The presumption of responsibility was one of the most controversial aspects of the forthcoming Senior Managers’ Regime for financial institutions.
Essentially, if a breach occurred of a requirement covered by a senior manager’s statement of responsibility, the manager would be deemed guilty of regulatory misconduct unless he could show that he took such steps as a person in his position could reasonably be expected to take to avoid the contravention.
This was controversial because it appeared to reverse the burden of proof. Rather than the regulator having to prove that the manager had failed in his duties, it meant the manager had to prove he hadn’t. That cut across the presumption of innocence, a fundamental human right in court cases. The regulators were sensitive to the criticism, but struggled to come up with a convincing justification for the move.
Last night, the Treasury announced that the presumption of responsibility will not be implemented. But does this amount to a watering down of the SMR? Our sense is that it doesn’t. The substance of the requirements on senior managers will remain the same – they will still be accountable for what happens within their sphere of responsibility. In the event of a failing, although the regulator will now have to make a positive case of misconduct, senior managers will still have to explain in their defence why they should avoid a misconduct finding.
So why the change? In our view, the reasons are probably both legal and political. On the legal front, it will remove the prospect of human rights challenges to enforcement, which would be an unwelcome and costly distraction from achieving the aim of the SMR. If such a challenge succeeded, it would undermine the whole regime. Politically, this was an area causing real consternation with the banks. By giving ground without undermining the substance of how senior managers will be held to account, the Government may stand a better chance of getting the banks behind the regime more broadly.
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