Vidya Ram

After all those bank scams, the clean-up

VIDYA RAM | Updated on October 15, 2014

Another view Can Britain’s banking system do an about-turn and set global standards? QQ7/SHUTTERSTOCK.COM

A tighter regulatory regime for UK’s scandal-hit financial sector is on its way. And that’s just as well

In early October it emerged that that two directors at HSBC’s British division — one a member of the UK division’s audit and risk committee, and the other the deputy chair of its UK operations — are set to quit the bank, despite one only having taken on his role late last year.

The reason? According to the news outlets, new rules are set to come in that will greatly tighten the responsibilities and accountability of senior managers at British banks and investment firms, including board members, potentially making them criminally liable for institutional failure.

The rules, being put forward by the Bank of England’s Prudential Regulation Authority (one of the successors of the Financial Services Authority which was disbanded following the 2007 financial crisis) and the Financial Conduct Authority are being consulted on till the end of October.

But they could be brought in swiftly early next year and are part of the initiative by UK regulators, based on the recommendations of a parliamentary commission, to restore trust in a sector hit by scandal after scandal.

Laid low by scandal

While the reputation of banks across the world took a hit from the financial crisis triggered by the collapse of the US mortgage market, it’s fair to say that in Britain the toll has been even more profound.

The financial crisis, the collapse of Northern Rock and HBOS and the government rescue of the Royal Bank of Scotland proved just the first in a long line of crises — ranging from the manipulation of the Libor interest rate and other benchmarks to enabling the movement of illicit funds.

Following the 2012 Libor scandal, a commission was appointed by parliament to make recommendations to raise professional standards in the banking sector and identify lessons about corporate governance, transparency and conflicts of interest.

Its report, Changing Banking For Good, published last year, concluded that the sector’s ability to support the real economy and maintain international standing had been eroded by a “profound loss of trust”.

“Top bankers dodged accountability for failings on their watch by claiming ignorance or hiding behind collective decision making,” it noted.

The current proposals would make British regulation of financial institutions among the toughest in the world, introducing a system where senior managers — defined to include all board members, members of executive committees and heads of divisions whose activities could impact the group as a whole — at banks will be held to high and specifically set out standards of responsibility and accountability.

Banks will be required to seek regulatory approval for the most senior of roles and will have to do regular checks on the propriety of senior personnel who could potentially put the bank at risk.

A new code of conduct will apply to pretty much all employees of financial institutions — bar those in non-banking roles (janitors, kitchen staff and so on).

Standard response

For now none of the rules will impact the UK divisions of foreign financial institutions but the regulators could proceed on this count as well (they already have the legislative mandate needed to make any such change).

However, it is the changes to the rules governing senior managers, and in particular the introduction of a criminal offence of reckless misconduct, that has most irked the industry.

So has the proposal that, under the system, it will be up to the senior managers to show that they took reasonable steps to prevent breaches.

It places “evidential burden on the senior managers who by virtue of their rank and seniority should have the knowledge and authority to prevent or tackle regulatory failure”. In other words, guilty till proven innocent.

While many within the legal profession have suggested that prosecutions are likely to be rare, there have been the predictable warnings from within the industry that accompany any regulatory clampdown: that banks would struggle to attract top talent to the boardrooms and that talent could trickle to less heavily regulated environs abroad.

However, regulators have been firm: in a speech in Washington DC over the weekend, Bank of England governor Mark Carney and head of the internationally-established Financial Stability Board the called their bluff — making the obvious but crucial point that those unwilling to shoulder responsibilities were unlikely to be much of a loss of talents to the banks. “If you are the chair, or if you are the head of the audit committee of a board… you have a responsibility for the activities of that institution and if you don’t think you can discharge that responsibility because you don’t have the information or because you feel you have too much else to do or you don’t feel personally qualified then you shouldn’t be on the board.”

Global precedent

It is, on the face of it, ironic that it is Britain that is bringing in such a regime — the same country that is fighting tooth and nail against the EU’s bonus cap. (Britain’s Prudential Regulatory Authority has permitted “allowances” to be categorised as fixed pay, giving British banks a way around the new EU rule that banking bonuses can be no more than twice fixed pay.)

However, at the same time, Britain is introducing its own clampdown on bonuses: at financial institutions they will be paid over a seven-year minimum period and regulators will be able to force bankers to return their bonuses within a seven-year period in the event of a major transgression, regardless of whether they had already spent the amount or not.

The changes being made in Britain could well set a global precedent. After all, if a country that has paid a huge price for once buying into the “de-regulate and they will come” approach can successfully reinstitute a sense of responsibility and custodianship at the top of institutions, other countries could follow suit.

Published on October 15, 2014

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