Plus ça change… will the forthcoming senior managers' regime actually increase individual accountability?

6 mins

Posted on 10 Jun 2015

Last month four of the world's largest banks, JPMorgan, Barclays, Citigroup and Royal Bank of Scotland, pleaded guilty to criminal charges brought against them in the U.S. relating to the manipulation of the foreign exchange market. A fifth, UBS, pleaded guilty to rigging benchmark interest rates. Between them they will pay fines totalling $5.7 billion (£3.6 billion), with Barclays paying the most, at $2.4 billion.

Barclays was also fined nearly £285,000 by the UK's Financial Conduct Authority (FCA) for failing to exercise proper control over business practices in its foreign exchange business in London. This is the largest fine ever imposed either by the FCA or its predecessor, the FSA. The FCA's director of enforcement and market oversight said that Barclays had "allowed a culture to develop which put the firm's interests ahead of those of its clients and which undermined the reputation and integrity of the UK financial system." Traders had inappropriately shared information about clients' activities and colluded with traders from other firms by using chat rooms set up with the aim of rigging the foreign exchange market.

The FCA also highlighted that failings in Barclays' FX business persisted despite previous similar control failings in relation to Libor and gold fixing, which were the subject of previous FSA and FCA enforcement actions. Although Barclays had made some improvements after these enforcement actions were taken, it still failed to take adequate steps to address the underlying root causes of the failings in its FX business. Other firms involved, including Citibank, HSBC, JPMorgan, the Royal Bank of Scotland and UBS, received fines ranging between £216,000 and £233,000 back in November 2014.

It is known that Barclays has dismissed eight employees involved in the scandal and there have been dismissals at other institutions as well.

Despite the size of these fines and the opprobrium caused to these institutions, what jumps out at a lot of readers is that no-one has been jailed over any of the financial scandals that have come out in the last few years (notwithstanding press reports that a former trader at the Royal Bank of Scotland was arrested in December 2014). Many are concerned that criminal fines for banks are not a sufficient deterrent to such behaviour. If the rewards are high enough, someone will always think the risks will be worth taking.

This brings us back to the age old problem of remuneration structures designed to reward performance and which have been shown to result in profit being put before the needs of customers and the integrity of the market. The FCA has been increasing its focus on this for some time, not to mention a similar concern at EU level leading to the introduction of a cap on bankers' bonuses of one year's pay, or two years' pay with shareholder approval.

Forthcoming changes, including those in the form of the new senior managers and certification regimes to be implemented by the PRA and FCA, are being introduced with a view, amongst other matters, to strengthening individual accountability. Broadly, the FCA and the PRA are proposing that this will apply only to individuals in UK banks, building societies, credit unions and PRA-designated firms. Under the new regime, "senior managers" will be those holding a Senior Management Function (SMF), defined as "a function that will require the person performing it to be responsible for managing one or more aspects of the relevant firm's affairs, so far as relating to regulated activities, and those aspects involve, or might involve, a risk of serious consequences for the authorised person, or for business or for other interests in the UK".

All senior managers will have a "statement of responsibilities". This will be a very important document, and is likely to be the subject of intense negotiations before it is sent to the regulator for approval. In summary, this is a statement of the affairs of a relevant firm for which it is intended that a person who performs an SMF is (or will be) responsible, and should include any FCA key functions and/or PRA prescribed responsibilities that have been allocated to and are to form part of the responsibilities of the individual applying to become a senior manager. Also, it should not contain any responsibilities that are inconsistent with the scope of the SMF being applied for and any of the FCA key functions or PRA prescribed responsibilities allocated to the individual applicant.

With this (and a lot more besides) comes the "presumption of responsibility". Changes made to FSMA by the Financial Services (Banking Reform) Act 2013 will mean that senior managers will be required to satisfy the FCA and/or the PRA that they took "reasonable steps" to prevent, stop or remedy regulatory breaches that took place in their area, or areas, of responsibility.

This will place an evidential burden on senior managers to discharge that presumption, rather than the other way round. Both the FCA and the PRA have expressed their view that such managers should, by virtue of their rank and seniority, have the knowledge and authority to tackle or prevent regulatory failings. To be clear, this means that if senior managers cannot demonstrate that they took reasonable steps to prevent, stop or remedy regulatory breaches that took place in their area or areas of responsibility then they may be held accountable for the regulatory breaches committed by their firm and have FCA or PRA enforcement action taken against them personally.

Also, from March 2016 senior managers could also be prosecuted and found guilty of a new criminal offence of reckless misconduct in the management of a bank. The offence, introduced by the Financial Services (Banking Reform) Act 2013, will be punishable by a maximum sentence of seven years in prison and/or an unlimited fine.

Will this lead to people actually going to jail in the wake of scandals such as the forex, Libor and gold scandals? It seems unlikely, as the offence will only be committed where the misconduct actually leads to the failure of the bank. None of the scandals referred to above led to the failure of the institutions in which the relevant traders worked, so even if this offence had existed at the time, it would have made no difference.

In the end, will this increased regulatory burden change things, or will it be a case of "plus c'est la meme chose"?

This article, written by Jessica Corsi, was originally published on Thomson Reuters Accelus at

The articles published on this website, current at the date of publication, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your own circumstances should always be sought separately before taking any action.

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