In June this year, the Parliamentary Commission on Banking Standards published its voluminous report into the UK's banking sector. We provide below some extracted highlights relevant to the future of enforcement and to the treatment of individuals. Whilst the report is directed at banks only, it may be that the regulators look to take up the recommendations more widely.
The Approved Persons Regime
The current approved persons regime comes in for scathing criticism. It is described as a complex and confused mess which fails to perform any of its varied roles to the necessary standard.
The Commission recommends a system to allow the full range of enforcement tools to be used against a wider range of individuals. They recommend the replacement of the APER regime with:
a Senior Persons Regime ("SPR")◦To cover a narrower range of individuals than covered by the current SIFs, as many of those holding current SIF functions cannot properly be categorised as senior decision makers.
- Board and Executive members always to be within the scope of the SPR, with the primary responsibility for identifying who else falls within the SPR resting with banks themselves.
- Regulators to set out guidelines as to how responsibilities are to be identified and assigned and should have power to take action where guidelines are not followed. Responsibilities should include all key activities and all key risks a business undertakes.
- Assignment of responsibilities should be aligned with the realities of power and influence within a bank.
- Allocation of responsibilities to take into account a procedure for changes in personnel. The Commission recommends that SPs prepare a handover certificate before relinquishing responsibilities outlining how they have handled them and any issue which the next person should be aware of. To be held by banks as a matter of record and made available to the regulator to assess SPRs and effectiveness.
Licensing Regime ("LR")◦SPR to be supported by a system of licensing for more junior staff.
- The LR to apply to a broader range of bank staff and expand the current narrow reach of the APER regime.
- The LR to be administered by individual banks, who will be required to ensure that all those subject to the BSRs (see below) are aware of their obligations.
- Banks should take a more active role in monitoring individuals and have primary responsibility for taking disciplinary action.
New Banking Standards Rules ("BSR")◦To be drawn up by the regulator following consultation with banks, staff and unions.
- Bank staff would be contractually obliged to adhere to the BSRs which regulators could enforce against and would replace existing statements of principle.
- BSRs to draw on the existing statements of principle but to be wider, and less complex and legalistic. Also to be more prescriptive, capturing expectations of behaviours, eg treating customers fairly.
Enforcement against individuals
The Commission was supportive of the public clamour for senior bankers to be disciplined for mistakes on their watch. They found that a culture of collective decision making had insulated individuals against feeling any personal responsibility for their actions (what they refer to as an accountability firewall). Recommendations included:
Reversing the burden of proof◦The Commission recommended in certain circumstances reversing the burden of proof, so that individuals have to show they took all reasonable steps to prevent or mitigate the effects of a specified failing.
- The reversal of the burden would only be where two conditions are met (i) the relevant bank is the subject of successful enforcement action which has been settled or upheld by tribunal, and (ii) the regulator can demonstrate that the individual held responsibilities assigned under the SP regime which are directly relevant to the subject of the enforcement action.
- Legislation to be introduced to accommodate this.
Changes to the limitation period◦The Commission has recommended that the limitation period for bringing action against individuals should remain at three years from the date the regulator first becomes aware of it, but with provision for an extension in certain circumstances (eg as above, where the regulator has to wait for action against the relevant bank to come to fruition in reverse of burden of proof cases).
- The Commission recognised that swift enforcement is preferable and that regulators should be required to retrospectively provide a full explanation for the need to go beyond three years.
New Criminal offence
- The Commission found a strong case for a new criminal offence of reckless misconduct in the management of a bank.
- The Commission recommends that the offence be limited to SPs and that it only be used in the most serious of failings, for example, where a bank has failed at the cost of the tax payer.
- Recognises likely difficulties of securing a conviction.
Enforcement Decision Making
- RDC not the right body to deal with the enforcement decisions of the banking sector.
- The Commission recommends the creation of an autonomous body to assume the decision making role of the RDC. A lay majority, but also members with senior banking experience. Chaired by someone with judicial experience. Should have statutory authority within the FCA. Should be appointed by the boards of the FCA and PRA.
Although not a recommendation given the upheaval it would create after a major set of organisational changes, the Commission did suggest a far reaching change to the Enforcement and Financial Crime Division. In order to achieve a higher priority for the enforcement function more generally, it suggested that the Division could be replaced with a separate statutory body.
The regulators are expected to publish their responses to the Commission by the end of September. We shall have to see what they say, and what legislative and regulatory proposals may then result.