Bankers' 'presumption of responsibility' removed from senior managers' regime

Out-Law News | 19 Oct 2015 | 11:54 am | 4 min. read

The most senior bankers 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 once new rules come into force next year, the UK government has announced.

Senior managers across all regulated financial firms will instead be subject to a new statutory duty of responsibility, backed by "the same tough underlying obligation ... [to] take reasonable steps to prevent regulatory breaches in the areas of the firm for which they are responsible", according to a policy paper on the incoming senior managers' and certification regimes (SM&CR). However, regulators will still be required to prove that the individual failed to do this.

The announcement came as part of plans to extend the SM&CR to all regulated financial firms, not just those in the banking sector. The new regime, which will be introduced for senior bankers on 7 March 2016, will be extended to cover insurers, investment firms, asset managers, brokers and consumer credit firms "during 2018", according to the policy paper.

Financial regulation expert David Heffron of Pinsent Masons, the law firm behind Out-Law.com, said that although many in the banking industry would consider the change to be "a weight removed from their shoulders", it was "too early at this stage to breathe a sigh of relief".

"Whilst the reverse burden of proof may no longer be part of the senior managers' regime (SMR), the approach likely to be taken by the regulators in assessing whether they have taken all appropriate steps to prevent a regulatory breach from occurring will no doubt be a high bar to clear," he said. "The mindset of the regulators will likely continue to be that if a failing occurs on the watch of a senior management individual, then that individual will face tough questioning around the steps they took to prevent such a failing."

"The extension of the SMR to the non-banking and insurance parts of the financial services sector had been expected. However, this will be a major change for firms from the existing approved persons' regime, bringing tough standards of personal responsibility and accountability on senior managers," he said.

The SM&CR forms part of the UK government's programme of banking reform following the financial crisis of 2008, and was developed following the recommendations of the independent Parliamentary Commission on Banking Standards (PCBS) in July 2013. The 'senior managers' part of the new regime will give named senior individuals within firms the responsibility for certain areas of the business, while the 'certification regime' will require firms to assess the fitness and propriety of staff in certain roles. New conduct rules will also apply to all staff within relevant firms except those carrying out "purely ancillary functions".

The Prudential Regulation Authority (PRA) has also developed new rules for senior managers in insurance firms, known as the senior insurance managers' regime (SIMR). The SIMR "already incorporate[s] some of the substantive ideas and principles underpinning the SM&CR", but does not replace the existing Approved Persons Regime (APR) for staff that are not in senior management roles. The introduction of the SIMR, which forms part of the PRA's preparations for the EU's Solvency II directive, will still go ahead and will "pave the way for the application of the SM&CR to insurers", according to the government's policy paper.

Currently, the APR allows financial sector regulators to take enforcement action against approved persons for breaches of the regulatory 'statements of principle' applicable to them, or if that person is knowingly involved in a regulatory breach by the firm. The new regime will introduce a third ground, allowing regulators to take action against an individual for regulatory breaches by the firm in the area of the business for which the senior manager is responsible. It will be a defence if the senior manager can show that they took "the steps that it is reasonable for a person in that position to take to prevent a regulatory breach from occurring".

The government intends to legislate to extend the SM&CR to other financial firms as part of a new Bank of England and Financial Services Bill, which has just been introduced to the House of Lords. This bill also sets out measures to strengthen the governance and accountability of the Bank of England, which is the UK's central bank; and to update resolution planning and crisis management arrangements between the Bank and the Treasury.

If passed in its current form, the bill would end the PRA's status as a subsidiary of the Bank of England and instead replace it with a new 'Prudential Regulation Committee' (PRC), which would be brought fully within the bank. The Financial Policy Committee (FPC) would also be brought fully within the bank rather than being accountable to its Court of Directors, in line with the new PRC and existing Monetary Policy Committee (MPC).

The bill would also create a "smaller, more focused unitary board" to replace the existing Court of Directors, and create a new 'Deputy Governor for Banking and Markets' role. It would also open up the central bank's accounts to value for money studies by public spending watchdog the National Audit Office (NAO). Plans to extend the scope of the government-backed Pension Wise guidance service, introduced as part of this year's pension reforms, to existing annuity holders once the new freedoms are extended in 2017 are also included in the bill.

Remuneration expert Steven Cochrane of Pinsent Masons said that the proposed extension of the SM&CR would raise questions about whether other regulatory requirements applicable to senior managers, such as those included in the PRA's remuneration code, would be extended to senior managers outside of the banking sector.

"It remains to be seen whether the extension of the SM&CR will be followed by related extensions of longer variable remuneration deferral and clawback periods for the managers to be brought within it," he said.