Individual accountability has become a focus for regulators around the world, with new rules raising the bar for what is expected of senior bankers. It remains to be seen, however, whether the accountability regimes will have the impact they intended. Jane Cooper reports.


One lesson to be learned from banking scandals could be that regulators – and the general public – need a ‘throat to choke’, a ‘head on a spike’, or, in regulatory parlance, ‘an accountable person’. Individual accountability has become a trend, with the UK, Australia and Hong Kong recently expanding their existing regimes. Singapore is currently running a consultation, and Ireland and Malaysia are expected to follow suit with rules of their own.

This means that when things go wrong, senior bankers will no longer be able to blame rogue individuals or insist many people were collectively responsible. In the UK, the problem of ‘many hands’ was most pronounced in the parliamentary hearings that followed the financial crisis, when politicians heard of an ‘accountability firewall’, making it difficult to identify the individuals responsible for a bank’s wrongdoing.

“In behavioural terms, what the public lacked was a face to blame, an identifiable cause. We like to locate the cause in order to do something about the story we tell ourselves of how to make it better,” says Roger Miles, faculty lead at UK Finance’s conduct and culture academy.

UK accountability

The UK commission recommended an accountability regime, legislation was passed, and in March 2016 the Senior Managers and Certification Regime (SMCR) was born. In December 2019, the rules were extended to all regulated financial firms. At the heart of the SMCR is the Senior Managers Regime (SMR), which formally apportions responsibility to senior leaders. Through statements of responsibilities and ‘responsibilities maps’, the regime identifies which individuals are accountable to the regulator for which activities.

Vaughan Edwards, founding director of Medius Consulting, which advises regulated firms on SMCR, explains what this means in practice. He says that the regulators – the Financial Conduct Authority (FCA) or the Prudential Regulation Authority (PRA) – could publicly censure an individual (making it difficult for them to find work in the future), fine them, or ban them from working in the industry.

In a significant change from the previous Approved Persons Regime, senior managers in the banking sector could also have up to 10 years-worth of their variable compensation clawed back. In 2018, in the first action brought under these rules, Barclays chief executive Jes Staley was fined £642,430 ($786,000) for “failing to act with due skill, care and diligence” when he attempted to uncover the source of an anonymous whistleblowing complaint. He had to pay it out of his own pocket; under the rules a bank is unable to pay penalties for individuals, nor are they able to insure individuals against potential fines.

Australian regime

Australia has recently introduced accountability rules, but its regulators do not have the power to fine individuals. The public’s ire over banking misconduct came later than in the UK – long after the financial crisis – and Australia introduced the Banking Executive Accountability Regime (Bear) in 2018. This was the government’s attempt to alleviate public and political pressure for a Royal Commission investigation, according to Patrick McConnell, formerly of the Macquarie University Applied Finance Centre. The Royal Commission hearings into banking misconduct, however, still went ahead in 2018.

“The key problem with Bear is that its administration was given to the wrong regulator, Apra [the Australian Prudential Regulation Authority],” says Mr McConnell. As the prudential regulator, he explains, it would only act under Bear if there was poor conduct that was of a systemic nature. “This is a very high bar to reach, requiring that bad conduct would have to put the entire firm in danger of almost bankruptcy before Apra would act,” he adds. “None of the [misconduct] unearthed in the Royal Commission would have reached anywhere near that bar.”

The Australian government is currently in the process of expanding Bear to other financial industry segments, including insurance and pensions. Its new regime – the Financial Accountability Regime (FAR) – is a response to recommendations that came out of the Royal Commission and will be regulated by both Apra and the Australian Securities and Investments Commission.

Mr McConnell describes FAR as “similar but not quite as powerful as the [UK’s] SMCR”, although he believes it is a vast improvement on Bear. He still takes issue with the regulators. “In the legislation there is no clarification of how ‘joint administration’ will actually work,” he says. “It makes no sense for government and regulators to demand that firms be transparent about their responsibilities and accountabilities when the financial regulators are so hopelessly confused about theirs.”

Updating regulations

Other jurisdictions have been working in parallel to introduce their own rules, against a background of increasing regulatory interest in conduct, culture and behaviour. The UK is often credited with leading the way on conduct regulation, but UK Finance’s Mr Miles points out that Japan introduced conduct regulation in the 1990s after its own financial crash. The Netherlands also had conduct regulation for government in the 1990s, which was later adapted for financial services. As such, it is not the case that other countries copied the UK’s SMCR, but rather, in the wake of the financial crisis, regulators around the globe have been seeking to tighten up their accountability rules.

For example, Hong Kong’s Securities and Futures Commission introduced the Manager-in-Charge (MIC) regime in October 2017, and the Hong Kong Monetary Authority followed suit with its Management Accountability Initiative (MAI) in March 2018. These were not new or copycat regimes. Charlotte Robins, partner at law firm Allen & Overy in Hong Kong, explains that the MIC “enhanced and supplemented the legislative framework Hong Kong already had”, and that the MAI was also a reinforcement of what already existed.

“Similarly, in Singapore, the regime is not being introduced by way of legislative change,” adds Ms Robins. Singapore is currently reviewing feedback from a second consultation on its Individual Accountability and Conduct proposals and is expected to announce the effective date of its new guidelines soon.

