Jul 20, 2015

The lack of legal accountability applied to key decision makers following the 2008 financial crisis remains a source of great public consternation. Iceland stands almost alone in having aggressively pursued criminal charges against the leadership of a number of its troubled institutions; Landsbanki, KAupthing and Glitnir in particular, resulted in convictions for offences including fraud. The principle of collective responsibility in the United Kingdom has prevented the prosecution of individual board members for deciding to take risks that ultimately contributed to the financial collapse of their organisations. However, this lack of accountability is likely to be remedied after the implementation of the Senior Manager Regime (SMR) on 26 March 2016.

Focusing on increasing individual accountability, the SMR requires affected institutions to map certain responsibilities to Senior Managers (key decision makers responsible for the firm’s activities’[1]). Each Senior Manager must accept the resulting Statement of Responsibilities before pre-approval of their appointment is sought from either the PRA or FCA, or both, as being deemed ‘fit and proper’. The SMR introduces a rebuttable presumption that, where the firm commits a regulatory breach, the Senior Manager who owns responsibility is personally liable. This liability is further reinforced by the introduction of the reckless misconduct offence, which results in a possible prison term of up to seven years and / or an unlimited fine, in the event of a proven misconduct. Additionally, the regulators may impose disciplinary measures against a Senior Manager, up to six years after the misconduct has occurred.

The SMR will enhance accountability and transparency by creating inevitable risks for those institutions which fail to effectively implement the requirements and any corresponding controls. Those failing to do so will find it difficult to fill vacant roles and retain senior staff. Furthermore, an inadequate response to SMR may result in defensive decision making by management, deterring them from making effective decisions crucial to the ongoing success of their business.

With this in mind, firms can undertake several steps to properly prepare and support Senior Managers. These include:

  • Identify Who Falls In-Scope – This will require the development of a set of principles specific to each firm’s unique organisational structure. Attention will also need to be given to the different set of functions which fall within the scope of the two supervising bodies.
  • Review the Organisational Landscape – A review of the firm’s organisational landscape aiming to simplify and add transparency to the decision-making process will be required.
  • Clarifying Reporting Lines – Reporting lines must be made clear, not overly complex (dotted or dual) and tie into the firm’s divisional, regional and global governance framework.
  • Record All Decisions Made / Actions Taken – Meeting minutes must be complete; a full record of all decisions, actions and comments must be recorded.
  • Create Awareness of Responsibilities – It must be ensured that Senior Managers understand and accept the responsibilities applicable to them. Any governance documents, such as Statements of Responsibility, should be formalised and include input from Senior Managers. Additionally, handover arrangements for incoming Senior Managers and updated regulatory training covering the new rules should be formalised and evidenced.
  • Strengthen Controls and Processes :
  • Controls should be implemented to ensure ongoing adherence to the Regime’s requirements.
  • Control functions must be made fit for purpose and sufficiently resourced, allowing Senior Managers to confidently demonstrate reasonable steps have been taken to prevent or rectify regulatory breaches. The strengthening of controls will require the development of a framework to evidence those ‘reasonable steps’ taken to prevent regulatory breaches.

Taking these steps in advance of the enforcement date, and ensuring their effectiveness, should help to reassure key decision makers that they have the security required to enable them to make the decisions necessary for the firm’s future success. It will not prevent all individuals affected pursuing opportunities with institutions beyond the Regime’s reach. Arguably, those who are unwilling to take ownership of the responsibilities allocated to the position they hold ought to be encouraged in this decision. However, such an approach may prove counterproductive at a time when the industry must attract people best equipped to make difficult the decisions required to introduce change.

Given recent history, and the strong public demand for greater accountability within the industry, firms must act to ensure the Regime’s requirements are met. Under the circumstances, the most effective way of preventing exodus and providing security to decision makers is to ensure that good governance standards and controls are embedded well in advance of implementation.

[1] http://www.fca.org.uk/static/documents/consultation-papers/cp14-13.pdf