The UK Parliamentary Commission on Banking Standards has this
week delivered its Final Report. Whilst most of the press
commentary has focused on proposals to jail bankers for very
serious misconduct occurring in the future, its recommendations
include some which are intended to impose greater and clearer
personal responsibility on directors and senior managers of banks,
thereby exposing them to the real risk of regulatory enforcement
action and appropriate sanctions. The regulators are clearly being
encouraged to give greater priority to enforcement with an
increased willingness to take on difficult cases often
involving the more powerful individuals and players in the market.
In support of its recommendations, the Commission proposes a new
autonomous Regulatory Decisions Committee in relation to the
banking sector with the possibility in the future of a separate
statutory body for enforcement operating across the financial
services sector.
The Commission attributes some of the blame for the recent
failures and scandals in the banking sector to a lack of
responsibility and accountability on the part of directors and
senior managers particularly in large, complex institutions.
Collective decision-making, complex decision-making structures and
extensive delegation have apparently led the regulator to place
enforcement actions against senior individuals in banks in the
"too difficult" box. The Commission makes a number of
recommendations to correct this. These would be underpinned by the
proposal to introduce a Senior Persons Regime whereby all key
responsibilities within a bank will be assigned to specific senior
individuals who will remain responsible notwithstanding delegation
or collective decision-making. These individuals will be limited to
those who really run the bank. The Commission believes this should
make it easier for regulators to identify those individuals at the
top of a bank who are truly responsible for failures.
The Commission's proposals would result in a more top-down
approach to enforcement, drawing on the clarity that the Senior
Persons Regime is intended to provide about who is exercising
responsibility at the highest levels within the bank, what they
knew and did, and what they reasonably could and should have known
and done. The Commission believes that taking earlier and more
effective enforcement action against senior individuals within
banks in the future will help to build up a credible deterrent
effect.
If the Commission's recommendations are implemented, any
senior manager against whom enforcement action is taken in the
future will likely meet a different Regulatory Decisions Committee
("RDC") to the one currently in operation. The Commission
had various concerns about the role and composition of the RDC,
which currently makes enforcement decisions on behalf of the
regulator of which it forms part. In its Final Report, the
Commission limited itself to recommending the creation of an
autonomous body to assume the decision-making role of the RDC for
enforcement in relation to the banking sector. It recommended that
its composition should change so that it is chaired by someone with
senior judicial experience and have a lay majority but importantly
should also contain several members with extensive and senior
banking experience.
The Financial Conduct Authority ("FCA") has already
taken some steps towards arranging for personal responsibility to
be assigned more clearly to senior individuals and has let it be
known that it is seeking to impose greater personal responsibility
on directors and senior managers by bringing more enforcement
actions against senior individuals. It needs little or no
encouragement from the Commission in this respect and is likely to
welcome most of its recommendations.
If the Commission's proposals in relation to a new Senior
Persons Regime are implemented, this will certainly assist the FCA
in assigning or apportioning culpability for regulatory failures
more easily in the future and thus secure appropriate
sanctions. The increased focus on personal responsibility that the
recommendations, if implemented, would create may not serve to
encourage senior individuals to seek out or take on positions of
responsibility particularly in organizations with a poor track
record. Directors and senior managers of banks will also want
(among other things) greater clarity about the scope and
limit of the responsibilities that are assigned to them and to
document clearly from the outset how these responsibilities are
exercised. Complex structures and complex decision-making may have
to become a little less complex. Directors and senior managers will
also want to ensure that the firm has in place appropriate and
adequate indemnities and D&O insurance for legal costs. The
costs of a regulatory investigation, enforcement action and
possible review by the Tribunal can be very significant,
particularly if more than one director or senior manager is
involved. All too often, the wording of D&O policies is unclear
or gives rights to the insurers which allow them to limit the
amount of cover, or avoid it altogether.
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