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