In June 2013 the Parliamentary Commission on Banking Standards (PCBS) released an extensive report – Changing banking for good.1 In particular, the PCBS acknowledged the need to introduce greater individual accountability for senior managers of UK financial institutions.
Key PCBS recommendations on Governance and Individual Responsibility

The key recommendations included:

  • More rigorous Approved persons regime (not a gateway function)
  • Set clearer expectations of the behavior of both senior and more junior bank employees
  • Replace the Approved persons regime for more junior employees with a Licensing regime operated by the bank itself
  • Single register to cover both Senior Persons regime and Licensing Regime
  • New criminal offence for reckless misconduct in the management of a bank

Legislation

Following the PCBS review and recommendations, major changes are being made to the regulatory regime for senior bankers in the UK. The reforms to the regime for the regulation of senior bankers are contained in Part 4 of the Financial Services (Banking Reform) Act 2013.

The Prudential Regulation Authority (PRA) and Finance Conduct Authority (FCA) responded to recommendations and issued a joint consultation paper2 on implementation of the new regime in July 2014. Consultation period ended on October 31, 2014.

Whilst the final rules are not expected until early 2015, the implementation will be required shortly after with compliance deadlines of mid-2015.

In November 2014, the PRA also consulted on Senior insurance managers regime: a new regulatory framework for individuals in all insurance and reinsurance firms. The PRA will be updating its Approved Persons Regime (APR) to take into account the Solvency II measures relating to governance and the fitness and propriety of relevant individuals. In addition, the PRA has indicated its intention to amend the APR for insurers to include some aspects of the Senior Managers Regime proposed for banks.

Key Changes Introduced by PRA and FCA in the Consultation Paper3

The changes introduced by the regulators are significant and include:

  • A new ‘Senior Managers Regime‘ (SMR) to replace the Significant Influence Function (SIF) element of the existing Approved Persons Regime, and to cover a narrower range of individuals who are subject to regulatory approval. The SMR will require firms to allocate a range of responsibilities to these individuals and to regularly vet their fitness and propriety.
  • A new ‘Certification Regime‘ which will operate alongside the Senior Persons Regime and apply to other bank staff whose actions or behavior could significantly harm the bank, its reputation or its customers. This regime will require firms to assess the fitness and propriety of its relevant employees. The assessment of fitness and propriety will include a review of qualifications, training, competence and personal characteristics.
  • A new set of ‘Conduct Rules‘ which will apply to a wide range of employees: All staff under the SMR and Certification Regime. There will be an obligation on regulatory firms to ensure that all staff are aware of the rules and receive training to help them understand how the rules apply to their individual roles.

Key Business Implication Triggered by the PRA and FCA Consultation Paper4

  • Governance structure: Banks’ chairmen to have explicit responsibility for setting and embedding standards of behavior.
  • Statement of Responsibilities: An application to perform a senior management function in a bank will need to be accompanied by a “statement of responsibilities”, which will define the scope of a senior person’s responsibilities and therefore potential liability.
  • Handover Certificates: Before a senior person relinquishes their responsibilities, they will be required to prepare a handover certificate outlining how they have exercised their responsibilities and identifying any issues which their successor should be made aware of. These certificates should be held by the bank as a matter of record and made available to the regulator.
  • New disciplinary powers: In the future if a contravention occurs, the senior manager responsible will be guilty of misconduct unless they can show that they took reasonable steps to avoid the contravention from occurring.
  • Duty to notify regulator: A firm must notify the relevant regulator if it takes disciplinary actions against a senior individual.
  • Annual review: A bank will be required to carry out a formal annual review of its senior persons to assess and notify the regulator if there are any grounds to withdraw the approval.
  • Vetting of senior person candidates: There is now a formal requirement that a bank should do their own vetting of candidates for senior management positions.
  • Annual certification: Certification regime for junior bank employees requires banks to build the annual certification process into their existing performance management process.

How can Accenture help?

Challenges for Firms Possible Accenture Support
‘Right-first-time’ or Day-1 Compliance:
  • Establish in-scope individuals/functions and prepare tactical compliance framework.
  • Clarification and/or re-mapping of responsibilities and reporting lines for Senior Managers, functional/entity alignments.
  • Understand current state and the Target Operating Model (TOM).
  • Establish a temporary SMR solution to deliver a tactical compliance, working in parallel on the design of a sustainable long-term TOM.
  • Embed compliance operations in the business as usual (BAU) operating model.
Behavioral Change:
  • Develop and initiate communications strategy.
  • Strong leadership support for Senior Managers to help support sustainable behavioral change, and reduce risk of flight of talent.
  • Support Senior Managers and Certified Persons to buy-in to new operating model and obtain necessary approval/certification.
  • Support Senior Managers to roll out Conduct Rules to all employees.
Regulatory Overlap:
  • Identify opportunities for efficiency gains from coordination of regulatory change initiatives (e.g. structural reform, remuneration reform, Office of the Comptroller of the Currency Heightened Standards, etc).
  • Establishment of a SMR-focused Project Management Office to identify thematic commonalities across the portfolio, track related change activity and coordinate change requests to minimize compliance risks and optimize resource usage to prevent re-work.
Industry Consistency:
  • Improves awareness of industry dialogue on basic procedures as required for HR data handovers, minimum attestation criteria, and similar coordination issues.
  • Capture benefits of Industry coordination (e.g. across criteria and procedures like vetting, referencing, and attestation).
  • Leverage industry consultations (e.g. Banking Standards Council) for continued alignment.

Notes:

  1. Banking Commission publishes report on changing banking for good,” UK Parliament website.
  2. Strengthening accountability in banking: a new regulatory framework for individuals – CP14/14” Bank of England and Financial Conduct Authority, July 2014.
  3. Ibid
  4. Ibid

Newsletter Contacts:

Hamish Wynn
Janki A.Shah

Newsletter Authors:

Anita Barseghyan

DISCLAIMER: This blog is intended for general informational purposes only, does not take into account the reader’s specific circumstances, may not reflect the most current developments, and is not intended to provide advice on specific circumstances. Accenture disclaims, to the fullest extent permitted by applicable law, all liability for the accuracy and completeness of the information in this blog and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professional.
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