New Steps for Regulating the UK Banking Sector from the FCA

by Alexander Beard, on May 7, 2015 5:22:03 AM

1The Financial Conduct Authority (FCA), on the 16th March 2015, outlined how it will implement new regulatory regimes to preserve the integrity of the UK finance industry and financial markets. The FCA stated that the new framework comprises two regulatory regimes, a ‘Senior Managers Regime’ and a ‘Certification Regime’, both of which are underpinned by the application of ‘Conduct Rules’, which will encourage individuals to take greater responsibility for their actions and make it easier for both firms and the regulators to hold individuals to account.

The FCA also announced consultation on further, more detailed guidance on how the FCA will apply the Presumption of Responsibility. Additionally, the FCA published a separate consultation, jointly with the Prudential Regulation Authority (PRA), on the accountability regime for incoming branches of foreign banks.

In June 2013, the Parliamentary Commission for Banking Standards (PCBS) published its report, “Changing Banking for Good”, setting out recommendations for legislative and other action to improve professional standards and culture in the UK banking industry. This was followed by legislation in the Banking Reform Act 2013 (the Act) to replace the Approved Persons Regime (APR) for banks, building societies, credit unions and PRA-designated investment firms with a new regulatory framework for individuals.

Martin Wheatley, Financial Conduct Authority CEO, commented:

“How a firm conducts its business and treats its customers must be at the heart of how it operates and this has to start at the top. Today’s policy measures are an important step in ensuring that regulators have the tools at their disposal to hold individuals to account and they build on the cultural change we are beginning to see in the boardrooms of firms across the country.”

The Senior Managers Regime will promote a clear allocation of responsibilities to key decision-makers and strengthen their individual accountability through a robust initial and ongoing assessment of their fitness and propriety (by firms as well as by regulators) and strengthened powers of approval and enforcement for the regulators.

The Certification Regime will require relevant firms 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 or those that could risk the integrity of financial markets.

The culture of a firm is important in ensuring customers are at the heart of how a business is run. A key driver of culture is how people are rewarded and the behaviours that are valued and recognised by the firm. They way in which staff are incentivised and their performance is managed plays a key role in this. The FCA has previously reported on the risks from financial incentives, recognising the positive progress we have seen and the significant changes made to firms’ financial incentive structures as a result.

The FCA has also highlighted the importance of ensuring that this progress is not undermined by other performance management practices. Following an increase in whistleblowing to the FCA and evidence of instances of poor practice, the FCA is issuing a forward looking report and consulting on guidance to help firms manage the risk of mis-selling from performance management.