Financial regulators in the United Kingdom are pushing for greater individual accountability from employees of banks and other financial institutions through two new proposed regimes.
The U.K.’s Prudential Regulatory Authority and Financial Conduct Authority issued a joint statement this week unveiling the plans for a new Senior Managers Regime and a Certification Regime. Officials said the proposals stem from recommendations by the Parliamentary Commission on Banking Standards, as well as changes called for in the Financial Services and Markets Act 2000 and the Financial Services/Banking Reform Act 2013.
The overarching goal is boosting accountability in the banking sector.
“The proposals in this consultation are intended to create a new framework to encourage individuals to take greater responsibility for their actions, and will make it easier for both firms and regulators to hold individuals to account,” the joint statement said.
The 395-page consultation paper includes details on both new regimes as well as rules of conduct, the regulatory lifecycle, how the changes apply to U.K. branches of foreign banks, and cost benefit analyses from both agencies.
The changes would apply to certain employees of banks, building societies, credit unions, and PRA-designated investment firms. Most of the proposals would not apply initially to U.K. branches of foreign banks, although regulators are mulling plans to extend the proposals to those firms as well.
Officials with the agencies wrote that “the behavior and culture within banks played a major role” in the financial crisis, including scandals like the Payment Protection Insurance mis-selling and the attempted benchmark rigging of the London Interbank Offered Rate (LIBOR).
“However, under the statutory and regulatory framework in place at the time, individual accountability was often unclear or confused. This undermined public trust in both the banking system and in the regulatory response,” the consultation paper said.
The Senior Managers Regime (SMR) applies to individuals subject to regulatory approval and will require the firms to allocate a range of responsibilities to the individuals and regularly vet their fitness and propriety. The regime will focus the accountability on a more narrow segment of senior executives than the current Approved Persons Regime, the agencies said.
Under the SMR, individuals performing a specified senior management function will require pre-approval from either the PRA, the FCA, or both, depending on the firm. Firms will have to provide a statement of responsibilities, detailing the functions the proposed manager would be tasked with overseeing. Both regulators would have the authority to tack on time limits or conditions to approvals. Those subject to the regime include board members, executive committee members for firms subject to FCA oversight, and in some cases heads of key business units, individuals in group or parent companies with significant influence on decision-making, and others responsible for important business, control, or conduct-related functions.
The Certification Regime will require affected firms to assess the fitness and propriety of employees who could pose “a risk of significant harm” to either the firm or its customers. This regime is broader in scope, applying to all employees who perform functions related to regulated activities which are not senior management functions but could pose significant risk.
The regulators will not approve employees under the regime, but will hold a senior manager of the firm accountable for the internal assessment and certification process. The regime calls for an initial certification of the employee’s fitness and propriety to perform the function, as well as annual reassessment and renewal of certifications.
The regulators said the FCA will include a broader swath of employees under the Certification Regime, including material risk takers like financial advisors and other customer-facing employees, supervisors and managers of other certified persons, and others, such as benchmark submitters, with significant influence function roles designated under the existing Approved Persons Regime.
A new set of conduct rules will affect employees targeted by both regimes, and capture a wider scope than the current code in the Approved Persons Regime. In the FCA’s case, the regulator will apply the conduct code to most employees of relevant firms who are based in the U.K. or handle customers in the U.K. Ancillary employees like caterers and security guards will be exempt.
The changes also give regulators greater enforcement powers, including a new criminal offence for decisions causing the failure of a financial institution and the presumption that senior managers are accountable for “contraventions” occurring within their responsibility areas.
Competition, costs, equality, and diversity are not expected to be affected by the changes, regulators said.
The PRA and FCA consultation period will end 31 October 2014, with final guidance expected by the end of the year or early 2015. The agencies are seeking comments on the proposals as well as the timetable for implementation.