About 47,000 firms across the UK financial sector will be subject from Monday to tough accountability rules designed to clean up the City of London’s reputation after a string of scandals.
The Senior Managers and Certification Regime, or SMCR, which holds financial companies’ top brass liable for failings on their watch, is being extended to the rest of the sector, three years after its initial rollout for banks and insurers.
Asset managers, independent financial advisers and hedge fund managers are all now on the hook for a ban or fine if their teams commit wrongdoing and they have not taken reasonable steps to prevent it.
Rules
The new rules – which cannot be applied retrospectively - come at the end of a year in which the fund industry has fallen squarely under the crosshairs of the regulators. Scandals have included the collapse of Neil Woodford’s equity fund, which is currently under investigation.
The 2016 introduction of the rules prompted wide concern that it would make it harder to find people willing to take on the added responsibility. But legal experts view the enforcement of the existing rules by the Financial Conduct Authority (FCA) and the Bank of England’s Prudential Regulation Authority as negligible.
Jes Staley, the chief executive of Barclays, remains the only person to be ostensibly sanctioned under the regime, for twice trying to uncover the identity of an anonymous whistleblower. He was fined a total of £642,000 by the two watchdogs in 2018.
While the regulators’ press release at the time stated that the case was the first to be brought under the SMCR, experts privately suggested that this was sleight-of-hand: Mr Staley was fined under so-called conduct of business rules for his own failings, not for those of his team.
“There is no part of our handbook called the Senior Managers Regime,” responded the FCA to a Freedom of Information request on the subject earlier this year.
“Mr Staley was penalised under [code of conduct rules] because he was a senior manager . . . It is accurate, although shorthand, to describe Mr Staley’s penalty as one under the senior managers regime generally.”
Investigation
Beyond the Staley case, the FCA currently has 18 senior managers currently under investigation, according to its most recent official statistics. This is despite a record 650 investigations across the board and an earlier pledge that whenever an investigation was launched into a firm’s misdemeanours after 2016, the expectation would be that a parallel investigation under the Senior Managers’ Regime would also be triggered.
“The fact that we have seen so few enforcement cases should give some comfort to senior management,” said Chris Brennan, a former regulator now at White & Case, the law firm.
The regime will not “make it any easier for the FCA to bring enforcement action”, Mr Brennan said, as the question will come down to whether the person undertook their responsibilities honestly and competently. In the absence of dishonesty, proving that a person took reasonable steps “is a fairly low threshold”, he added.
The FCA counters that the point of the rules - much like speeding cameras - is not necessarily fines but that their mere existence alters behaviour.
“The primary purpose of the SMCR is not enforcement but to encourage firms and their staff to take greater responsibility for their actions,” said the regulator. “We have seen signs that the SMCR is encouraging senior management to exercise greater responsibility for decision-making in their areas, simplifying organisational complexity within firms and improving their culture.”
David Rundle, a regulatory lawyer at WilmerHale, described this view as “a more positive interpretation of the lack of enforcement action”. – Copyright The Financial Times Limited 2019
