City view: Warnings for senior managers at the start of a new regime

This month sees the dawn of the Senior Managers Regime (SMR), the UK regulators’ plan to hold financial services executives’ feet to the fire for their failings. Today, it applies to those at the commanding heights of our industry; two years hence, it will cover all regulated firms

In December, Tracy McDermott, acting head of the Financial Conduct Authority (FCA), made it plain that a chief purpose of the SMR is to help prevent future crises: “[The Regime] has the capacity to lead a sea change in how UK financial services are seen by all parties. Why? Not because of how it affects ex-post enforcement, important as this is. But because it should drive better, clearer ex-ante decisions fostered by a sense of real responsibility and clear accountability. And thus less problems in the future.” The FCA under former CEO Martin Wheatley muscled up a ‘shoot first, ask questions later’ reputation, a guise which he and his cohorts did little to dispel. The figures tell a different, nuanced story.

Attestations, simple documents signed  by named individuals in essence verifying that they understand what is going on around them, created fear and alarm at their debut. The FCA’s intent was laudable, if frightening for the dodgy and the dozy: “When we request an attestation, we do so to gain personal commitment from an approved person  at a regulated firm that specific action  has been taken or will be taken. The  aim of an attestation is to ensure there is clear accountability and a focus from senior management on those specific issues where we would like to see change within firms.” But in the year to June  2015, there were just 61 attestations, and in the final quarter of last year, a mere ten, five of those in wholesale banks and, tellingly, none in investment banking. Private warnings? Around the same volume, we understand.

Fines levied by the FCA came to £905m in 2015, down from £1.4bn in 2014. But this is a drop in the ocean compared with the £200bn plus in fines and recompenses

– twice the annual budget of Britain’s National Health Service – levied on the biggest global banks in the five years 2010–2014, analysed in depth in this quarter’s Review of Financial Markets.

Regulators have always had a bad press. The widest-ranging and longest-lasting of all, the Inquisition, tortured far fewer folk in its 700-year reign than is commonly believed; ‘showing the instruments’ had the desired effect in many cases, without the mess. Sophisticated modern national security agencies know that trick well.

Likewise, the UK regulators’ newly burnished instruments for enforcing personal accountability may be more effective in driving McDermott’s “better, clearer ex-ante decisions” than actual penalties years down the pike.
Directors and other senior managers must bewareBut directors and other senior managers must beware. As Francis Kean, a renegade City lawyer turned insurance consultant, warns in this month’s CPD article, 'Who wants to be a non-executive director of a UK financial institution?', individual liability, while not a feature of the fallout from the 2008 crisis, will now come to the fore. At the CISI’s February event ‘Personal accountability – the countdown for worried directors’, Peter Bibby, former head of enforcement at the FCA’s predecessor, now back in City legal practice, warned that regulatory investigations are “long, expensive and extremely stressful”. The threat will hang over senior people, executives and non-executives, for years – see CISI TV for details.

Three storm warnings, then, for senior managers at the start of this new regime of accountability. First, senior people must reflect that their corporate lawyers’ first responsibility is to protect the firm’s, not their own, interests. So even the most competent, wise senior managers or directors will have personal legal protection in place, and the contractual means to pay for it, before the regulator comes calling. Firms have not been slow to hang individuals out to dry in the past; that temptation will grow. Second, the new regime departs from the tradition of collective board responsibility, where the courts regarded decisions as having been taken by a majority rather than a group of individuals. The ‘Murder on the Orient Express’ defence that drew Wheatley’s ire no longer works; all senior managers are now in the firing line as individuals. Third, while judges in the Anglo-Saxon world have in the past held true to the ‘Business Judgment Rule’ as it is expressly called in Australia and the US, meaning they will typically not make their own retrospective judgments on business decisions taken in good faith by directors, SMR gives the regulators new powers to do just that.

These are uncharted waters.

The original version of this article was published in the March 2016 print edition of the Review

Published: 08 Mar 2016
  • Compliance, Regulation & Risk
  • The Review
  • Opinion
  • Features
  • Senior Managers Regime
  • City view March 2016

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