In July 2014, the Bank of England first proposed a new code for insurers and senior bankers which would heavily sanction executives under a new offence for reckless decisions causing a financial institution to fail. The proposals for the code have now been widened to include senior non-executives alongside chairmen in a tough new personal liability regime which was recently unveiled.
No enforcement action has been undertaken so far against top executives due to the difficulties in proving ultimate responsibility for decisions at the top end. The new code is due to take effect next year and will allow authorities to punish top executives with substantial fines likely to be significantly greater than existing levels, lifetime bans and even prosecution for reckless mis-management.
This is one of the most stringent codes in the world for individuals at the top of insurance companies and banks and is unlike any other regime. It is an attempt to crackdown on malpractice in the City following the financial crisis. Following a consultation next month on the new code, it is envisaged that the code will also apply to foreign banks’ UK branches.
The new code also replaces the Approved Persons regime with a Senior Managers regime although the process for applying for approval from the PRA/FCA as a Senior Manager will be similar to the old regime. The code effectively puts the onus on a Senior Manager (as defined in the code as being an approved individual with a Senior Management Function (SMF)) to prove to regulators that they took steps to stop the wrongdoers, rather than putting the onus on the authorities where the burden of proof would normally lie. As such, there is a fear that the code will discourage non-executives from joining boards at a time when they are most needed.
The PRA’s intended approach is to use the code for the most extreme cases and where necessary. They are not looking for a swath of high profile enforcement actions. Organisations need to ensure they have individuals on the board with the right skills who are prepared to dedicate an appropriate amount of time to this vital role.