City view: Is the presumption of innocence being stood on its head for bankers?

On the 800th anniversary of the signing of the Magna Carta, that seminal event in the development of British justice, it is perhaps inevitable that the impact of any significant changes to the law or regulation which are made this year will be compared with the impact of that moment


Within financial services, or more particularly banking, changes of a Magna Carta-type nature are in train via the Financial Services and Markets Act and the proposed Senior Managers Regime. Putting aside the temptation to draw an historical analogy, we are concerned that a key tenet of British justice, namely the presumption of innocence is, in certain circumstances and then only for bankers, being stood on its head in favour of a ‘presumption of responsibility’ – or guilt.

The Senior Managers Regime which contains this contentious proposal also requires detailed ‘Statements of Responsibility’ to be drawn up which will specify precisely who is responsible for all aspects of an organisation, in order to avoid the situation of the recent financial crisis when, by making everyone responsible, the outcome was that no one was responsible. From that perspective, the proposals may seem entirely sensible and indeed have been publicly welcomed by senior industry figures.

Against that background, a requirement for firms to act in accordance with the law and regulation, and for senior managers to accept personal responsibility for the areas they manage, is currently the exception rather than the rule. We accept entirely that a bank being bailed out by the taxpayer to the tune of many billions of pounds, without any individual director or senior manager appearing to accept responsibility for its failure, is impossible to justify and is an understandable cause of public antipathy.

However, we do have reservations over whether the potential ramifications of the Presumption of Responsibility are intrinsically equitable. It is not so much whether the charge of ‘reckless misconduct’ is itself unreasonable, but rather the mechanism by which the enforcement process will work, where the regulator appears to be effectively acting as judge, jury and potential executioner. This concern is recognised by the regulator, and Martin Wheatley, Chief Executive of the Financial Conduct Authority (FCA), recently commented: “neither the Senior Managers Regime, nor the presumption of responsibility, correspond to a ‘heads on sticks’ strategy. . . the FCA will apply the presumption proportionately and in a way that’s fair to the subject of the investigation.”
We prefer the safeguards of the current position, accepting its imperfections

But if your name is Pottage or Cummings, you may not find that statement very reassuring. As CEO of UBS Wealth Management at a particularly tricky time for the firm, John Pottage was pursued by the Financial Services Authority (FSA), the predecessor of the FCA, seeking to fine and ban him. Pottage appealed to the Upper Tribunal – and won. The tribunal indicated that an approved person would be in breach of a statement of principle only where “he is personally culpable and not simply because a regulatory failure has occurred in an area of business for which he is responsible”.

Peter Cummings, as former Head of HBOS Corporate Division, was banned from the industry for his “failure to exercise due skill, care and diligence by pursuing an aggressive expansion strategy… without suitable controls to mitigate the risk.”

Cummings chose on cost grounds not to appeal, but commented that “the decision to single me out for investigation is even more grotesque, given that even the FSA has to admit in its notice that other senior people were involved in the critical decisions for which I am taken to task”.

We prefer the safeguards of the current position, accepting its imperfections, where the liability of senior managers is set out as in the Pottage and Cummings enforcement decisions, and the regulator must show an element of recklessness, either in making positive decisions, or ignoring issues that need to be addressed.

The new responsibilities maps and individual Statements of Responsibility should leave little room for managers to hide. But can we be confident that this will be applied both fairly and consistently, and will anything be done to counter the impression that an appeal to the Upper Tribunal is a course of action reserved solely for the rich?

Readers will be aware that while this is a proposal aimed at ‘bankers’ it must be conceivable that, if viewed as successful, its reach will be extended in due course to wider areas of financial services, including wealth management.

The original version of this article was published in the June 2015 print edition of the Review.

Published: 17 Jun 2015
  • Compliance, Regulation & Risk
  • The Review
  • Opinion
  • Insight
  • Financial Services and Markets Act
  • Senior Managers Regime
  • City View

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