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Firms remain in FCA crosshairs despite focus on individual accountability, experts say

Out-Law Analysis | 11 Apr 2017 | 10:07 am | 3 min. read

ANALYSIS: Firms that had assumed Financial Conduct Authority (FCA) enforcement was now all about individual accountability following the implementation of the senior managers' regime (SMR) are very much mistaken, according to a recent speech by the FCA's Director Of Enforcement and Market Oversight, Mark Steward.

Speaking at New York University, Mark Steward warned that the SMR was "no free pass" for firms, and would not result in an end to action against corporate entities - including heavy financial penalties. The FCA's director of enforcement and market oversight did, however, declare that the SMR marked "an important and decisive shift in the right direction in tackling conduct issues".

In his speech, Steward said that some had viewed the SMR as "a means of shifting corporate liability onto individuals". This was not the case, so far as the duty of responsibility imposed on senior management is concerned, because "the firm's liability is a jurisdictional fact in any action against an individual".

"There is no free pass for firms, and so the senior managers' regime does not mean there will be an end to action against firms, including heavy financial penalties," he said.

The purpose of the SMR was to provide greater precision regarding the individual responsibilities of senior managers and to enable the FCA and Prudential Regulation Authority (PRA) to hold senior individuals to account for breaches or failings at their firms. Although this has yet to come to fruition for the FCA and PRA, it is something upon which they are focusing a great deal of time and resource. Such enforcement action may become even easier for the FCA and PRA when the regime is implemented by the wider industry, including financial advisers, which is currently expected to take place in 2018.

The SMR designates specific senior management functions which should be implemented across firms and performed by specified senior managers. A 'duty of responsibility' is imposed on senior managers to take such steps as a person in their position could reasonably be expected to take to prevent the firm from contravening a relevant requirement. The SMR was designed to improve accountability within firms by removing structures which stand in the way of the responsibility of senior personnel.

However, those subject to the regime will not be required to prove that they took every reasonable step to prevent regulatory breaches in their area of responsibility in order to escape enforcement action, as had originally been proposed by the regulators. Whether or not the SMR proves to be a re-branding of what went before and its overall success will inevitably rely upon whether the FCA and PRA are successful in holding a significant number of senior individuals responsible for failings at financially significant institutions.

The SMR is almost inevitably not going to be the panacea the FCA an PRA were hoping for in holding senior individuals to account personally for failings within their firms. With the loss of the reverse burden of proof only time will tell if the SMR has actually progressed the position to such a stage that senior individuals are held to account by the regulators. 

It remains unclear what is really new in this regard by comparison to the approved person regime given that most financial services firms previously had job descriptions, key functions, maps of responsibility and clear lines of delegation. Whether or not the SMR proves to be a re-branding of what went before and its overall success will depend on the FCA or PRA's success in holding a significant number of senior individuals responsible for failings at financially significant institutions.

The corporate offence of failing to prevent the facilitation of tax evasion within the Criminal Finances Bill, and the proposed corporate offence of failing to prevent economic crime, should make it crystal clear to all corporates – in particular those in the financial services sector, that they are increasingly in the crosshairs of not only the FCA and PRA, but also the Serious Fraud Office (SFO) and others. The increase in exposure of corporates to criminal prosecution means the FCA cannot be seen to be 'going soft' on corporates or focusing on individuals instead.

The FCA's position, as highlighted in Steward's speech, together with the recent action against Tesco, paints an interesting picture when considered in tandem with the government's recent call for evidence on corporate liability for economic crime. UK firms are operating in an environment where the government is considering whether the existing law for holding companies to account for financial crime is insufficient, and a financial regulator with the power to bring prosecutions and regulatory actions against those corporates is sending a clear message that the SMR does not mean that corporate responsibility is being watered down.

We have seen a recent uptake in firms considering internal governance and operations systems to ensure that they are on top of recent changes in law and regulation. However, if the government's consultation results in a meaningful change to the criminal law in holding corporates to account, then together with the FCA's approach to corporate responsibility and the SMR generally, it will be even more important for firms to consider whether governance models which decentralised responsibility and did not properly give appropriate responsibility to senior management will be sufficient to address the exposures of law and regulation in future.

Jonathan Cavill and Michael Ruck are financial services regulation experts at Pinsent Masons, the law firm behind Out-Law.com.