UK: Mark Carney's Speech Of 10th June 2015 – The Implications For Employers And Employees

Last Updated: 24 June 2015
Article by Rose Branson

The Governor of the Bank of England, Mark Carney, gave his annual speech at Mansion House on 10th June 2015.  As ever, this speech grabbed headlines for its discussion of raising interest rates and the potential benefits of deflation.

But of equal interest and importance will be the implications of Mr Carney's call for the end of "the age of irresponsibility", and his proposed policies associated with making that change.

Addressing the "ethical drift" within the financial services industry, and the fact that "personal accountability was lacking", commentators noted that Mr Carney was almost headmasterly in style. However, Mr Carney is not just imposing rules, he intends for the Bank of England to lead by example and to be an early adopter of the stringent proposed  policies for regulation and improvement of personal accountability within the industry.

Mr Carney was enthusiastic about the new Senior Managers Regime which will commence in 2016.  This Regime extends personal responsibility to senior managers, so that such individuals are responsible not only for their own compliance, but for the compliance of people for whom they are responsible.

Referring to the Fair and Effective Markets Review produced by the Bank of England, the Treasury, and the FCA, Mr Carney's view expressed that this new regime alone would be insufficient, and that the Senior Managers Regime should be extended to more individuals.  In fact, he suggested that all firms with active wholesale FICC departments should be subject to this Regime, and that it should apply to more employees, including traders and brokers, not merely senior managers.  This will mean that there are considerably more individuals (potentially tens of thousands) against whom direct sanctions may be available.  Mr Carney confirmed that the Bank of England will be the first to adopt this new regime.

The increased regulation is not only an issue to regulated employees, as firms will also be subject to more stringent regulation. The proposal to widen the scope of the Senior Managers Regime is in line with the "tone from the top" approach being encouraged by the Bank of England and regulatory authorities.  Conduct, training and control structures are expected to be led in a top down manner to ensure compliance with the regulatory authorities.   The Senior Managers Regime will hold individuals to clearer, higher, common standards which Mr Carney expects to be clearer, for such individuals to be provided with better training and qualifications and for there to be full disclosure of any history of misconduct or negligence so that individuals cannot move on having already been subject to sanctions.

Mr Carney also suggested that the maximum sentence for the most serious breach of the regulatory responsibilities should be increased from seven to ten years.

Of particular interest to both employers and employees will be Mr Carney's comments that "incentives will be aligned" with compliance with the Senior Managers Regime.  If the Regime, and the alignment of incentives, is also extended to more individuals, then it is possible that we are seeing a further step towards the regulation of payments to employees in authorised firms, building on the cap on bankers' bonuses.

These are changing times for authorised firms and their employees. Individuals should be aware that they will be subject to a considerably higher level of scrutiny, both internally and externally, and that their remuneration may become dependant on their compliance. Authorised firms should be aware of the increased obligations on them to comply with regulations, provide training so that individuals can comply with the Senior Managers Regime, and also to keep their own disciplinary and reporting processes up to date and to ensure that remuneration policies are compliant.

The trend towards controlling what is paid to employees who are regulated and their facing accountability for their actions, as have been seen recently in the Southwark Court in the LIBOR-fixing case, looks likely to continue under Mr Carney's supervision and, potentially, become even more regulated. Indeed, Mr Carney also proposed that the maximum sentence for the worst breaches of the regulations should be increased from 7 to 10 years' imprisonment.

The Bank of England will be commencing an Open Forum in the Autumn to discuss the implications of the proposed changes and interested parties are invited to provide their insight at that time. It will be interesting to see if the Senior Manager Regime is extended as Mr Carney proposes, and whether it may be considered for use in other sectors, for example, insurance, as well.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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