A United Kingdom financial regulator last week laid out plans to better hold senior managers accountable for compliance lapses while at the same time pitching new rules and penalties for external auditors and actuaries.
The U.K.’s Prudential Regulation Authority released its plans to hold individual senior managers of banks, investment firms, and building societies accountable when the institution breaches regulatory requirements and the senior manager responsible for the non-compliant area cannot show they took “reasonable steps” to prevent or avoid the breach, the PRA said. The PRA and its tandem regulator the Financial Conduct Authority were granted the authority to sanction individual managers by the Banking Reform Act of 2013.
In addition to sanctions for compliance lapses, senior managers also face the possibility of criminal charges if it can be shown they made reckless decisions leading to a bank’s failure. The regulator will face the same burden of proof of guilt beyond reasonable doubt as other criminal cases.
“Senior managers will be held individually accountable if the areas they are responsible for fail to meet our requirements,” Andrew Bailey, deputy governor of prudential regulation for the Bank of England and CEO of the PRA, said in a statement. “Our new accountability regime will hold all senior managers, including non-executive directors, to a clear standard of behavior and we will take action where they fail to meet this.”
Only specific non-executive directors fall under the new regime, those deemed by the PRA to have specific responsibilities for functions directly relating to the safety and soundness of the firm. The non-executive directors covered are the chairman, senior independent director, chair of the risk committee, chair of the audit committee, and chair of the remuneration committee. The PRA said they will be held accountable individually for their specific areas, as well as their collective responsibility as board members. Requirements include meeting with sufficient frequency, challenging executives when appropriate, and devoting sufficient attention to their responsibilities. Senior managers also will be subject to conduct rules.
In determining whether sanctions are warranted, the PRA said it would take into consideration what reasonable steps the senior manager was expected to take, as well as what they knew and what they should have known. The PRA also will review facts like size and complexity of the firm, a senior manager’s experience, delegations of responsibilities, and whether those delegations were appropriately supervised.
The PRA is working up rules to comply with EU requirements ensuring the fitness of all members of a bank’s board, including notification and assessment requirements for non-executive directors not covered by the new Senior Managers’ Regime.
Insurers face a different set of rules through the Senior Insurance Managers’ Regime because of their differing framework and risks. The presumption of responsibility contained in the banking regime is not included for insurers, nor are potential criminal sanctions, the PRA said.
Together the PRA and FCA also issued procedures to formalize firms’ whistleblowing policies to ensure employees are encouraged to report suspected wrongdoing without fear of facing repercussions.
In other news, the PRA also released proposals this month covering the interaction between the regulator and external auditors and how the regulator intends to exercise its new disciplinary powers over auditors and actuaries.
Aimed at strengthening the relationship between the regulator and external auditors, the PRA is proposing a new requirement for external auditors of large, U.K.-based banks to submit written reports to the PRA as part of the statutory audit cycle. The requirement would not apply to subsidiaries of non-U.K. firms. External auditors would be required to submit annually a written report on the firm’s financial reporting and the accompanying audit. The PRA said the reports would give the authority a better picture of financial risks facing a firm, as well as give auditors earlier indications of any concerns the PRA has.
The PRA said it is aiming the rule at the U.K.’s biggest banks because they pose the most financial risk, and added that before the financial collapse there was a lack of a strong relationship between external auditors and regulators. The targeted launch date for the new requirement is for financial reporting periods ending on or after 1 November 2016.
The authority also is set to begin flexing new disciplinary powers over both external auditors and actuaries for firms under the PRA’s purview if they fail to comply with regulations. Disciplinary action could come against either a firm or an individual, depending upon the terms of an appointment, the PRA said. Possible penalties include fines, public censures, and even disqualification from working in financial services.
“We need the relationship between external auditors and supervisors to work effectively. This needs to be supported by high quality, thorough audits which can help mitigate emerging issues and risks that can threaten both the safety and soundness of individual firms and financial stability more broadly,” Bailey said in a statement. “Where auditors and actuaries fail to provide us with the information that we need to supervise firms effectively, we now have disciplinary powers which allow us to take action to rectify this.”