New accountability regime set to more strictly regulate Britain’s financial sector

New accountability regime set to more strictly regulate Britain’s financial sector

The Senior Managers and Certification Regime (SM&CR) came into force on March 7, 2016. This framework aims to increase the accountability of individuals at the top of financial services firms and ensure better governance within the corporate sector.

On March 3, 2015, the Economic Secretary to the Treasury Andrea Leadsom, stated: “A key part of our long term economic plan is to restore trust in Britain’s banking sector so that it works much better for customers and businesses. Ensuring that our banks are properly run is vital for the health of our economy.”

The 2007-08 financial crisis and more recent events – such as the Libor scandal – have indeed highlighted concerns about the performance and behaviour of many of the individuals working in the financial services industry.

Government and regulators work together to assure the “health of the economy”

The Parliamentary Commission on Banking Standards was established in 2012 to consider the professional standards and culture of the UK banking sector. It concluded that “a lack of accountability contributed to the mismanagement of the key risks and led to public distrust in the industry,” as reported by Deloitte’s EMEA Centre for Regulatory Strategy.

It was believed that all too often it was the shareholders of financial institutions who suffered, rather than the senior individuals who are responsible for the firm discharging its regulatory obligations.

The FSA, the predecessor of the current FCA, garnered fierce criticism for its apparent inability to sanction those individuals responsible for the misfortunes that beset the UK’s largest firms during the financial crisis.

The goal of the FSA, therefore, is to make it easier for enforcement action to be taken against the individuals at the top who are found to have breached the regulators’ rulebook, replacing the complex and oftentimes confusing Approved Persons regime.

Terry Sahathevan, director at Medius Consulting, a London-based regulatory consultancy, explains that, “it is a sign that governments in the public are fed up with business people doing things wrong. It’s the cost of not having things being worse again”.

From APR to SM&CR: Expanding the scope

Calling for a more rigorous, comprehensive, and consistent approach across the financial services industry, the application of the regime beyond banking seemed necessary. According to HM Treasury, “many firms beyond the banking sector – such as large investment firms, insurers and those involved in shadow banking – can pose a threat to financial stability.”

With the belief that holding individuals accountable is a key component of effective regulation, the tough new regime for senior banking executives and managers came into effect on March 7. It will extend to other financial firms in 2018.

The table below indicates the numbers of firms and individuals subject to the APR and SM&CR.

While the SMR includes about 20 senior manager positions, the certification regime will also apply to individuals who are not carrying out Senior Managers Functions (SMFs) but whose roles have been deemed capable of causing significant harm to the firm or its customers by the regulators. In other words, these individuals, deemed “certified persons”, have the ability to wreak significant financial damage.

Individual accountability at the heart of UK’s corporate criminal liability

In fact, the FCA’s new rules are coherent with the evolution of the British judiciary system. SM&CR is just one step forward in embedding a culture of personal responsibility throughout the financial services industry.

England has recognised this for decades now. Indeed, this principle was famously elucidated in the British legal case of Kent and Sussex Contractors Ltd (dating back to 1944). In that case, the judge argued that such people are so close to the “very ego and centre” of the personality of the corporation that their actions should be identified with it.

This was, however, at odds with the current legal accountability framework. According to the International Financial Law Review, a key problem identified as the cause of the FSA’s difficulties was the evidential challenge of having to illustrate that a particular individual was personally responsible for the firm’s regulatory failings.  Collective responsibility made it difficult to take action against an individual, no matter how senior.

That is why new requirements creating a responsibilities map for each financial institutions and requiring every Senior Manager to sign a Statement of Responsibilities might soon clarify liability.

Indeed, recent legislative changes to the regulatory regime for UK financial services firms reaffirm Britain’s culture of compliance and its ability to adapt to economic development and contemporary challenges.

Even though some point to watered down rules, this major reform is being carefully watched by financial services regulators outside the UK, particularly in the U.S. and Hong Kong, which may enact similar laws. Its impact might yet reverberate well beyond Britain.

Categories: Europe, Finance

About Author

Julie Sima

Julie is a political risks analyst with a regional expertise on Europe, and focus on regulatory environments. She holds an MSc in International Political Economy from the London School of Economics (LSE) along with a BSc in International Studies from the University of Montreal.