On the hook and nowhere to hide The regulators’ increasing scrutiny of senior individuals
Briefing
Thursday 11th December 2014
Prem Griffith
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Agenda
• The evolving focus on Approved Persons
• The proposed Senior Persons Regime
• Possible read-across to Approved Persons
• How to keep out of the firing line
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Focus on Approved Persons
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Approved Persons Regime – the Gateway
• Existed for years under a variety guises
• Demonstrate candidate is Fit and Proper
When assessing fitness and propriety…
The most important considerations will be the person's:
1. honesty, integrity and reputation;
2. competence and capability; and
3. financial soundness.
FIT 1.3.1G
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Evolution from registration to authorisation
• Pre-2009, FSA focussed on probity
(not competence)
• Turner Review recommended
scrutiny of technical ability
• Since 2009, SIF interview process
– Tends to focus on the larger
firms, but not always…
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Action against individuals
• Was focussed on dishonest
behaviour
• Failure to take action against
boards of failed institutions
• Collective responsibility =
difficult to take individual action
SIFs need to have:
– Clarity of responsibilities and
accountabilities
– Awareness of potential
liability
“…fining of individuals more
of a deterrent” Martin Wheatley
“…FCA clearly committed to
achieving a credible deterrent
and using enforcement to
demonstrate societal
disapproval” Tracey McDermott
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Supervisory / enforcement tools
• Use of attestations
– Increased accountability
• Enforcement powers
– Private Warning
– Restrictions on Business
– Withdraw (firm) authorisation
– Fine
– Public censure
– Suspension (individual)
– Prohibition (individual)
– Prosecute (individual)
0
10
20
30
40
50
60
£-
£2,000,000
£4,000,000
£6,000,000
£8,000,000
£10,000,000
£12,000,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Monetary Amount
Number of fines
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FSA/FCA fines – individuals
9
FSA/FCA fines – firms
0
5
10
15
20
25
30
35
£-
£200,000,000
£400,000,000
£600,000,000
£800,000,000
£1,000,000,000
£1,200,000,000
£1,400,000,000
£1,600,000,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Monetary Amount
Number of fines
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Recent examples
Individual Role Firm Fine Other action
Peter Cummings CEO HBOS £500k SIF ban
Peter Halpin CEO Swinton £413k CEO ban
Anthony Clare FD / Compliance
Oversight Swinton £209k SIF ban
Nicholas Boyer Marketing
Director Swinton £307k SIF ban
John Pottage CEO UBS
Subsidiaries N/A
Overruled at Upper
Tribunal*
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Senior Persons Regime
… a quick canter through
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The problem…
• insufficient or meaningless personal responsibility
• illusion of regulatory controls
• claiming ignorance or hiding behind collective decision-
making
• little realistic prospect of financial penalties or sanctions
• individual incentives not consistent with high standards.
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PCBS Recommendations (June 2013)
Recommendation Key points
New regime for individuals
• Senior persons regime
• Individual statements of responsibilities
• Responsibilities map
• Code of practice (conduct rules)
Incentives for better behaviour • Incentives / disincentives to reflect long-
term risk and reward
New enforcement approach • Reverse burden of proof
• Potential for criminal prosecution
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Birth of the Senior Persons Regime
• Individuals to have a “statement of
responsibilities”
• Firms to have clear map of
responsibilities
• New set of conduct rules
• Reverse burden of proof
• Criminal offence (for actions resulting
in failure of an institution)
For banks, building societies and PRA-designated investment firms
Certification Regime
Senior Management
Regime
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Tier one – Senior Management Regime
• PRA Senior Management Functions (SMFs)
– Prescribed list of responsibilities that equate to SMF
• FCA Senior Management Functions (SMFs)
– Prescribed list of functions that equate to SMF
• Combined list of SMFs broader than the corresponding SIF functions
• PRA and FCA SMF regime to work jointly as a single cohesive regime
• Existing SIFs grandfathered
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Senior Management Functions
Description SMF FCA/PRA CoSignificant Influence Function
Chief Executive function (CEO) SMF1 PRA CF3
Chief Finance function (CFO) SMF2 PRA CF28 (may be CF1)
Executive Director SMF3 FCA CF1
Chief Risk function (CRO) SMF4 PRA CF28 (may be CF1)
Head of Internal Audit SMF5 PRA CF28
Head of key business area SMF6 PRA CF29?