In the process of implementing new accountability rules, banks have had to define who exactly is responsible for what. In a video produced by the FCA, Jonathan Symonds, deputy group chairman at HSBC at the time, said: “Prior to the SMR, we were constantly asking questions of: ‘So, who’s accountable? How is this project going to get delivered, by when and by whom? And who are the teams?’ And so, the SMR came into an environment where actually we were looking for more clarity and, to be honest, the stimulus it gave us in its implementation was exactly what we needed.”

The liability trail

The process of defining accountability, however, is not as simple as it first seems. Jayne-Anne Gadhia, former CEO of Virgin Money, commented in the same 2019 video that when the rules were first proposed there was concern about the amount of bureaucracy that would be involved. “I remember actually speaking with Andrew Bailey [chief executive of the FCA at the time] about it and he said: ‘I really don’t understand what all the fuss is about because this should be what people are doing already’.”

Ms Gadhia added that a significant change as a result of the SMCR came from being absolutely clear about where the accountabilities lie in an organisation. “I think before the regime came in, we thought we were clear, but when you started to then put it against a required template, you realised that there are some areas that are a bit fuzzy and some areas of decision making that weren’t really clear enough,” she said.

A further challenge is when international banks do not have their ‘managers in charge’ in the same jurisdiction as the regulatory regime; many large banks do not arrange their responsibilities maps according to legal entity boundaries. This arrangement is accepted by regulators in Hong Kong, for example, but it does mean groups and managers are potentially dealing with varying accountability regimes in different jurisdictions. “Working out the differences and dealing with them, as well as appropriate cross-border compliance and reporting structures, can be a challenge,” says Ms Robins.

Roger McCormick, honorary senior visiting fellow at Cass Business School, highlights the consequences of putting down in writing actions taken and then having lawyers look at it. With the phrase ‘reasonable steps’, for example, he points out: “Ten years ago you would have said, ‘Yes, I took reasonable steps.' But when you put it in regulation, you had better define what these reasonable steps should and should not be. Before you know it, you have written a book.”

Chris Stears, a UK-based lawyer and founding member and research director of the Conduct Costs Project (CCP), says there were concerns the rules would lead to defensive reporting practices to demonstrate that these ‘reasonable steps’ had been taken. “The regime has caused firms to evaluate the effectiveness of their governance structures, and while these have, on the whole, remained materially unchanged, this appears to have had mixed results,” he says. Some individuals continue to engage proactively in decision making, while others conspicuously refrain from comment unless they have a clear responsibility, he adds.

Better behaviour?

Anecdotally, there have been cases of senior bankers stepping aside once their responsibilities are laid out, arguing they are not being paid enough for the additional responsibility. Others see the new regime as providing the perfect opportunity to take early retirement. For those who do stay, however, there are still ways of avoiding accountability, which Mr Miles lays out in his book Conduct Risk Management.

These methods include ‘juniorising’, whereby senior managers step down so that they are not officially an accountable person, and let the buck stop with someone else; or ‘temporising’, whereby they avoid formal responsibility by converting their permanent employment status into a temporary contract.

Commenting on the response to the accountability regime in the UK, Medius Consulting’s Mr Edwards says: “In our experience, while we believe there have been positive responses, the picture is very mixed between – and even within – different organisations. Firms were generally very diligent in how they went about their implementation programmes, but the supporting frameworks created at that point have not necessarily been well maintained.

“Tight budgets may be partly responsible, but we believe the absence of any material enforcement of the regime for more than four years has been the single most significant contributory factor. This trend is likely to continue until the FCA or PRA takes disciplinary actions against senior managers in a way that demonstrates the regime really does have teeth.”

On the question of whether there is now a different kind of leadership at banks, Mr Edwards says: “There is patchy evidence of better practices – partly helped by a greater regulatory focus on conduct and culture – but no, we don’t believe there has been any significant change in the behaviour of individuals in leadership positions at banks as a consequence of the SMR.”

CCP’s Mr Stears says that leadership behaviour will be a function of the governance arrangements. If the frameworks have been improved so that decision making is more streamlined, effective and accountable – and is supported by individuals who want to do the right thing – the behaviour of the senior management will change. 

“The real test of its success in changing behaviours will be the sustainability of that engagement,” he says. “A firm may have very effective governance structures, supported by systems and processes that are well known and understood within the firm, but unless the regime and conduct rules are demonstrably enforced – beyond unpublished firm supervisory warnings – there is a risk that positive changes to behaviours, leadership styles and engagement are transitory.”

Intended impact

As the earliest organisations to implement the SMCR, banks experienced initial pain for the first 18 months, but now the quality of board interaction has “noticeably improved”, says Mr Miles. He observes that there are now more effective challenges from non-executive directors, as well as greater separation of the CEO and chairman roles.

“The governance is healthier now,” adds Mr Miles. “There is more interest and discussion around culture and behaviour more generally within organisations. This can manifest itself in senior leaders, for example, doing a floor walk – where they visit the floors of their employees – in a way that is spontaneous and not stage-managed, so they can get a sense of what is really going on.”

On the purpose of accountability rules, Mr McCormick says: “None of it really matters at all unless it has an effect on conduct and behaviour.” The purpose has to be that banks start behaving better than they were in the lead-up to the financial crisis, he adds. Has the regulation achieved that? “It is a bit too early to say,” concludes Mr McCormick.


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