Regulatory reforms will mean far more scrutiny on how firms and individuals are operating in finance, writes Michael Ruck
THE Financial Conduct Authority (FCA) last week announced the detail of its intended policy to improve individual responsibility and accountability in the banking sector.
FCA chief executive Martin Wheatley said the policy measures reflected a cultural change taking place in company boardrooms across the country, emphasising that how a business treats it customers must be at the heart of its operations and must start at the top of the organisation.
Mr Wheatley was setting out how the FCA will implement the Senior Managers Regime (SMR) and plans for a Certification Regime (CR) which are both designed to encourage individuals to take greater responsibility for their actions and make it easier for firms and regulators to hold individuals to account.
Under the SMR key decision-makers in the banking industry will undergo robust and ongoing assessment of their fitness and propriety, while under CR firms will be required to assess and certify, at least annually, the fitness and propriety of employees deemed capable of causing significant harm to the firm or any of its customers, and those that could risk the integrity of financial markets.
These latest announcements are a sharp reminder that the FCA, and the Prudential Regulation Authority (PRA), which is currently within the Bank of England, are determined to crack down on poor management, mismanagement and any dereliction of duty to clients by individuals and organisations working in the financial sector.
Following the banking crisis and subsequent scandals involving the rigging of benchmark interest and foreign exchange rates, the FCA has made clear its determination to pursue not just errant firms when something goes wrong, but to also target key individuals.
Logically, we can expect similar measures to be extended to cover the rest of the financial services industry in some way, shape or form, for example asset managers, brokers and IFAs in due course. The FCA and PRA are both due to announce their new rules applicable to senior managers in the insurance industry imminently.
We expect that already having shown an appetite, under the umbrella of market integrity, for regulating the Forex market as well as the Libor rate, that the FCA will look to increase its involvement in other exchanges and benchmarks. From next month, the FCA assume regulation of a further seven UK benchmarks – with increased financial penalties and sanctions imposed on those involved in inappropriate activities and on firms and individuals who fail to take the appropriate steps to prevent wrongdoing.
It is clear the FCA believes there is further work to be done here and suspects there may have been potential manipulation in other markets, or at least a lack of compliance with the standards it believes should apply to those markets.
The FCA’s Financial Crime Guide makes clear that in cases which breach anti-bribery legislation or involve corruption, fraud or cyber-crime, that stiff financial penalties and other sanctions will be applied to firms and individuals who fail to meet regulatory standards.
The number of firms authorised to undertake consumer credit activities will also be reduced and new FCA rules, introduced without consultation, prohibit credit brokers from charging fees to customers unless the brokers’ identity and fees are transparent. This approach is another clear indication of the FCA’s attitude to future rule making and an interventionist approach to regulation which will impact on all regulated firms.
For individuals working in financial services, now more than ever, they have to make sure that they understand what their firm’s responsibilities are, they need to understand what their own responsibilities are within that framework, and they have to ask the same questions of those to whom they have delegated responsibility.
Strong supervision and monitoring is a prerequisite and there is a requirement for individuals to ensure they receive appropriate information from the business for the operations for which they are responsible. Crucially, the process needs to be evidenced to prove they have done so.
Our view is that individuals need to be willing to speak up within the firm, and if necessary be able to ask difficult questions regarding the quality or veracity of the information received.
The FCA last week laid the onus firmly at the door of senior bankers, outlining that they will be guilty of misconduct until they can prove they “took such steps as a person in their position could reasonably be expected to take” to prevent misconduct occurring.
Now is the time to ensure all procedures and safety checks are in place to prevent such a situation happening or risk attracting a potential jail term of up to seven years.
• Michael Ruck is a Senior Associate with Pinsent Masons www.pinsentmasons.com