On the hook and nowhere to hide The regulators’ increasing scrutiny of senior individuals

Briefing

Thursday 11th December 2014

Prem Griffith

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Agenda

• The evolving focus on Approved Persons

• The proposed Senior Persons Regime

• Possible read-across to Approved Persons

• How to keep out of the firing line

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Focus on Approved Persons

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Approved Persons Regime – the Gateway

• Existed for years under a variety guises

• Demonstrate candidate is Fit and Proper

When assessing fitness and propriety…

The most important considerations will be the person's:

1. honesty, integrity and reputation;

2. competence and capability; and

3. financial soundness.

FIT 1.3.1G

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Evolution from registration to authorisation

• Pre-2009, FSA focussed on probity

(not competence)

• Turner Review recommended

scrutiny of technical ability

• Since 2009, SIF interview process

– Tends to focus on the larger

firms, but not always…

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Action against individuals

• Was focussed on dishonest

behaviour

• Failure to take action against

boards of failed institutions

• Collective responsibility =

difficult to take individual action

SIFs need to have:

– Clarity of responsibilities and

accountabilities

– Awareness of potential

liability

“…fining of individuals more

of a deterrent” Martin Wheatley

“…FCA clearly committed to

achieving a credible deterrent

and using enforcement to

demonstrate societal

disapproval” Tracey McDermott

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Supervisory / enforcement tools

• Use of attestations

– Increased accountability

• Enforcement powers

– Private Warning

– Restrictions on Business

– Withdraw (firm) authorisation

– Fine

– Public censure

– Suspension (individual)

– Prohibition (individual)

– Prosecute (individual)

0

10

20

30

40

50

60

£-

£2,000,000

£4,000,000

£6,000,000

£8,000,000

£10,000,000

£12,000,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Monetary Amount

Number of fines

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FSA/FCA fines – individuals

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FSA/FCA fines – firms

0

5

10

15

20

25

30

35

£-

£200,000,000

£400,000,000

£600,000,000

£800,000,000

£1,000,000,000

£1,200,000,000

£1,400,000,000

£1,600,000,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Monetary Amount

Number of fines

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Recent examples

Individual Role Firm Fine Other action

Peter Cummings CEO HBOS £500k SIF ban

Peter Halpin CEO Swinton £413k CEO ban

Anthony Clare FD / Compliance

Oversight Swinton £209k SIF ban

Nicholas Boyer Marketing

Director Swinton £307k SIF ban

John Pottage CEO UBS

Subsidiaries N/A

Overruled at Upper

Tribunal*

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Senior Persons Regime

… a quick canter through

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The problem…

• insufficient or meaningless personal responsibility

• illusion of regulatory controls

• claiming ignorance or hiding behind collective decision-

making

• little realistic prospect of financial penalties or sanctions

• individual incentives not consistent with high standards.

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PCBS Recommendations (June 2013)

Recommendation Key points

New regime for individuals

• Senior persons regime

• Individual statements of responsibilities

• Responsibilities map

• Code of practice (conduct rules)

Incentives for better behaviour • Incentives / disincentives to reflect long-

term risk and reward

New enforcement approach • Reverse burden of proof

• Potential for criminal prosecution

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Birth of the Senior Persons Regime

• Individuals to have a “statement of

responsibilities”

• Firms to have clear map of

responsibilities

• New set of conduct rules

• Reverse burden of proof

• Criminal offence (for actions resulting

in failure of an institution)

For banks, building societies and PRA-designated investment firms

Certification Regime

Senior Management

Regime

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Tier one – Senior Management Regime

• PRA Senior Management Functions (SMFs)

– Prescribed list of responsibilities that equate to SMF

• FCA Senior Management Functions (SMFs)

– Prescribed list of functions that equate to SMF

• Combined list of SMFs broader than the corresponding SIF functions

• PRA and FCA SMF regime to work jointly as a single cohesive regime

• Existing SIFs grandfathered

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Senior Management Functions

Description SMF FCA/PRA CoSignificant Influence Function

Chief Executive function (CEO) SMF1 PRA CF3

Chief Finance function (CFO) SMF2 PRA CF28 (may be CF1)

Executive Director SMF3 FCA CF1

Chief Risk function (CRO) SMF4 PRA CF28 (may be CF1)

Head of Internal Audit SMF5 PRA CF28

Head of key business area SMF6 PRA CF29?

