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UK Financial Regulators Impose Personal Accountability on Senior Management

Chris D. Brown - Global Industry Practice Leader, Financial Institutions

The regulatory framework for financial institutions in the U.K. continues to evolve in the post-crisis economic environment. UK regulators are placing increased personal accountability on leadership within the regulated financial services sector. The Financial Services & Markets Act (FSMA) was amended by the Financial Services (Banking Reform) Act 2013 to include a new Senior Managers Regime, which came into effect on 7th March 2016.

The FSMA legislation in 2000 created the Financial Services Authority (FSA) as the regulator for the financial services industry, including insurance, investment and banking businesses. In 2012, lawmakers sought to reform financial regulation that was deemed to have failed to protect the UK’s economy during the preceding financial crisis. This resulted in the creation of the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). UK banks, building societies and systemically important investment firms are dual regulated in the sense that conduct of business supervision is carried out by the FCA and prudential supervision by the PRA.

The Senior Managers Regime places greater personal accountability on those performing “senior management functions”, defined as a role in which the person is required to manage one or more aspects of the institution’s business affairs that could potentially result in severe consequences or loss to the firm, its business operations or other-third party interests within the UK. The intent is to establish clear guidelines regarding the allocation and supervision of senior management business obligations for enforcement of individual accountability with regard to institutional and corporate governance oversight. The change was driven by frustration at the difficulty of holding individuals accountable because committee decision made it easy to diffuse responsibility.

Senior managers will be required to sign attestations in which they personally confirm their firm’s compliance with particular regulatory requirements. It is believed that the attestations will make it easier to take enforcement action.

The combined scope of the PRA and FCA Senior Manager Regimes captures all board members of relevant firms (both executive directors and non-executive or independent directors), as well as heads of key business units. The Senior Management Regime aims to advance cultural change and incite financial sector integrity throughout all levels of an organization. The legislation provides that senior managers of banks and building societies may be prosecuted by the PRA or FCA for making a decision that causes the institution to fail.

Regulators’ desire to codify personal responsibility and accountability triggers greater liability exposure and can potentially place the individual in conflict with the employer and colleagues. In today’s challenging regulatory environment, financial institutions are well advised to seek comprehensive protection for its valued directors, officers and key leadership.

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