The City’s top regulator has said a new system designed to hold bank executives to account is “not about trying to get heads on sticks”.
The new regulatory regime, which came into force on Monday and holds top executives responsible for failures in banks, has been watered down since it was first proposed, though Tracey McDermott, the acting head of the Financial Conduct Authority, insisted it would still have a major impact.
She told the Guardian the new arrangements were “not about trying to get heads on sticks – this regime is about trying make sure that banks are run better”. That will be achieved by bosses better understanding their responsibilities.
McDermott has been accused of taking a less stringent approach to regulating banks since taking up the role in September, particularly after dropping a review into banking culture. She said: “I completely reject any suggestion I or the organisation is going soft on banks or going soft on the City.”
The senior managers and certification regime comes into force alongside a new criminal offence of failing to prevent a bank from collapsing, in an attempt to address the fallout of the 2008 banking crisis where senior bankers were not found culpable.
They were born out of ideas presented by the parliamentary commission on banking standards set up in the wake of the Libor rigging scandal in 2012.
George Osborne said: “The new criminal offence, which becomes law today, is the latest milestone in my plan to ensure that the British banking industry operates to the highest possible standard. It is absolutely right that a senior manager whose actions causes their bank to fail should face jail.”
However, the chancellor, who has talked about having a “new settlement” with the City following the crisis, diluted parts of the regime. In particular, he has changed his mind over the burden of proof required for a finding of wrongdoing by senior bankers.
Initially, it had been envisaged that the new regime would require bankers to demonstrate they had done the right thing throughout any banking failure. But after intense lobbying the revised burden of proof will fall on the FCA, requiring the regulator to actively prove wrongdoing by bankers, who are presumed to have acted correctly.
McDermott has not decided whether she will stay on once Andrew Bailey, a deputy governor of the Bank of England, arrives to run the FCA. She said she was told of the revisions in advance but not consulted on it and refused to say whether she would have argued against the decision, which was announced in October.
The acting FCA boss had been in contention to lead the regulator on a permanent basis, but decided to withdraw from the race. Her decision was disclosed by George Osborne during a radio interview.
As of Monday, about 50,000 names will come off the FCA’s public register as whole swathes of staff will no longer be authorised by the regulator but instead “certified” by their managers.
Under the senior manager regime, 7,000 senior bankers and 3,500 top insurers will be deemed to be covered. McDermott said the need for a public register could be part of the consultation that will take place when the regime is extended beyond banks and big insurers in 2018.
The FCA is facing calls to ensure that it keeps track of the certification process, which could cover 30,000 staff. “Putting the onus on institutions to assess fitness and propriety will no doubt raise its own problems,” said Julie Matheson, regulatory partner at law firm Kingsley Napley.
“One firm’s consideration of what meets this standard may differ to another’s. This will always be a matter of judgment for the senior managers involved in assessing issues raised.”
Arpita Dutt, a partner at employment lawyers Brahams Dutt Badrick French, said the new rules could put off those seeking promotion. Dutt said: “The senior managers regime places a heavier compliance and policing function on senior individuals compared to the rest of Europe and the main global financial and insurance markets. Inevitably we may see bankers being paid more to justify the additional liabilities they are being required to accept.”
McDermott said that those who were already acting in a responsible manner should have little to fear, a view echoed by some lawyers. “Individuals identified as senior managers may be kept awake at night at first, but for those who acted in a responsible way in the first place, there should be no reason to worry,” said Sarah Henchoz, a partner at the law firm Allen & Overy, who doubts that bankers will leave to work elsewhere as a result of the regulations.
Three changes came into effect on 7 March
- Senior managers regime
Top executives at major banks and leading insurance companies are put in charge of specific areas of their organisation. Their responsibilities are clearly set out and should something in their area go wrong, they are held to account. They are also approved by the FCA and feature on its register.
- Certification regime
The senior executives who have been approved by the regulator are required to certify that those individuals who could cause “significant harm” are suitable and honest to hold their roles. They are recertified every year. This changes from the current regime where the FCA authorises individuals in a series of different job categories.
- Criminal offence
Section 36 of the Financial Services (Banking Reform) Act introduces a criminal offence for failing to prevent a bank collapse. The individual could be prosecuted if they take a decision that causes the institution to fail, were aware there was risk that the decision could cause the institution to fail, or their conduct fell far below what could reasonably be expected of a senior manager in that position.
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