Issues relating to conduct are rapidly rising up the list of priorities for UK regulators, which is having a significant impact on the City of London. In an attempt to combat this, UK regulators have introduced the Senior Managers and Certification Regime. Justin Pugsley reports.
What is happening?
The UK wants its capital markets to be a gleaming example of robustness, trust and good conduct. To reach these objectives, UK regulators have introduced the Senior Managers and Certification Regime (SM&CR), which comes with onerous responsibilities for those who fall within its grasp.
Recently the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) decided to take the regime a step further, to widen its scope and deepen its reach. The two regulators came up with a combination of consultations and new rules – and there is much to digest. For instance, non-executive directors – who are already hard enough for banks to recruit – could be subject to more penalties if they have not done their jobs properly.
Also, the regime could extend overseas. For example, a senior manager responsible for areas such as operations or risk based in a third country could find themselves answerable to UK regulators if something goes wrong on their patch and has an impact upon the UK operations of that bank.
The regulators also want to encourage more whistle-blowing as it is such an effective way of rooting out wrongdoing. Senior managers will come under far greater pressure to report any malpractice to regulators. This could also reverberate on to banks with headquarters outside the UK. However, the regulators are not offering the ‘bounty’-style system practised in the US by the Securities and Exchange Commission, where informants get a cut of any fines.
Also, the increasingly stringent SM&CR, which the UK is pursuing independently of EU or global initiatives, should give food for thought to those who think the UK will slip back into light-touch regulation once the country leaves the EU. So far, the signals indicate quite the opposite.
Why is it happening?
FCA head Andrew Bailey wrote an article in the Guardian, a UK newspaper, acknowledging that much progress had been done in the financial sector while strongly emphasising that culture matters a great deal to the regulator.
While financial firms are broadly on the right track, he wrote that there is still work to be done – hence this latest salvo of proposals and new rules appearing only six months after the new regime went live.
What do the bankers say?
In discussing the regime with senior bankers, it becomes clear the regime makes them nervous. They are now much more on the line than before if something goes wrong with not only potential career-destroying implications, but criminal ones as well.
Indeed, the regulator wants responsibility maps so it can quickly identify who to call to account when something goes awry. And to ensure ‘bad apples’ do not get recycled around the industry there is an obligation to check six years of employment history, which must be updated as new information emerges.
Another worry for bankers is that the regime potentially has implications for certification and bonus buy-outs. A vindictive former employer could have scope to negatively influence bonuses and certification of someone who has moved to a new bank.
Clearly, lawyers are the big winners from the regime and will continue making hay out of it thanks to some of its latest enhancements.
In private, some bankers acknowledge that the regime is basically good as it significantly discourages bad behaviour. One banker who had recently moved jobs told The Banker that it made him pay much closer attention to the culture of his new employer, such were his concerns of potentially ruining his career if he ended up working for the wrong kind of people.
Will it provide the incentives?
On the face of it, the rules might look quite draconian and there are clearly some areas that need refining, for example, around referencing and certification. Hopefully, new industry practices will evolve to smooth these processes.
Building trust in banking and capital markets is ultimately a good thing for society, the economy and even bankers. And following the financial crisis and the general aura of public mistrust in the establishment that has emerged, banks desperately need to revamp their image.
Recommendations from the likes of the Banking Standards Board around professional qualifications for bankers covering competence and ethics are also very helpful and complement the work of the FCA and PRA. Hopefully, the SM&CR will help reshape a scandal-prone industry for the better, and if seen to work could be replicated in other financial centres.
