How Universities should investigate a complaint under the disciplinary procedure
The Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) published a paper 24 February 2015 entitled “Approach to non-executive directors in banking and Solvency II firms & Application of the presumption of responsibility to Senior Managers in banking firms” (referred to here as “the New Consultation”).
The New Consultation has been published to revise elements of a consultation by the same bodies, published in July 2014 entitled “Strengthening accountability in banking: a new regulatory framework for individuals” (referred to here as “the July Consultation”).
The consultations together cover a number of issues relating to accountability in banking, but the headline issue is that to do with the accountability of senior individuals in banks. The July Consultation sets out the new approach that the PRA and FCA plan to take in regulating more stringently senior individuals working in banks and large insurance companies (to be known as the “Senior Manager’s Regime” (SMR)), but responses to the consultation included criticisms of the proposed regime as it related to Non-Executive Directors (NEDs), saying that the proposals would compromise the independence of NEDs and make it difficult for banks to recruit talented people into those roles. The purpose of the New Consultation is to address those criticisms.
What is the current system of regulation of individuals?
At present, individuals are regulated by the FCA via the Approved Persons Regime (APER) as set out in the Statements of Principle and Code of Practice for Approved Persons in the FCA Handbook. Under APER the FCA carries out assessments of whether individuals are “fit and proper” to be authorised to perform a number of specific functions. The FCA handbook sets out the minimum standards required for becoming and remaining an approved person in the Fit and Proper test for Approved Persons (FIT).
How will this change?
The July Consultation proposed the following changes:
What does the New Consultation add / change from the July Consultation?
The earlier consultation proposed that the Senior Management Function would apply to all NEDs, including those without specific responsibilities within the bank (“Standard NEDs”). The New Consultation seeks to address concerns raised about including Standard NEDs in the SMR.
The greatest concern related to the fact that Standard NEDs would, by virtue of their inclusion, also be subject to the “presumption of responsibility” (of which more later) and that the requirements placed upon Standard NEDs would be disproportionate i.e. that NEDs could be exposed to regulatory enforcement action where they had not been involved in the actual decision-making and/or had not had direct oversight of the operations under criticism. In order to mitigate the risk of enforcement action or personal censure it is predicted that some Standard NEDs might seek to become actively involved in areas beyond their current remit and more traditionally dealt with by the executive directors, which would in turn compromise their independence on bank boards. Alternatively, the disproportionate personal risks could mean good quality candidates are put off from taking up such roles in the banking sector and thereby limit the ability of banks to attract high-quality NEDs.
In consequence, the New Consultation tempers a little the FCA’s position on NEDs. It allows that Standard NEDs, i.e. those without specific responsibilities, would not need to be approved as Senior Managers or subject to the SMR. However, it retains the position that some NEDs with specific responsibilities will be subject to the more rigorous requirements of the SMR including the Chairman, Senior Independent Director and the chairs of major board committees, such as the Audit, Risk, Remuneration and Nominations Committees.
The “presumption of responsibility”
The July Consultation stated that where there had been a failing in a bank under a Senior Managers area of responsibility, there would be a presumption that the Senior Manager was personally responsible for the failing and could face individual sanction unless they could satisfy the regulators that they took “reasonable steps” to prevent, stop or remedy regulatory breaches by the firm”.”
This provision reverses the burden of proof. Currently it is for the regulator to establish that an individual committed a breach or, in the case of failings of senior management, if they did not commit the breach themselves that they had the requisite knowledge that breaches were being committed by others and did not do anything about those breaches. The new regime will not require the regulator to show direct knowledge or wrongdoing by the Senior Manager but will presume that they are responsible unless they can demonstrate that they took reasonable steps to prevent breaches in their area of responsibility.
What happens next?
The New Consultation seeks to address the feedback that there was previously little guidance on when and how the presumption would be applied, and what steps a Senior Manager would be expected to take. That information is now set out in a PRA Supervisory Statement and in draft text for the FCA Handbook setting out guidance on the role and responsibilities of NEDs (these are found at Appendix 2 and 3 of the Consultation, respectively). The FCA and PRA are seeking views on this guidance from interested parties.
The authorities are welcoming comments on the Consultation, to be received by 27 April 2015.
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