Tough at the top?

Posted: 23rd June 2014

There is much discussion within financial services at present calling for stricter rules for senior persons.

The debate however is not new. The Parliamentary Commission on Banking Standards (PCBS) published its report on banking standards back in June 2013 calling for the creation of a new Senior Managers Regime (SMR). The Commissions inquiry into professional standards and culture concluded that many individuals operate with very little personal accountability and with little prospect of enforcement action against them. Events at the Co-op have only served to heighten this debate.

Since its inception, the FCA has positioned itself and its supervision model as ‘intensive and intrusive’ with a credible deterrence strategy, i.e. punishing firms through fines. Fines levied by the FCA (and its predecessor the FSA) during 2013 amounted to £474,138,738, an increase of over 50% on the previous year’s total. Increasingly however it can be seen that the FCA is also taking action against individuals through fines and / or instances where individuals were prohibited and lost their ability to work in the financial services industry. There have also been cases of individuals refusing to be granted approval to work in the industry. You may be surprised to know that the FSA took more action against individuals over the 2012 / 13 year than they did against firms (55 actions against individuals, which included £5m in fines, 43 prohibitions and 13 criminal convictions. In comparison, they took action against 38 firms, fining them £418m).

The FCA is clear that the overall culture of firms and its overall compliance of course sits at the top. The issue however is that fining firms alone is not enough. To quote Tracy McDermott – the FCA’s Director of Enforcement and Financial Crime, “in order to achieve credible deterrence, senior managers must be held to account”.

So what does the new regime look like and what does this mean for those at the top?

The PCBS highlighted the complexities within the APR. Individual responsibilities were inadequately defined, restricting regulators’ ability to take enforcement action. Where for firms the regime operated mostly as an initial gateway to a post, the SMR acts to serve as a system through which the regulator bring greater individual responsibility to those at the most senior posts.

The changes mean replacing the Significant Influence Function (SIF) elements of the APR. Individuals will have more specific regulatory responsibilities, enabling the regulators to take more targeted enforcement measures. The SPR would apply to fewer individuals than the current SIF regime.

Conclusion

Finding the right person to take on senior functions within your firm is always challenging, especially given the tightening consequences of any transgressions. Although the Commission is focussed on banks and bank holding companies operating in the UK, the desire of the FCA is that the new regime should apply to all financial services firms.

For individuals the regulators’ warnings that individuals will be held to account are now being backed up by changes to the Approved Persons regime based on a set of conduct rules as well as imposing tough new penalties against individuals.