Following the 2008-09 financial crisis and scandals including PPI mis-selling and LIBOR manipulation, an enhanced focus has emerged from the UK regulator, the Financial Conduct Authority (“FCA”) on the behaviour and culture within financial institutions. The FCA is paving the way for a new regime, which uses “credible deterrence” by focusing on the responsibility of individuals in order to change compliance culture. In essence, the FCA has recognised that even large fines have failed to change the culture within banks so has shifted its focus to the senior individuals.
In this article, we look briefly at the changes underway in the UK and expected to be in force by March 2016 (which are dealt with in more detail on page 6). We look at the impact that this is likely to have within regulatory
regimes in the Middle East international financial centres, such as the DFSA, the QFC and forthcoming Abu Dhabi Global Market, which are to an extent modelled on, and share information with, the FCA and other international regulators.
Changes in the UK
As dealt with on page 6, in 2013 the Parliamentary Commission on Banking Standards recommended an overhaul of the current FCA Approved Persons Regime applying to the banking sector and its replacement with a Senior Persons Regime whereby key responsibilities within banks would be assigned to specific individuals.
While the drive to change culture in financial services is largely a product of the recent excesses of the banking industry, the insurance sector has not escaped increased regulatory scrutiny and the PRA and FCA have also proposed a new regime (from early 2016) for senior management individuals working in insurance companies. These proposals mirror some aspects of the more rigorous system of individual accountability proposed for banks but have, fortunately, avoided the more draconian requirements on the banking industry, including criminal sanctions and the reverse burden of proof.
Turning back to the banking sector, the FCA’s March consultation paper included a set of proposals covered in more detail on page 6, including:
- A “Management Responsibilities Map”
- A “Statement of Responsibilities”
- A fit and proper certification process for more junior employees who have a direct relationship with customers and who could pose harm to them
- Introducing a “presumption of responsibility” placed on Senior Managers
Once this new regime comes into place, by 7 March 2016, there will be an increased focus on “leading from the top”, management responsibility, tougher enforcement action and a focus on effective corporate governance.
The likely impact on certain regulatory regimes in the Middle East
We have seen an increased focus by the regulators in this region on the activities of financial institutions, the culture within those institutions and the conduct of management in nurturing effective governance and compliance.
Both the QFC and the DFSA are, broadly, modelled on the UK (and European) regulatory authorities and regularly liaise, share know-how and best practice methods with them.
When bringing enforcement action against individuals, these regimes currently place the onus on the relevant regulator to prove how an individual’s actions or conduct fell below the standard reasonably expected. This is in contrast to the new regime expected to come into place in the UK whereby the presumption of responsibility will shift the onus upon the individual. However, regional regulators will be watching the UK developments closely.
In September 2014, the DFSA carried out a thematic review of corporate governance amongst its regulated firms. The DFSA generally found a good level of compliance with statutory obligations, and that governance structures and arrangements generally reflected the nature, scale and complexity of businesses reviewed.
However, the DFSA noted that governance arrangements and responsibilities did not always align with business plans and strategy. Additionally, the DFSA found that authorised firms often did not carry out structured, periodic reviews of their governing bodies and their committees, or their effectiveness.
There is already an increased focus by regional regulators on the responsibility of management individuals and implementing credible deterrence by attributing responsibility not just on firms, but also on individuals.
In contrast to early enforcement decisions issued by the DFSA which focussed primarily on the conduct of the institutions, it is clear they are now also pursuing enforcement against individuals. The recent decisions in April 2015 against Abdul Rahman Al Ansari and Anthony Robert D’Aniello are a case in point. Both were banned for knowingly providing false, misleading and/or deceptive information and failing to deal openly with the DFSA. That was despite the fact that the firm had been sanctioned during an earlier investigation and was no longer operating in the DIFC. The DFSA referred to “the fundamental issues of unalienable responsibilities of the firm and the senior management” in rejecting a defence that relevant tasks had been delegated to junior staff. A finding that these individuals are not “fit and proper” based on integrity issues will likely have an impact on their careers in any highly-regulated environment around the world.
Financial institutions, senior management individuals within them (and their D&O Insurers) need to be alive to the shift in focus on individual conduct and the regulatory changes occurring under the FCA regime, monitor developments and be aware of the possibility that similar changes will occur in the near future within the Middle-Eastern regulatory regimes. As the regimes develop, senior management individuals will need to ensure that they are taking an active role in managing their personal regulatory risk.
UK Insurance Act 2015
The Insurance Act 2015 received Royal Assent on 12 February 2015. When it comes into force in August 2016, it will (together with the consumer insurance reforms that came into effect in 2013), represent the greatest change to insurance contract law in this country in over 100 years. Our London team has been examining the implications for financial institutions and D&O underwriters and claims specialists, and we have put together a team of insurance specialists to advise the industry on the Act across all business lines. Our briefings on the Act can be found at www.clydeco.com. If you would like to talk to us about the impact upon FI and D&O business or to know more about our work in this area, please contact Laura Cooke (firstname.lastname@example.org).