Holding individuals to account in financial services - unexpected shift in burden of proof

16 October 2015

The mission to improve accountability for individuals working in financial services is still in full swing as the Treasury introduced the Bank of England Financial Services Bill on 15th October.  One of the key provisions is the extension of the Senior Managers and Certification regimes (SM&CR), introduced under the Financial Services (Banking Reform) Act 2013 (due to come into force in March 2016 for the majority of the banking sector),  to cover all investment companies, insurers, asset managers and consumer credit firms by 2018. The Treasury argues that extending the SM&CR across the whole financial services industry will create a fairer, more consistent and rigorous regime for all financial services firms – taking the number of Senior Managers in firms under scrutiny to 60 000 plus.

Julie Matheson and Louise Hodges look at what the changes may mean and highlight a number of questions that remain unanswered.

U-turn on presumption of responsibility

Both individuals and firms in the financial sector will be significantly affected by the Senior Managers and Certification regime. However, the controversial move by the Financial Conduct Authority (FCA) to introduce a “presumption of responsibility, has been shelved. The Government has instead decided to introduce a statutory duty on senior managers to take reasonable steps to prevent regulatory breaches in their areas of responsibility – the so-called “duty of responsibility”.

The FCA had trumpeted the introduction of a “presumption of responsibility” as a key tool in the new accountability regime and a way to hold all senior managers, including some Non-Executive Directors (NEDs), to a clear standard of behaviour.   The aim of this is to change the banking culture and behaviours from the top-down, with action being taken where there is a failure to meet this standard. The  Senior Manager responsible for the business unit in which the alleged failure occurs (to be set out in the ‘responsibilities map’ relating that role) will be personally accountable for the failing and  could face personal sanction. 
Under this “presumption of responsibility” approach, the FCA would not have been required to show direct knowledge or wrongdoing by the Senior Manager, but would have presumed they are responsible for an alleged breach falling within their area of responsibility, unless the Senior Manager could satisfy the regulators that they took “reasonable steps” to prevent or stop the regulatory breaches occurring or continuing.  This would have amounted to a reversal of the current FCA burden of proof, under which the FCA has itself to prove that an individual is culpable for an alleged failure.  This was a substantial shift in the onus of proof in regulatory proceedings, leading to controversy. 

However, in a policy paper accompanying the announcement, the Treasury clearly states that: “the government will amend the Financial Services (Banking Reform) Act 2013 (Commencement No. 9) Order 2015 to ensure that the ‘reverse burden of proof’ does not come into effect when the SM&CR comes into operation for banking sector firms on 7 March 2016.”

Instead, whilst the “duty of responsibility” will require management to take appropriate steps to prevent a regulatory breach from occurring, the burden of proving this misconduct will fall on the regulators, as with other regulatory enforcement actions.

How this will work in practice is as yet undefined and may continue to raise difficult questions about where responsibility lies, with the waters somewhat muddied between bank and banker.

Why there has been such a change remains to be clarified but it is symptomatic of the Chancellor’s softened position and new relationship with the City. Did the sectors’ vocal concerns as to the ability to retain and attract talent ring home when it became clear that the perceived personal risks would have meant good quality candidates would have been put off from taking up such roles in the banking sector?  Commentators had noted that the onerous regime would have limited the ability of banks to attract high-quality NEDs, and to fill Senior Manager roles, which would have a detrimental effect on the running of the City.

Despite protestations in the media from the Bank of England’s Deputy Governor of Prudential Regulation that: “The introduction of the ‘duty of responsibility’ in place of the ‘presumption' makes little difference to the substance of the new regime”, this is potentially a significant sea-change. However, the acting Chief Executive of the FCA, Tracy McDermott, was keen to play down this shift in focus.  In a release last night, she said:

“Extending the Senior Managers’ and Certification Regime is an important step in embedding a culture of personal responsibility throughout the financial services industry.

While the presumption of responsibility could have been helpful, it was never a panacea. There has been significant industry focus on this one, small element of the reforms, which risked distracting senior management within firms from implementing both the letter and the spirit of the regime. The senior managers’ and certification regime is intended to deliver better decisions to help avoid problems arising. We remain committed to holding individuals to account where they fail to meet our standards.”

The real impact of this change is yet to be known; in particular, whether it amounts to a ‘watering down’ of the strict accountability regime heralded by the FCA and PRA.

Further information

For further information, please visit our page, Senior Managers & Certification Regimes: increased accountability and regulatory sanctions, or contact Louise Hodges or Julie Matheson.

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