Issues for directors and bank ring-fencing

Out-Law Guide | 18 Dec 2013 | 4:09 pm | 3 min. read

This is one of a  series of guides  on issues connected to ring-fencing and banking reform faced by banks. Other guides cover issues such as tax, real estate, employment, pensions, litigation, third party contracts and competition considerations.

This guide was last updated in December 2013

The Senior Persons Regime

Perhaps the most pressing issue for directors within the banks will be the new level of individual accountability envisaged by the Government – a set of proposals which the media have claimed would see greater potential for 'banged up bankers'.

The Government has announced a new Senior Persons Regime will replace the current Approved Persons Regime and introduce significant liabilities and duties for employees who hold these positions including:

  • new criminal sanctions for reckless misconduct by senior bank staff;
  • a reversal of the burden of proof meaning Senior Persons can be held accountable for contraventions of regulatory requirements in their areas of responsibility unless they can demonstrate they took all reasonable steps to prevent the contravention occurring;
  • extended time limits for regulators to take disciplinary action against Senior Persons;
  • specific duties to support stability and soundness within the Bank.

 

The Licensing Regime will also result in banking standards rules replacing the existing statements of principle and Codes of Practice for Approved Persons. These rules will have a broad reach and shall apply to Senior Persons plus employees who are not subject to prior regulatory approval but whose actions may harm the bank, its reputation or its customers. Regulators will have the ability to take disciplinary action for any breach.

Human resources teams are likely to be subject to challenges regarding the robustness of internal disciplinary proceedings and whether they are fit for purpose; evidence of training and steps put in place to ensure adherence to regulatory requirements, and support available.

Corporate Governance

Management and corporate governance structures are likely to attract much attention on the business pages of the press, with any hint of vested interest being severely punished. The board of directors of the parent should include individuals who are independent both of the ring-fenced body and the wider group, as well as non-executive directors.

Consideration could be given to whether formalised dividend policies should be introduced to restrict distributions by ring-fenced bodies to other members of their groups. Additional training for the directors of ring-fenced bodies to ensure that they understand their responsibilities in terms of ensuring that their banks comply with the ring-fence would doubtless be helpful and looked upon kindly by regulatory authorities

Remuneration

Remuneration in the stand alone entities will have to be designed against a backdrop of considerable, and changing, legislation. Remuneration committees will face considerable challenges.

Banking sector pay is already heavily regulated through the FCA Remuneration Code, which is intended to ensure that pay practices within regulated firms does not encourage inappropriate risk taking and that firms do not pay out more than they can afford.

For senior managers, and others identified as 'core staff' at least 40% - and for some, 60% - of their bonus must be deferred, and at least 50% of variable pay delivered in the form of shares or non-cash investments.

In addition, notwithstanding the Government's legal challenge through the Court of Justice of the European Union (CJEU), the UK with be implementing the Capital Requirements Directive IV from January 2014. This will include the controversial 'bonus cap' under which variable pay cannot exceed one times (or with shareholder approval, two times) fixed pay.

In addition, a new UK regime for quoted companies whose accounting period ends on or after 30 September came into effect in October 2013. Annual reports for those companies must contain more information about how directors have been and will be paid along with how this relates to company performance. This information can then be used by company shareholders when exercising their new legally-binding vote on the company's policy for director remuneration.

All companies within the new rules should now be planning ahead and identifying any issues that may require particular explanation and justification. Careful thought will be needed in putting together the remuneration policy, including some elements that many companies would previously have dealt with only as and when they arose. For instance, the policy will need to include the approach to remuneration in the context of director appointments and terminations, even if none are in prospect.

Investors and businesses agree that the link between top pay and long term company performance needs to be re-established to mitigate against directors focusing on achieving short term goals, even when these are not in the long term interests of the company.

Taken together, the new provisions will ensure that investors are clearer about the potential size of directors' remuneration packages, how they align with performance and the extent to which the remuneration committee has considered the pay and conditions elsewhere in the company and the views of shareholders in setting the remuneration policy.

The customer impact

10 years ago it might have been considered remarkable for the majority of the public to know the names and faces of the people running the UK's banks. However, given the increased level of focus on the sector, many executives are household names. New rules are expected to increase the level of transparency, so impeccable personal conduct will be expected, as will strong systems and controls to reflect a new culture of responsibility within the banks.