Bank Individual Accountability Regime – the fuller picture Simon Morris April 2015
Looking at 1. The new structure 2. Presumption of responsibility 3. Non-executive directors 4. Foreign branches 5. General state of progress
The policy driver Parliamentary Commission on banking standards − Only some 10% of staff were subject to individual regulatory approval; − The regulators front-end loaded the approval process, focusing too much on initial approval, rather than ongoing probity; and − Lines of responsibility were too often unclear so that it was difficult to attribute individual responsibility
1. The new structure a) Senior managers b) Certification regime c) All other staff 4
Senior managers – for a UK bank the top layer of executive management and all directors other than an ordinary non-executive director. Will be pre-approved & subject to 1 st & 2 nd tier conduct rules substantially similar to APER. Also a) A senior manager must prepare a statement of responsibility setting out his duties. b) The bank must prepare a responsibilities map linking these together and describing its governance arrangements. c) The burden of proof is reversed , so if something goes wrong in an area for which a senior manager is responsible, taking his statement of responsibility into account, he must prove that he took reasonable steps to avoid this happening. d) A senior manager is liable for a new criminal offence of causing a bank to fail, unlikely ever to be prosecuted. 5
Senior Managers will be … Executives Non-Executives 1. CEO, CFO & all other directors 1. Chairman 2. Head of key business area – £10b 2. Chair of the Risk Committee assets/20% revenue 3. Chair of the Remuneration 3. ExCo – direct board reports with Committee delegated authority 4. Chair of Nominations Committee 4. Head of Internal Audit 5. Chair of Audit Committee 5. Group entity senior manager* 6. Senior Independent Director 6. MLRO & Compliance + fin crime 7. Significant responsibility function** *Developing strategy ok. But may be GESM if (a) implements strategy without local delegation; or (b) directly involved in, or takes decisions over, UK regulated business without local consent/approval. ** Flexible, when required 6
Prescribed responsibilities and key functions must be allocated to a senior manager, including … 19 + 4 prudential responsibilities 11 conduct responsibilities plus 27 functions 8 for small firms (assets < £250m) for management mapping, including 1) Implementation and oversight of regime 1) Client assets 2) Performance under the Certification Rules 2) Payment services 3) Compliance with management 3) Settlement responsibilities map 4) Financial or investment advice 4) Training senior management 5) Mortgage advice 5) Internal audit ops & integrity 6) First line quality assurance of sales 6) Compliance ops & integrity 7) Lending decisions 7) Risk ops & integrity 8) Design and manufacturing of products 8) Developing culture and standards 9) Marketing materials and communications 9) Allocation & maintenance of capital, funding 10) Customer service & liquidity 11) Customer complaints handling 10) Treasury management functions 12) The firm’s information technology 11) Financial information and regulatory 13) Business continuity reporting 14) Human resources 12) Recovery plan and resolution pack 7
Statement of responsibility … Individual statement of responsibilities • Prepare & lodge when seeking approval • Important opportunity to clarify & codify responsibilities The bank must have an integrated overall responsibilities map = who does what, lines of delegation & reporting, governance • Single, comprehensive up-to-date document • Describing management and governance arrangements • To ensure collective allocation of responsibilities complete • Detailed lines of reporting & responsibility & the persons performing them • Details of management & governance of the bank’s main business areas & governance functions 8
Certification regime Middle management and some material risk takers are not subject to the same regulatory fit and proper standards. There’s a blind spot here. And this, essentially, is where the certification regime comes in. Martin Wheatley: Nothing to fear from high standards (16 March 2015) Individuals below the level of senior manager who can cause significant harm to the bank or its customers, such as managers of significant business areas, dealers, customer advisers and their managers, will not be individually approved. Instead, the bank is responsible for ensuring and must certifying their fitness and properness. They are subject to 1 st tier conduct rules. 9
They will be … 1) Material risk takers 2) Former SIFs 3) Managers of certification employees 4) Head of unit or member of committee with significant responsibility for a significant business unit that a) Carries on credit related activity b) Makes material decisions on the commitment of the firm’s resources c) Processes settlements or client money d) Carries on other designated business activities 5) Functions requiring TC qualifications 6) CASS oversight 7) Benchmark submission & administration 8) Functions with a material impact on the firm’s risk profile and which might involve the risk of significant harm to the firm or its customers 9) Likely to be extended to wholesale traders 10
What does fit & proper look like? Attributes – personal Evidence characteristics Referencing & checking − Assessment & confirmation Honesty − − Assessment & testing Integrity − − Record outcome with reasons − Reputation − Competence, training, − Process knowledge, qualifications, experience Template for the position − Initial assessment Capability − − Ongoing oversight Financial soundness − − Annual reassessment − 11
All other staff All other staff apart from twenty designated categories such as cooks, cleaners and receptionists will be subject to 1 st tier conduct rules 12
In other words … Prior Statement of Annual Subject to Liable for Subject to approval responsibility vetting for senior breach in conduct F&P manager your area rules rules � � � � � Senior Must also manager be fit & proper � � Certificate staff � Other staff Must also be fit & proper 13
And what about the rules? 14
First tier – rules for everybody Individual Conduct Rules • Rule 1 : You must act with integrity. • Rule 2 : You must act with due skill, care and diligence. • Rule 3 : You must be open and cooperative with the FCA, the PRA and other regulators. FCA only Rule 4 : You must pay due regard to the interests of customers and • treat them fairly. • Rule 5 : You must observe proper standards of market conduct. 15
Second tier – rules for Senior Management SM1 : You must take reasonable steps to ensure that the business of • the firm for which you are responsible is controlled effectively. • SM2 : You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with relevant requirements and standards of the regulatory system. • SM3 : You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively. • SM4 : You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice. 16
2. Senior manager presumption of responsibility 17
There are three grounds for individual discipline Currently – 1. You f ailed to comply with rules of conduct; or 2. You have been knowingly concerned in an authorised person’s contravention of a relevant requirement And now – 3. The bank contravened a rule a) Which fell within the responsibility of a senior manager/in- scope NED in his senior management function b) Unless he can show he took reasonable steps to avoid the contravention 18
The regulatory policy The core ambition here is to make sure that where a firm contravenes a regulatory requirement, in an area for which a senior manager is responsible, it will be up to that manager to satisfy regulators that they took reasonable steps to prevent the contravention happening. The broad political intention here is to rebalance responsibilities and avoid a scenario where it becomes very difficult for regulators to definitely demonstrate whether X or Y took reasonable steps to prevent their firm breaching a particular regulatory requirement in their business area. This moves us away from where determining who is accountable for what, has required often enormous powers of regulatory decryption . Martin Wheatley: Nothing to fear from high standards (16 March 2015) 19
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