Group Entity Senior Manager SMF7 PRA CF1 (“CF00”)

Credit union SMF (small credit unions

only)

SMF8 PRA CF29?

Chairman SMF9 PRA CF2

Chair of the Risk Committee SMF10 PRA CF2

Chair of the Audit Committee SMF11 PRA CF2

Chair of the Remuneration Committee SMF12 PRA CF2

Chair of the Nominations Committee SMF13 FCA CF2

Senior Independent Director SMF14 PRA CF2

Non-Executive Director SMF15 FCA CF2

Compliance Oversight SMF16 FCA CF10

Money Laundering Reporting SMF17 FCA CF11

Significant Responsibility SMF SMF18 FCA CF29?

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Tier two – Certification Regime

• PRA

– functions that might involve a risk to the ‘safety and soundness

of the relevant firm’

• FCA

– SIF functions who are not an SMF

– Individuals in customer-facing roles that are subject to

qualification requirements

– Anyone who supervises or manages a certified person.

• No regulatory approval – onus on firms to police and certify that

individuals are ‘fit and proper’

• Regulators to assess effectiveness of Certification Regime.

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Section 36 – Criminal Offence!

36 Offence relating to a decision causing a financial institution to fail

(1) A person (‘S’) commits an offence if:

(a) at a time when S is a senior manager in relation to a financial

institution (‘F’), S:

(i) takes, or agrees to the taking of, a decision by or on behalf

of F as to the way in which the business of a group

institution is to be carried on, or

(ii) fails to take steps that S could take to prevent such a

decision being taken,

(b) at the time of the decision, S is aware of a risk that the

implementation of the decision may cause the failure of the

group institution,

(c) in all the circumstances, S's conduct in relation to the taking of

the decision falls far below what could reasonably be expected

of a person in S's position, and

(d) the implementation of the decision causes the failure of the

group institution.

…

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Outstanding questions

• Regulators still considering branches of

‘Third Country’ banks

• Competence for branches of EEA banks

• FCA now consulting on regime for

Solvency II firms

• How will it all work in practice?

• Practical implications of greater

personal liability

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The read-across

What effect will the Senior Persons Regime

have on Approved Persons?

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The broader impact isn’t yet clear

• Application to non-banks / insurers?

• Expectation of clearly documented / mapped responsibilities

• Greater individual accountability / liability

• Increased use of attestations

• Regulatory action against individuals

• Certification regime for all staff at all firms?

THOUGHTS?

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Keeping out of the firing line…

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Apportionment of responsibilities

• Who is responsible for what?

• Not just approved persons

• How are risks / issues reported upwards?

• Is this mapping / reporting clearly documented?

• Would you be able to explain to the regulator?

• Review arrangements periodically?

– Evidence?

• Culture / customer focus?

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Responsibility Maps

• Potentially very complex (large organisations / groups)

• How do you document this?

• Clear and concise MI crucial

– Is the MI used?

• What about unregulated / overseas holding companies?

• Legal entity / business line focus

• Conduct risk – what does this mean for your firm?

• What does comprehensive management responsibilities map

look like?

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Example responsibility map

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Individual responsibility / accountability

• Clear job descriptions / role profiles

• Care with wording of attestations to the regulator(s)

– s166 to test compliance with attestations

• Awareness of potential liability

• Not a blame culture but…if something goes wrong…

– Does this create a personal conflict (pressure to cover-up)?

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Controls / checks

• Annual fitness and propriety certifications?

• Training for all new staff: 1-2-1 with Compliance Officer

• Annual reminder of obligations and liabilities

• Background checks on existing staff

• Re-credit referencing?

• Evidence is key

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Any questions?

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Summary

• Ensure individual responsibilities / accountabilities are:

– Documented

– Mapped

– Reviewed

• Ensure decisions you take are:

– Reasoned

– Reasonable

– Challenged

– Documented

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