Group Entity Senior Manager SMF7 PRA CF1 (“CF00”)
Credit union SMF (small credit unions
only)
SMF8 PRA CF29?
Chairman SMF9 PRA CF2
Chair of the Risk Committee SMF10 PRA CF2
Chair of the Audit Committee SMF11 PRA CF2
Chair of the Remuneration Committee SMF12 PRA CF2
Chair of the Nominations Committee SMF13 FCA CF2
Senior Independent Director SMF14 PRA CF2
Non-Executive Director SMF15 FCA CF2
Compliance Oversight SMF16 FCA CF10
Money Laundering Reporting SMF17 FCA CF11
Significant Responsibility SMF SMF18 FCA CF29?
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Tier two – Certification Regime
• PRA
– functions that might involve a risk to the ‘safety and soundness
of the relevant firm’
• FCA
– SIF functions who are not an SMF
– Individuals in customer-facing roles that are subject to
qualification requirements
– Anyone who supervises or manages a certified person.
• No regulatory approval – onus on firms to police and certify that
individuals are ‘fit and proper’
• Regulators to assess effectiveness of Certification Regime.
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Section 36 – Criminal Offence!
36 Offence relating to a decision causing a financial institution to fail
(1) A person (‘S’) commits an offence if:
(a) at a time when S is a senior manager in relation to a financial
institution (‘F’), S:
(i) takes, or agrees to the taking of, a decision by or on behalf
of F as to the way in which the business of a group
institution is to be carried on, or
(ii) fails to take steps that S could take to prevent such a
decision being taken,
(b) at the time of the decision, S is aware of a risk that the
implementation of the decision may cause the failure of the
group institution,
(c) in all the circumstances, S's conduct in relation to the taking of
the decision falls far below what could reasonably be expected
of a person in S's position, and
(d) the implementation of the decision causes the failure of the
group institution.
…
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Outstanding questions
• Regulators still considering branches of
‘Third Country’ banks
• Competence for branches of EEA banks
• FCA now consulting on regime for
Solvency II firms
• How will it all work in practice?
• Practical implications of greater
personal liability
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The read-across
What effect will the Senior Persons Regime
have on Approved Persons?
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The broader impact isn’t yet clear
• Application to non-banks / insurers?
• Expectation of clearly documented / mapped responsibilities
• Greater individual accountability / liability
• Increased use of attestations
• Regulatory action against individuals
• Certification regime for all staff at all firms?
THOUGHTS?
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Keeping out of the firing line…
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Apportionment of responsibilities
• Who is responsible for what?
• Not just approved persons
• How are risks / issues reported upwards?
• Is this mapping / reporting clearly documented?
• Would you be able to explain to the regulator?
• Review arrangements periodically?
– Evidence?
• Culture / customer focus?
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Responsibility Maps
• Potentially very complex (large organisations / groups)
• How do you document this?
• Clear and concise MI crucial
– Is the MI used?
• What about unregulated / overseas holding companies?
• Legal entity / business line focus
• Conduct risk – what does this mean for your firm?
• What does comprehensive management responsibilities map
look like?
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Example responsibility map
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Individual responsibility / accountability
• Clear job descriptions / role profiles
• Care with wording of attestations to the regulator(s)
– s166 to test compliance with attestations
• Awareness of potential liability
• Not a blame culture but…if something goes wrong…
– Does this create a personal conflict (pressure to cover-up)?
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Controls / checks
• Annual fitness and propriety certifications?
• Training for all new staff: 1-2-1 with Compliance Officer
• Annual reminder of obligations and liabilities
• Background checks on existing staff
• Re-credit referencing?
• Evidence is key
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Any questions?
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Summary
• Ensure individual responsibilities / accountabilities are:
– Documented
– Mapped
– Reviewed
• Ensure decisions you take are:
– Reasoned
– Reasonable
– Challenged
– Documented
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