New regulation could cause banking brain drain

The Financial Conduct Authority (FCA) and the Prudential Regulation Authority’s (PRA) first use of their new senior managers regime powers has led regulatory experts to suggest many senior bankers may move to the relative safety of FinTech.

The two regulators together fined Barclays Group chief executive James Staley a total of £642,430 for failing to act with due skill, care and diligence in response to an anonymous letter received by the bank in June 2016.

Barclays must now report annually to the regulators detailing how it handles whistleblowing, with personal attestations required from those senior managers responsible for the relevant systems and controls.

This is the first case brought by the FCA and PRA under the Senior Managers and Certification Regime (SM&CR), which replaces the current Approved Persons Regime.

It came about as a response to the 2008 banking crisis, with the Parliamentary Commission for Banking Standards recommending a new accountability framework focused on senior management. Parliament passed legislation in December 2013 for all banks, building societies and credit unions, with changes in May 2016 extending the regime to cover insurers and solo-regulated firms – final details are due this summer.

Richard Pike, chief executive of RegTech firm Grovenor Software, told FStech that he’s already seen evidence of senior bankers considering their options and making moves.

“Fining individuals rather than companies will have an irrevocable change, banks are really worried as people at the top simply aren’t willing to risk their personal assets and will either retire or move to industries less impacted by the regime” he commented.

“This completely changes the game for firms though, whereas individuals could previously avoid responsibility and blame the business, now they may be thrown under the bus in the ‘one bad apple’ defence – it is now imperative that managers have a clear understating of their obligations under SM&CR.”

Pike did note that as FinTechs grow and get regulated more formally, the senior staff could find themselves back in the same situation though. “Or we could find ourselves in a market where the large players are very utility-like and then there's a lot of small FinTechs doing different things around them – the industry has to work out the problem of personal risk vs. reward, which at the moment is not working.”

David Fenton, head of financial services at professional services firm RSM, said he has heard anecdotal evidence of some senior executives and non-executives looking to free themselves of some of their responsibilities that carry SM&CR accountability.

“The regime does cast doubt on the future attractiveness of the financial services sector as a home for executives and non-executives to ply their trade,” he commented. “Some businesses have however benefitted, as executives have by self-selection stepped away from areas of responsibility they were not fully committed to, which has helped give the business better focus.”

It all depends on the size of the organisation, so large banks will typically have a full suite of senior management function holders as well as countless certified people, whereas very small regulated FinTechs - who will still be caught by the regime - may only be required to have one or two senior management function roles within their organisation.

“Therefore there could be a case to say that much smaller institutions could be the beneficiaries of a migration of top talent from the larger firms, although of course, the rewards attaching in smaller firms will be that much less,” stated Fenton.

He also suggested that firms are less likely to hang individuals out to dry and maintain the more traditional ‘esprit de corps’.

“It is the regulator, in my opinion, who will start to come after individuals in a much more robust manner than we may have seen previously,” he said, citing the Barclays boss being fined 10 per cent of his annual earnings. “Whilst the incident has ultimately cost Mr Staley at least part of his bonus and a £640,000 fine from the regulator, the bank’s board has stopped short of letting him go.”

A cynical view would be that the SM&CR is the regulators’ ensuring that the finger does not get pointed at them the next time there is a financial crisis, and instead that individuals in firms can be held properly accountable for things that go wrong.

“One of the original drivers for the regime was the then head of enforcement who was generally unable to pin down individuals responsible for significant failures who hid behind collective board responsibility,” Fenton added.

Rita Hunter, senior solicitor at law firm Macfarlanes, agreed that the Approved Persons Regime was subject to criticism post-crisis for not having the power to hold individuals to account, so the SM&CR has been designed to enable the FCA and PRA in that respect.

The new Statement of Responsibility means that after a contravention, the regulator can determine which senior member of staff is responsible, and if they can’t prove reasonable steps were taken to prevent it, then there’s a clear route to disciplinary action.

“There’s definitely been a shift towards enforcement, the banks have now had ample time to get up to speed with the new regime, so the Barclays CEO fine is the regulator showing its teeth,” Hunter commented.

“I think the focus will be on punishing individuals in the near future, which does give institutions the opportunity to minimise reputational damage. Many may have to increase pay and benefits for senior roles willing to take on the additional responsibility, or risk losing them,” she added.

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