Regulatory Steps to Improve Corporate Culture and Individual Accountability in the Financial Sector

August 2017

Five years ago, a Parliamentary Commission on Banking Standards recommended that measures should be taken to improve standards in the financial sector. As a result, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) introduced new rules for senior managers and changes to remuneration code. The Senior Managers and Certification Regime (SM&CR) and the Senior Insurance Managers’ Regime (SIMR) came into force on 7 March 2016.

The SMR and SIMR apply to the most senior managers who require regulatory approval under section 59 of the Financial Services and Markets Act 2000; the Certification Regime (CR) applies to staff who are not senior managers, but whose role makes it possible for them to cause ‘significant harm’ to the company or its customers. In both cases, once a year firms must confirm to the Bank of England that these senior managers / employees are suitable to do their jobs; this is done through a complex application process, which entails details of the due diligence process undertaken by firms in appointing each candidate, and the rationale they have used to conclude that the candidate is fit for the role.

A feature of the new regime is the set of “Conduct Rules”, which are standards of behaviour that apply to everyone in the finance sector, although some are specific for senior managers. Firms have a responsibility to ensure that staff are trained in these rules, and they are required to notify the BoE when someone breaches a conduct rule.

The FCA says the new rules were introduced “to increase individual accountability within the banking sector”, by ensuring that senior manager responsibilities are properly allocated and understood within firms.

The Bank of England goes even further, considering that the new regime can actually help “support a change in culture at firms”, by insisting on a culture of individual accountability.

Earlier this year, the PRA issued a series of optimisations to the SM&CR and SIMR, including the proposal to apply certain Conduct Rules to non-executive directors who are not approved persons under the SMR and SIMR. On the 3rd July this change became effective.

From 2018, the SM&CR regime should apply to a significant number of employees across the sector (according to FCA’s proposal to extend the rules to all firms). Watch this space for further updates.

As the title of most consultation papers on this theme suggests, the overall purpose remains to “strengthen accountability” in banking and insurance. The fact that this is done with increased requirements for firms to vet, train and monitor senior manager (as well as other staff) says something about the regulators’ acknowledgement of the intricate interdependence that exists between individual and collective responsibility. It remains to be seen if the new regime is effective enough in stimulating both

Ana-Maria Pascal, August 2017