The City's new accountability rules risk unintended consequences

The Senior Managers and Certification Regime makes senior bankers personally accountable for failings.

by Joanna Chatterton and Peter Wright
Last Updated: 13 Aug 2018

Over a decade since the global financial crisis, it is widely accepted that many of the structural causes behind the crash have now been resolved. As the dust settled on the events of 2008, policymakers worked quickly and tirelessly to build robust regulation to ensure that high-risk operating models like that of Northern Rock could not exist today.

In more recent years, regulators have turned their focus to tackling some of the less tangible causes of the crisis. The Senior Managers and Certification Regime (SMCR) is the most pronounced attempt so far to improve an industry culture increasingly seen to have been one of the key causes of the crisis, and to overcome the problems the FCA faced bringing senior bankers to account for banks’ failings.

For those new to the SMCR, the rules require a small number of senior managers to have personal accountability for failings around the prescribed responsibilities allocated to them. Failure to meet the standards expected may result in fines and sanctions, including being barred from the industry.

Initially designed to focus on banks, the regime has been expanded to include insurers and all other financial firms, marking an important shift in the way the financial services industry manages its culture and handles conduct issues. These developments are causing individuals to reflect on their daily decisions and seriously consider how they could have an impact on their organisation.

A new referencing regime also means that it’s no longer possible for a bank to allow a senior manager, who has not met regulatory standards, to resign and move on with a bland agreed reference. This helps prevent the dangers that can arise from the ‘rolling bad apple’. All but a few staff are required to adhere to conduct rules, a breach of which must be reported both on a reference and to the regulator. Most staff need to be certified as ‘fit and proper to perform their role, where this involves certain ‘significant harm functions’, such as client-dealing, not just when they start a new job.

It is clear that the rules are starting to have a positive impact on the system. The first public test of the rules in action was with Barclays boss Jes Staley, who was fined around £642,000 for his attempts to reveal the identity of a whistleblower. However, as with any legislation, there are unintended consequences that are likely to manifest over time and these cracks are already beginning to show.

Exercising judgement

An important change is that, for many staff, it is their employer that decides if they are ‘fit and proper’ to perform their role. Decisions can be finely balanced, and, in the absence of defined criteria, there can be a lack of consistency on what might be deemed a breach of conduct rules. 

Managing discipline has also become more complicated. Now, banks need to consider whether misconduct amounts to a breach of the conduct rules, as well as being deserving of disciplinary sanction. Larger banks have created new committees to help determine this. For the employee, any mistake can have career-defining implications, particularly if a zero-tolerance approach is adopted with regard to regulatory concerns (despite this not being the intention of the regulators). There can be inherent tensions between this and employment law considerations, which are not usurped by the regime.

Unintended consequences

There is a risk that as regulation has become more onerous, it will unintentionally hurt recruitment efforts. In truth, it is too early to say. But it is likely that some people, particularly non-executive directors (NEDs), may not be willing to take on the personal responsibility that being a senior manager now requires.

Likewise, some senior compliance professionals in large businesses are concerned about whether they can completely comprehend everything happening on their watch.

As a result of the SMCR, senior managers often have a stronger regard for their personal position in a company. However, such individual ownership can sometimes undermine collective responsibility, which can generate some conflict.

Fear of a negative regulatory reference can prevent some employees moving on and even leaving the industry altogether. In some instances, we are seeing employees fearful of raising concerns or admitting mistakes, which is precisely what the regime was trying to avoid. 

Although it is early days, these new accountability rules have so far contributed to ensuring we do not repeat the mistakes of the past. However, we must be careful to ensure that any unintended consequences don’t cause problems for the future.

Only time will tell if the SMCR unintentionally triggers a talent drain from the UK’s financial services industry or undermines the very culture it is trying to improve.

Joanna Chatterton and Peter Wright are partners at Fox Williams LLP.

Image credit: Fresnel/Shutterstock

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