The rules on individual accountability are being introduced following changes set out in the Banking Reform Act, to improve professional standards and culture within the UK banking industry. The main rules will come into effect on 7 March 2016.
The rules will make it easier for firms and regulators to be clear about who is responsible for what. Its effect should drive up standards, and make firms easier to run and to supervise. The rules will also allow senior managers to be held to account for misconduct that falls within their area of responsibility. It will also hold individuals working at all levels within relevant firms to appropriate standards of conduct.
Who it Applies to
The rules apply to:
The key features of the new rules are:
The good news is that existing Approved Persons will not be required to go through a fresh round of pre-approval in order to be ‘grandfathered’ into the new regime. Firms will be required to submit a grandfathering notification, which will let firms map existing approved persons to an equivalent Senior Manager Function.
The Government has also proposed that Senior Managers in the banking sector should be subject to a ‘duty of responsibility’ which means senior managers will be required to take the steps that it is reasonable for a person in that position to take to prevent a regulatory breach from occurring. This replaces the Presumption of Responsibility and is currently being debated in Parliament.
The main changes are:
What does this mean for board structures?
The regulator (whether this be the PRA or the FCA) intends to work very closely with Boards, more so than in the past . The PRA’s objectives is around the safety and soundness of firms that they supervise. Their secondary objective is in respect of competition.
The PRA will have a focus on risk assessment and will want to understand how firms take and manage risk, the controls they have and the quality of risk management. The PRA will be raising the standards in this area. The PRA have made it clear that they are a judgement-based supervisor through applying judgement against a framework of rules and regulation.
The regulator has made it clear that: -“Ensuring the Bank of England has the instruments necessary to achieve its financial stability objective will depend on the EU continuing to have regulations of the highest standards, which strike the appropriate balance between harmonisation and flexibility, and which accommodate necessary national responsibilities, including for supervision”. Narrow rules-based approaches to regulation create inflexibility and can be easy to arbitrage. The sensible application of judgement involves looking at a situation from several angles, and employing forward-looking tools such as stress tests.
The role of Boards will be a focus of the regulator to include Executive Senior Management of firms; Boards (with Non-Executives in the majority); and Supervisors.
The PRA will expect Senior Executives to exercise judgement on risks and returns on a day-to-day basis. The regulator want firms to earn sustained and thus sustainable returns through the exercise of good business judgement. Senior Executives are expected to exercise that judgement within frameworks set by, and overseen by, their Boards, namely the overall strategy, the risk appetite and assessment frameworks and the oversight of controls and compliance.
Board should be reminded of their role expected by the regulator be able to set a strategy and risk appetite and oversee implementation. The role of the Executive. Supervisor will be to challenge hard and ask for changes, but they do not substitute for the Board or the Executive.
So, what does the Regulator expect of Boards?
In a recent speech by the PRA the three that mentioned where:
The regulator makes it clear that it is the job of the Executive to be able to explain in simple and transparent terms these complex matters to Non-Executives. In doing so, they should understand the uncertainty around judgements, in what circumstances they could be wrong, and how there can reasonably be different ways to measure things like liquidity. Non-Executives should not be left to find the answers for themselves, and they should not feel that they have to do so out of a lack of sufficient confidence in what they are being told.
What does a Board need to understand?
The regulator makes it very clear that boards must understand:
Non-Executives should be put in a position to possess a general understanding of the model and meet these expectations without detailed technical knowledge. That’s the job of the Executive, to explain complexity, provide good Management Information and enable challenge and thus accountability.
The PRA will overhaul its approach to supervision of governance in firms. Executives should be able to rigorous challenge. Executives should see that their Non-Executive colleagues’ experience and knowledge as a means of improving the effectiveness of the Board’s judgment through constructive support and challenge.
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