The proposed UK standard
In response to public anger over apparent failings to hold individuals accountable for recent banking scandals – involving, for example, mis-selling of Payment Protection Insurance, the attempted manipulation of LIBOR, and potential manipulations of the spot foreign exchange market - the UK’s Financial Conduct Authority (“FCA”) announced details of the Senior Managers Regime (“SMR”), which introduces a “presumption of responsibility” rule. This rule reflects powers given to the FCA pursuant to the Financial Services (Banking Reform) Act 2013 and requires senior managers to demonstrate that where a firm is guilty of misconduct they “took such steps as a person in their position could reasonably be expected to take” to avoid it happening.
The regime is being introduced following recommendations made by the UK Parliament’s Banking Standards Commission, which was set up to find ways to improve culture and conduct within the industry. The new powers will enable the Prudential Regulation Authority (“PRA”) to fine and/or sanction senior bankers for misconduct that occurs in their areas of responsibility. This regime also introduces a new criminal offence, applicable to senior managers in UK banks, building societies and PRA-regulated investment firms.
The measures will apply to all banks and bank holding companies “operating in the UK.” Individuals caught by the regime will be identifiable through a proposed register of senior managers. Banks whose home countries are not members of the European Economic Area will have to appoint a head of overseas branch that has the pre-approval of the FCA and the PRA.
According to Martin Wheatley (FCA Chief Executive), the SMR is intended to “create a more resilient and publicly trusted industry.” If certain conditions are met, regulators would be able to impose the full range of civil sanctions on an individual unless that person could show that they took all reasonable steps to prevent or mitigate the effects of a specified failing. Where individual knowledge can be demonstrated, the new criminal offence of “reckless misconduct” can result in up to seven years’ imprisonment.
The SMR comes alongside a “Certification Regime,” under which banking staff who are able to cause significant harm to their company or customers will be subject to annual checks, replacing the current ‘Approved Persons Regime.’ Under the Certification Regime, relevant firms will be required to assess and certify - at least annually - the fitness and propriety of employees deemed capable of causing significant harm to the firm, any of its customers or those that could risk the integrity of financial markets.
The revised FCA regime follows the incoming EU bonus cap, which comes into force as part of the revised Capital Requirements Directive IV (“CRD IV”). CRD IV restrict bankers’ bonuses to 100% of their fixed annual remuneration, or 200% with the agreement of shareholders.
The FCA aim to finalise the revised rules by this summer (public comments to the FCA consultation are required by 16 June 2015). The UK’s HM Treasury has said new rules will come into force on 7 March 2016.
Does the proposed UK standard differ from the US standard?
The knee-jerk American response to that question is that this is outrageous – the U.S. requires proof of intentional conduct to convict someone. That is certainly true for the criminal statutes used to prosecute financial crime - at least for now.
In September 2014, U.S. Attorney General Eric Holder gave a speech where he proposed, among other things, amending laws as appropriate to permit prosecution of the top executives of the nation’s financial institutions if they failed to prevent crime. This kind of liability is called the “responsible corporate
officer doctrine,” made famous in the U.S. v. Park case. There, the Court held the Chief Executive Officer was criminally responsible for failure of the company to ensure compliance with the Food, Drug and Cosmetic Act. This decision was based on the lack of intent required under the Act and the need to ensure the safety of the nation’s food supply.
Attorney General Holder also mentioned the Sarbanes-Oxley Act’s requirement that a designated executive certify the financial results and bear liability for misstatements. Although, criminal liability under the SOX requirement still requires proof of intent.
A lower standard of intent does not yet exist for financial crimes in the US. Some would argue that under the “willful blindness” standard of intent, which is allowed in the US, there are parallels with the “reckless misconduct” standard proposed under the SMR. In either case, however, the message both from the UK and the US is that law enforcement agencies are targeting top management at financial institutions, and those individuals will be investigated and prosecuted where appropriate.