A friend of mine who heads the compliance department of a multinational bank recently drew my attention to the stupefying impact of the United Kingdom’s Financial Services (Banking Reform) Act 2013. Following the impact of the global financial crisis in 2007-2008, in June 2010 the United Kingdom government established the Independent Commission on Banking to inquire into the structural and related non-structural reforms to the UK banking sector to promote financial stability and competition. After slogging through numerous details and nail biting horror stories from members of the public on the favorite whipping boy of human beings: banks, the Commission made its recommendations in September 2011 which resulted in the Financial Services (Banking Reform) Act being published, debated in the UK Parliament and assented to by December 2012.
The fairly righteous indignation of the British public and their parliamentary representatives against “Big Banks” provided the much needed wind assistance for the speedy conclusion of the inquiry and the conversion of their recommendations into law within 15 months. A key outcome of the Act was the creation of a new regulatory framework for financial services which including the abolishment of the Financial Services Authority and creation of the Financial Conduct Authority (FCA).
Please note the nomenclature used in the new entity: “Conduct”. The global financial crisis and the Libor crisis in the United Kingdom a few years later were primarily the result of misconduct on the part of errant bankers. Conduct has become the catchall phrase for addressing the shortcomings and trying to fundamentally shift behavior within the banking fraternity. According to Wikipedia, the FCA mandate includes the power to regulate conduct related to the marketing of financial products and it is able to specify the minimum standards and to place requirements on products. The FCA has the power to investigate organizations and individuals as well as the power to instruct firms to immediately retract or modify promotions that it finds to be misleading and to publish such decisions.
But this is the point that has made many senior bankers as well as banking executive and non-executive directors sit up and take notice. One key objective of the FCA is protect consumers and while the caveat emptor (buyer beware) principle that consumers are responsible for their decisions is maintained, if the consumer’s decision is made as the result of advice then the advisor should be responsible. So in March 2016, a new accountability regime was established called the “Senior Managers Regime” for both the banking and insurance industries. According to the press release on the FCA website, the new regimes will hold individuals working at all levels within relevant firms to appropriate standards of conduct and ensure that senior managers are held to account for misconduct that falls within their area of responsibility.” The thought process behind this regime change is that while there have been numerous occasions of banks being found guilty of flouting conduct rules, there have been very few cases of individuals being held to account.
According to a Deloitte UK publication explaining the Senior Manager Regime, “As there has previously been no requirement to determine who is responsible for what in a bank, it has been possible for individuals to claim that it was someone else’s responsibility, or ‘individuals seeking to protect themselves on a ‘Murder on the Orient Express” defense (It wasn’t me it could have been anyone)’ as noted by Martin Wheatly the former CEO of the FCA.”
Now if I were a senior manager at a UK bank, this is right about the time I would be having a candid chat with my line manager about decisions within my pay grade, with the option of a downgrade in title, but not salary being a viable option. Because the thrust of the new senior manager regime is one: ‘You can delegate tasks but you can’t delegate responsibility.’ The FCA then puts its mouth where its money is and proceeds to produce a lengthy document subjecting its own organogram from the board of directors through to management to demonstrate who has senior management responsibilities as well as prescribed responsibilities and overall responsibilities. The aim of this diagrammatic self exposure is to establish to the public how it expects financial institutions to identify who a senior manager is and where the overall responsibility of their decision flows up the organization’s chart all the way to the chairperson of the board.
It’s a very complicated way to arrive at the conclusion that the buck stops at the chairperson of the financial institution’s board, as one key responsibility that he has been given is quite simply put: “The responsibility for the allocation of all prescribed responsibilities.” In other words: The Big Dog, The Big Cahuna, or He-Who-Shall-Never-Sleep-Well-At-Night.
But all is not lost for chairpersons of financial institutions. The new regime now clearly identifies each senior manager and the scope of his or her responsibilities. In the event of a breach, it’s easy to have that most unfortunate conversation: “One of us has to take one for the team, and it’s certainly not me.” Or in relationship speak: “It’s not me, it’s you who is the problem.” As the Deloitte paper aptly puts it, the increased focus on individual accountability removes the regulators away from the time consuming task of having to determine who is accountable for what, to a position of determining whether the individual(s) responsible took reasonable steps to control their areas effectively and to comply with all relevant regulations.
Given that a large part of our jurisprudence and regulatory frameworks are borrowed from the United Kingdom, it would be interesting to see if this will eventually flow into East Africa in which case bankers should girdle their loins in anticipation.
However, if this regime was in force in the United States, the current refusal of the Wells Fargo CEO John Stumpf to resign for the misconduct of his team in opening fake accounts for purposes of driving up revenues would be difficult to maintain.