A new era in bank gover­nance: UK in­di­vid­ual ac­count­abil­ity rules put spot­light on in­ter­na­tional banks

Business Mirror - - BANKING&FINANCE -

WITH reg­u­la­tors in the United King­dom rolling out the Se­nior Man­agers and Cer­ti­fi­ca­tion Regime (SM& CR) on March 7, this ground­break­ing ap­proach to bank gover­nance is gar­ner ing world­wide at­ten­tion— and rais­ing the prospects that its prin­ci­ples will spread glob­ally.

While the SM& CR will bring wel­come strength and clar­ity to bank gover­nance, it presents par­tic­u­lar challenges to multi­na­tional banks with global ma­trix or­ga­ni­za­tions, cross- bor­der struc­tures, staffing, sys­tems and trans­ac­tions. Th­ese banks must now re­visit and re­cal­i­brate their gover­nance practices to ac­com­mo­date the SMR’s em­pha­sis on in­di­vid­ual ac­count­abil­ity and lo­cal le­gal en­ti­ties.

Although the banks must grap­ple with the rea­son­able steps nec­es­sary to com­ply and pos­si­ble un­in­tended con­se­quences on their op­er­at­ing mod­els, some smart bank boards rec­og­nize the SM& CR to be an op­por­tu­nity to em­bed gover­nance stan­dards and en­hance cul­ture that can drive stronger long- term per­for­mance for share­hold­ers.

Se­nior Man­agers Regime adds in­di­vid­ual ac­count­abil­ity

THE SM& CR arises from rec­om­men­da­tions made by the UK’s Par­lia­men­tary Com­mis­sion on Bank­ing Stan­dards ( PCBS), which was set up fol­low­ing the Li­bor rate- fix­ing scan­dal, and de­scribed ex­ist­ing reg­u­la­tions as a “com­plex and con­fused mess.”

With many com­men­ta­tors stat­ing their be­lief that the banks had pos­si­bly grown too big and com­plex to man­age, the SMR is among a wider set of tools and reg­u­la­tions that could im­prove bank gover­nance and realign risk and re­ward. This, in turn, could ul­ti­mately ben­e­fit share­hold­ers, since bet­ter de­ci­sion­mak­ing may re­sult when ex­ec­u­tives have clear in­di­vid­ual ac­count­abil­ity for their ac­tions, rather than col­lec­tive ac­count­abil­ity at the in­sti­tu­tional level.

“A lack of per­sonal re­spon­si­bil­ity has been com­mon­place through­out the in­dus­try. Se­nior fig­ures have con­tin­ued to shel­ter be­hind an ac­count­abil­ity fire­wall,” ob­served An­drew Tyrie, chair­man of the Trea­sury Se­lect Com­mit­tee and the PCBS, in de­scrib­ing the PCBS find­ings. “Where the stan­dards of in­di­vid­u­als, es­pe­cially those in se­nior roles, have fallen short, clear lines of ac­count­abil­ity and en­force­able sanc­tions are needed.”

Not­ing that the SMR “is not meant to be rad­i­cal or life- chang­ing,” An­drew Bai­ley, head of the Pru­den­tial Reg­u­la­tion Au­thor­ity ( PRA), ex­plained in a speech that, “We do want to avoid what the PCBS de­scribed as the Mur­der on the Ori­ent Ex­press out­come when firms get into trou­ble, which is akin to the ‘ ev­ery­one and no one’ is re­spon­si­ble, but ev­ery­one is con­nected to the event. Clar­ity of re­spon­si­bil­ity is, I hope, un­ob­jec­tion­able.”

The regime is also gar­ner­ing in­ter­na­tional pro­file, in­clud­ing in the US, where US Se­cu­ri­ties and Ex­change Chair­man Mary Jo White de­scribed the SMR as “a very in­trigu­ing set of changes.”

The topic is likely to in­crease mo­men­tum at the G-20 Sum­mit as Bank of Eng­land Gover­nor Mark Car­ney is also the chair­man of the Fi­nan­cial Sta­bil­ity Board ( FSB). If it’s en­dorsed by the G-20, then one would cer­tainly ex­pect fur­ther rules and reg­u­la­tions on the lines of SMR.

To be over­seen by the PRA and the Fi­nan­cial Con­duct Au­thor­ity ( FCA)— and ap­ply­ing to all banks in the UK, whether they be lo­cally head­quar­tered re­tail brands or whole­sale of­fices of for­eign­based banks—the new regime is de­signed to make se­nior in­di­vid­u­als within fi­nan- cial firms per­son­ally ac­count­able for breach­ing reg­u­la­tions or caus­ing se­ri­ous dam­age to their in­sti­tu­tion.

Global banks face Se­nior Man­agers Regime challenges

WHILE the SMR may be the nec­es­sary rem­edy for past gover­nance fail­ings, many banks face siz­able challenges in light of the regime’s fo­cus on pre­cisely pin­point­ing in­di­vid­ual ac­count­abil­ity.

To­day it is typ­i­cal for in­ter­na­tional banks to maintain ma­trix man­age­ment across bor­ders, busi­ness lines and func­tions, with key re­spon­si­bil­i­ties held by global busi­ness heads or over­seas man­agers lo­cated off­shore, and with de­ci­sions made by com­mit­tees rather than by in­di­vid­u­als. Es­tab­lish­ing in­di­vid­ual ac­count­abil­ity through a le­gal en­tity lens in such a con­struct is a dif­fi­cult challenge.

The prob­lem is com­pounded by the fact that a num­ber of for­eign banks run their UK op­er­a­tions as a bank branch in an­other ju­ris­dic­tion, and they do not have the for­mal, lo­cal gover­nance ar­range­ments that a UK-based bank would; this demon­strates that le­gal en­tity- type in­di­vid­ual ac­count­abil­ity is more com­pli­cated for branches.

Is­sues also arise from global banks’ cross- bor­der trans­ac­tions, since they of­ten ap­ply re­mote book­ing mod­els and uti­lize re­gional or global trad­ing hubs, by which a trans­ac­tion is not domi­ciled in the ju­ris­dic­tion where the trade may have orig­i­nated. Th­ese practices make it chal­leng­ing to clearly de­fine ac­count­abil­ity, es­pe­cially for se­nior man­agers in the UK le­gal en­tity. With the SMR driv­ing reg­u­la­tors to ask, “Who ac­tu­ally makes the key de­ci­sions and un­der­stands the risks?” over­seas se­nior em­ploy­ees may also find them­selves pulled into the regime.

In ad­di­tion, if things go wrong and a bank finds it­self in fi­nan­cial cri­sis or dif­fi­culty, reg­u­la­tors will ask se­nior man­agers to prove they took “rea­son­able steps.” This has prompted a lively de­bate on what con­sti­tutes ad­e­quate steps, es­pe­cially as it will be ap­plied in hind­sight. While the banks may take ob­vi­ous ac­tions, such as main­tain­ing bet­ter min­utes, they should also en­sure they have ef­fec­tive gover­nance struc­tures, with clearly de­fined ac­count­abil­i­ties at the out­set, and high-qual­ity le­gal en­tity man­age­ment-in­for­ma­tion sys­tems.

This will en­able them to re­spond with a more ro­bust de­fense if they are chal­lenged re­gard­ing the rea­son­able steps taken. To be con­cluded

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