scrutinised. Determining the above requirements will place heavy reliance on the quality of audit trails that are maintained to demonstrate that the relevant considerations and suitable due diligence took place.
Extending the Senior Managers Regime and the Certification Regime to apply equally to both banking professionals as it does to other financial professionals does have the effect of implementing a level playing field and creating one high standard of expectations for all to adhere to. However, there is much debate over the necessity of the extension of the regimes. Many non-banking professionals have been quick to point out in the wake of the financial crisis that it was large banking institutions that have been responsible for any identified misconduct, and that the other sectors have not demonstrated the propensity to act in a similar way. Conversely, if a high standard of behaviour is instilled across the entire financial industry, then it should make no difference to the institutions that have already been meeting such behaviour standards, if their actions are now required to meet such a prescription or otherwise. Introducing these regimes can be viewed as the initial steps in entrenching a culture of personal responsibility across the industry which in turn should help to rectify the current defect in consumer trust that the entire market continues to face.
 Tracey McDermott, acting CE of the FCA