The UK Parliamentary Commission on Banking Standards has this week delivered its Final Report. Whilst most of the press commentary has focused on proposals to jail bankers for very serious misconduct occurring in the future, its recommendations include some which are intended to impose greater and clearer personal responsibility on directors and senior managers of banks, thereby exposing them to the real risk of regulatory enforcement action and appropriate sanctions. The regulators are clearly being encouraged to give greater priority to enforcement with an increased willingness to take on difficult cases often involving the more powerful individuals and players in the market. In support of its recommendations, the Commission proposes a new autonomous Regulatory Decisions Committee in relation to the banking sector with the possibility in the future of a separate statutory body for enforcement operating across the financial services sector.

The Commission attributes some of the blame for the recent failures and scandals in the banking sector to a lack of responsibility and accountability on the part of directors and senior managers particularly in large, complex institutions. Collective decision-making, complex decision-making structures and extensive delegation have apparently led the regulator to place enforcement actions against senior individuals in banks in the "too difficult" box. The Commission makes a number of recommendations to correct this. These would be underpinned by the proposal to introduce a Senior Persons Regime whereby all key responsibilities within a bank will be assigned to specific senior individuals who will remain responsible notwithstanding delegation or collective decision-making. These individuals will be limited to those who really run the bank. The Commission believes this should make it easier for regulators to identify those individuals at the top of a bank who are truly responsible for failures.

The Commission's proposals would result in a more top-down approach to enforcement, drawing on the clarity that the Senior Persons Regime is intended to provide about who is exercising responsibility at the highest levels within the bank, what they knew and did, and what they reasonably could and should have known and done. The Commission believes that taking earlier and more effective enforcement action against senior individuals within banks in the future will help to build up a credible deterrent effect.

If the Commission's recommendations are implemented, any senior manager against whom enforcement action is taken in the future will likely meet a different Regulatory Decisions Committee ("RDC") to the one currently in operation. The Commission had various concerns about the role and composition of the RDC, which currently makes enforcement decisions on behalf of the regulator of which it forms part. In its Final Report, the Commission limited itself to recommending the creation of an autonomous body to assume the decision-making role of the RDC for enforcement in relation to the banking sector. It recommended that its composition should change so that it is chaired by someone with senior judicial experience and have a lay majority but importantly should also contain several members with extensive and senior banking experience.

The Financial Conduct Authority ("FCA") has already taken some steps towards arranging for personal responsibility to be assigned more clearly to senior individuals and has let it be known that it is seeking to impose greater personal responsibility on directors and senior managers by bringing more enforcement actions against senior individuals. It needs little or no encouragement from the Commission in this respect and is likely to welcome most of its recommendations.

If the Commission's proposals in relation to a new Senior Persons Regime are implemented, this will certainly assist the FCA in assigning or apportioning culpability for regulatory failures more easily in the future and thus secure appropriate sanctions. The increased focus on personal responsibility that the recommendations, if implemented, would create may not serve to encourage senior individuals to seek out or take on positions of responsibility particularly in organizations with a poor track record. Directors and senior managers of banks will also want (among other things) greater clarity about the scope and limit of the responsibilities that are assigned to them and to document clearly from the outset how these responsibilities are exercised. Complex structures and complex decision-making may have to become a little less complex. Directors and senior managers will also want to ensure that the firm has in place appropriate and adequate indemnities and D&O insurance for legal costs. The costs of a regulatory investigation, enforcement action and possible review by the Tribunal can be very significant, particularly if more than one director or senior manager is involved. All too often, the wording of D&O policies is unclear or gives rights to the insurers which allow them to limit the amount of cover, or avoid it altogether.