Out-Law News 3 min. read

PRA: financial senior manager rules will cover those with 'specific responsibilities'

Tougher rules designed to make "senior managers" at financial firms more accountable for failures on their watch will be extended to board members with "specific responsibilities" for aspects of that firm's "safety and soundness", UK financial regulators have confirmed.

The announcements by the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) means that certain non-executive directors (NEDs) at banks and insurers will be held individually accountable for their areas of responsibility, along with any collective responsibility they may have as members of that firm's board. The regulators are also proposing that firms ensure all board members are held to high standards and conduct.

The senior managers regime (SMR) will cover board chairs, senior independent risk directors and the chairs of a firm's risk, audit, remuneration and nominations committees, as well as managers responsible for the day to day running of the business, according to the announcement. These individuals will be subject to regulatory pre-approval, new conduct rules and a new presumption of responsibility. NEDs that are not subject to the SMR will no longer be subject to regulatory pre-approval once the new rules are in force.

PRA chief executive Andrew Bailey, who is also a deputy governor at the Bank of England, said that extending the senior managers rules to certain NEDs would ensure that they were "held individually accountable if the areas they are responsible for fail to meet our requirements".

"Our new accountability regime will hold all senior managers, including non-executive directors, to a clear standard of behaviour and we will take action where they fail to meet this," he said.

FCA chief executive Martin Wheatley said that by narrowing the scope of the SMR, the regulator would be able to "focus" its resources on "those responsible for key business areas and board committees".

"NEDs play a vital role in providing challenge to and an independent oversight of the executive directors. Including all NEDs in the new regime would risk the unintended consequence of changing the whole nature of this vital role," he said.

The SMR will apply to senior managers at banks, building societies and designated investment firms, and was created following the recommendations of the independent Parliamentary Commission on Banking Standards (PCBS) in July 2013. It will ensure that the main responsibilities within banks are assigned to specific individuals, who will be held accountable for any breaches unless they can demonstrate that they took reasonable steps to avoid or stop that breach. The PRA is also introducing a Senior Insurance Managers Regime (SIMR), with rules aligned with but not identical to those applicable to senior bankers.

Senior bankers will also become subject to a new criminal offence of reckless misconduct that leads to bank failure, as established under section 36 of the Banking Reform Act; as well as new remuneration rules designed to increase the alignment between risk and reward. This offence could carry a prison sentence in the most serious cases. The new criminal offence, remuneration rules and presumption of responsibility will not apply to senior insurers subject to the SIMR.

The new criminal offence will be subject to the usual standard of proof 'beyond reasonable doubt' applicable to criminal cases, and is designed for use only in "the most egregious cases". Writing in the Financial Times, PRA chief executive Andrew Bailey said that the regulator was "not looking for a swathe of high-profile enforcement actions".

"We do not seek to collect scalps, or to make examples of individuals," he said. "Success will be well-governed companies, where senior management know what is expected and run their firms responsibly. Appropriate and robust accountability for senior managers in financial institutions is not a regulatory burden. It is a crucial part of the effecting functioning of the economy."

The FCA and PRA have also published a joint consultation on proposed whistleblowing rules for banks, building societies, credit unions and insurers, taking forward another recommendation of the PCBS in its June 2013 report. The draft rules include a requirement for firms to appoint a "whistleblowers' champion"; a senior manager who will be responsible for overseeing the effectiveness of firms' whistleblowing policies and reporting to the board on their operation. The consultation, which closes in April, also proposes that this person report to the regulator where an employment tribunal finds in favour of a whistleblower.

Financial enforcement expert Michael Ruck of Pinsent Masons, the law firm behind Out-Law.com said that the announcements showed the regulator's "clear intention to identify those in senior management responsible for breaches or misconduct". "When combined with the regulator's desire to ensure whistleblowing procedures are clearly outlined and promoted, this must surely provide the regulators with the arsenal they are seeking to identify failings and hold the relevant senior managers accountable," he said.

"Particular note should be taken of the requirement that a senior manager take specific responsibility for whistleblowing under the new regimes, as this illustrates the importance the FCA and PRA are placing on this issue. Whistleblowing can be an emotive issue, but if firms have an appropriate regime in place it can enable the firm to identify issues and remedy them before they become a significant regulatory failing," he said.

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