The Government has reversed its controversial plans to swing the burden of proof in favour of financial services regulators by requiring senior management to prove their efforts to prevent regulatory breaches. While likely to be welcomed by the industry, the impact of the move on the new regulatory framework remains to be seen.

Background

As reported in the September edition of this newsletter, a regulatory shake-up designed to increase individual accountability at the senior levels of the financial services industry has led to the development of the new Senior Management and Certification Regimes. In 2013, the Government legislated for the regimes to come into force in the banking sector on 7 March 2016.

The focus on accountability was clear from the beginning: under the new Senior Management Regime, specific responsibilities will have to be allocated to employees at the most senior levels of the organisation. Responsibility statements and maps will need to show how those roles have been shared out among the relevant senior individuals (the "Senior Managers").

However, new provisions about individual misconduct proved to be the most controversial aspect of the regimes as originally proposed. Under the original plans, if a regulatory breach occurred within a particular area of the business, the Senior Manager with responsibility for that area would be presumed to be responsible unless he or she could show that such reasonable steps as could have been expected were taken to prevent the breach (the "Presumption of Responsibility").

The usual position is that where misconduct is alleged, it is for the regulator to prove its case. The Presumption of Responsibility therefore effectively reversed the normal burden of proof. Placing the burden on the Senior Manager to prove his or her innocence in this way, not surprisingly, unsettled many within the financial services sector.

New Developments

On 15 October 2015, the Government revealed the new Bank of England and Financial Services Bill. It contains some significant changes to the Senior Management and Certification Regimes as originally envisaged.

This bill proposes the extension of the regimes: while they would still come into force for the banking sector on 7 March 2016, they would be extended to cover other financial services firms, such as investment firms and consumer credit companies, from 2018 onwards.

Even more significantly, the Presumption of Responsibility has been removed and the Government plans to legislate to block its implementation for the banking sector on 7 March 2016. Instead, under the new proposals, a statutory duty of responsibility will be created for all Senior Managers across the financial services industry: where a regulatory breach occurs, the Senior Manager will only be guilty of misconduct if the regulator can prove that he or she did not take the steps that could reasonably have been expected to avoid the breach. There will therefore no longer be any burden on the Senior Manager to positively demonstrate his or her efforts.

The bill started in the House of Lords and has been through the First and Second Reading, as well as Committee Stage. On completion of a Report Stage and Third Reading, the bill will be transferred to the House of Commons. As a result, amendments are still possible.

Comment

The Government U-turn on the Presumption of Responsibility will be welcomed by financial services firms and their senior management teams alike. Managing the risk for senior individuals under the original proposals would almost certainly have involved documentation that would have been both extensive and expensive. The erosion of the sector's ability to attract talent also looked like a real possibility.

However, the regulators have sought to say that they do not consider the changes to amount to a watering down of the original proposals. Andrew Bailey, Chief Executive of the PRA, has stated that: "The introduction of the 'duty of responsibility' in place of the 'presumption' makes little difference to the substance of the regime." Tracey McDermott, acting CEO of the FCA, has added that the Presumption of Responsibility was "never a panacea."

This change aside, it seems unlikely that regulators will be abandoning the new drive towards individual accountability. It remains to be seen how the removal of the Presumption of Responsibility will affect the operation of the new regulatory framework. Affected organisations would be well-advised to consider whether their internal systems sufficiently record the decisions and measures that senior staff take. Even in the absence of a requirement to demonstrate reasonable steps, positive evidence to that effect will always be valuable.