New UK regime to strengthen senior management accountability will apply to banks and insurers in 2016 and to all other financial institutions in 2018.
With significant shortcomings in governance and accountability within the UK banking industry revealed by the global financial crisis of 2008, Parliament introduced framework legislation for a new regime governing senior managers whose actions have a significant impact on the banking sector and its customers. UK regulators have since been elaborating on that framework. The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) are still consulting the industry on certain aspects of the rules, but the bulk of them were published this summer. The new regime will apply to UK banks, building societies, credit unions, investment banks, and the UK branches of foreign banks, all of which are subject to conduct regulation by the FCA and prudential regulation by the PRA. There are three parts to the new rules: the Senior Managers Regime, the Certification Regime, and Conduct Rules. Scheduled to take effect in March 2016, these rules clarify the lines of responsibility at the top of relevant firms and encourage senior personnel to take greater responsibility for their actions. The rules also make it easier for both the firms and the regulators to hold individuals accountable.
Regarding insurers, the FCA and PRA were mandated to update their approved person regimes by the EU Solvency II directive regardless of actions being taken in the banking sector and have been developing a bespoke regime for insurers that is materially lighter than its banking counterpart and will also apply in March 2016.
On October 15, the UK government announced its decision to extend the new regime beyond the banking and insurance sectors to all other financial services firms, including asset managers, advisers, and stockbrokers in 2018. In a startling u-turn, the government also announced it would abandon the controversial “reverse burden of proof” that would have applied to senior managers in the banking sector next year. Instead, the government has decided to introduce a statutory duty on senior managers to take reasonable steps to prevent regulatory breaches in their areas of responsibility, but the burden of proving any misconduct will be on the regulators.
One of the key takeaways from these new rules is that regulators will expect greater levels of responsibility from more people than ever before—initially from March 2016 across the banking and insurance sectors and in 2018 across all other financial sectors. The new regulatory framework will apply to the UK branches of non-UK banks and insurers. Furthermore, a senior manager working outside of the UK may still potentially fall within the scope of the regime if that manager takes operational decisions affecting the UK business or its customers. Accordingly, the new regulatory framework cannot be ignored by any insurers or banks targeting customers in the UK.