Holding management to account:Where is it all heading?

Briefing

Thursday 10th September 2015

Ben Blackett-Ord, Jo Ann McNulty and Prem Griffith

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Agenda

• Brief history

• Recap on Approved Persons Regime

• Outline of the Senior Managers & Certification Regime

• Discrepancies, anomalies and challenges

• Predictions

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A little history

• Drivers for change

• “Twin peaks” debate

• Creation of the FSA (“Super SIB”)

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Holding individuals to account

• Defining controlled functions

• Senior Management:

– Directors, NEDs, Apportionment & oversight

• Others:

– Customer facing (including traders)

– Oversight of customer property

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A shift in focus…

Banking

crisis

“Probity” “Competence”

Turner and

Walker reviews

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Failing to hold individuals to account

“…fining of individuals more

of a deterrent”Martin Wheatley

“…FCA clearly committed to

achieving a credible deterrent

and using enforcement to

demonstrate societal

disapproval” Tracey McDermott

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Parliamentary Commission on Banking Standards

“Too many bankers have operated with…

• insufficient or meaningless personal responsibility

• illusion of regulatory controls

• claiming ignorance or hiding behind collective decision-making

• little realistic prospect of financial penalties or sanctions

• individual incentives not consistent with high standards.”

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PCBS Recommendations (June 2013)

Recommendation Key points

New regime for individuals

• Senior persons regime

• Individual statements of responsibilities

• Responsibilities map

• Code of practice (conduct rules)

Incentives for better behaviour• Incentives / disincentives to reflect long-

term risk and reward

New enforcement approach• Reverse burden of proof

• Potential for criminal prosecution

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Senior Persons Regime

Senior

Management

Functions

Certification Regime

Individuals

All other staff

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FC

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Fir

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Tier one – Senior Management Regime

• Set of Senior Management Functions (SMFs)

• List of prescribed responsibilities

• Responsibility for all areas of activity

• Individual statements of responsibility

• Firm to create Responsibility Map

• Presumption of culpability

• Potential criminal offence (in extremis)

Governance framework

Personal accountability

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Prescribed responsibilities/responsibilities map

• Defined ‘prescribed responsibilities’:

• Areas of overall responsibility

• Individual statement of responsibilities

• Responsibility map

Responsibility for compliance with the requirements of the regulatory

system about the management responsibilities map

Responsibility for overseeing the adoption of the firm’s culture in the day-

to-day management of the firm

Responsibility for the development and maintenance of the firm’s

business model by the governing body

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Reverse burden of proof and criminal offence

Reverse burden of proof

• SMF guilty of misconduct…

• …unless can demonstrate that took reasonable steps

Potential criminal offence

• SMF party to decision

• Decision caused firm to fail

• SMF conduct far below reasonably expected

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Tier two – Certification Regime

• Individuals who pose risk of

significant harm to the firm or its

customers:

• The firm is responsible for fitness

and propriety

Senior

Management

Functions

Certification Regime

Individuals

All other staff

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Role of accredited bodies

Certificate of

Professional Standing

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Bodies recognised by the FCA

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Conduct rules – “Same, same but different”

• High level rules

• Reflect core standards expected of staff

• Similar to APER, plus:

• Apply to:

– SMFs

– Certified individuals

– Almost everyone else

• Actual or suspected breaches reported to the regulator

You must pay due regards to the interests of the customers and treat

them fairly

You must take reasonable steps to ensure that any delegation of your

responsibilities is to an appropriate person and that you oversee the

discharge of the delegated responsibility effectively

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Branches of foreign banks

• Rules not yet finalised

• Reduced set of applicable SMFs

• Reduced set of prescribed responsibilities

• Certification regime applies

• May catch overseas individuals

• Annual SYSC attestation no longer required

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Challenges

• Very different regime for relevant firms

• Agreeing and documenting responsibilities

• Responsibility map

• No register for certified individuals

• Uncertainty over FCA/PRA approach to supervision

• Will it work?

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Short term

• Culture change – covering your back

• Increased use of attestations

• More committees

• Conflicts between individuals and firms…

• …Employment law / tribunals

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Medium term

• Prescribed responsibilities will change

• Some elements will prove to be unworkable

• Regime will extend to other sectors

• Regulatory arbitrage

• PRA vs FCA – tensions may rise

• Role of accredited bodies will increase

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What you should be doing

Relevant firms:

• Decide where responsibility sits

• Consider resources required

• Start with responsibility map and work through it

• Use training and education

• Consider use of accredited bodies certification

process

• …Time is short!

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What you should be doing

Senior Managers:

• Understand the regime and its drivers

• Define your responsibilities in advance

• Where are the red lines?

• Avoid being defensive

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What you should be doing

Other firms:

• Be aware this is probably coming your way

• Review your approach to “Apportionment and

oversight”

• Document your own responsibilities map.

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Any questions?