Our response to further consultation on strengthening accountability in banking - FCA CP 15/5 and PRA 7/15

Background and key concerns

1.    On 23 February 2015, the PRA and FCA issued a further consultation on their plans to strengthen accountability in the banking sector.  In our responses to the various consultations on this subject we have always made clear that we agree that senior individuals should take responsibility for their actions.  This is particularly pertinent when these actions could result in the collapse of an institution.  

2.    But we also cautioned that some of these proposals could have significant unintended consequences on firms.  Behaviour will be changed, but not always how the regulators plan.  The financial consequences - long and short term - would be considerable too, particularly on smaller firms, such as the majority of building societies.  While these firms must, of course, be regulatorily-compliant, they are not the regulators’ real targets.  They should therefore not be viewed as collateral damage.

3.    As we have previously said, we fully accept that all relevant staff, however junior, should be subject to appropriate conduct rules.  But the onus should be on management in firms to ensure that individual members of staff are accountable through internal appraisal and disciplinary processes.  

4.    Our particular concern is that the requirement to report breaches (however minor), on an individual-named basis, to the regulators is likely to be counter-productive.  It would encourage a climate of fear, where individuals would be less likely to be honest about, and learn from, their mistakes.  Under current proposals, junior staff would be fully, and individually, captured by the conduct rules, while a large cohort of directors would not be.  

5.    How can it be sensible to bring junior staff into the net, while excluding certain directors?  Junior staff did not sit on the boards of the firms that failed prudentially and/or in conduct terms – directors did.

Summary of main proposals

6.         Under the current set of proposals, “standard” non-executive directors will not be subject to:

  • prior regulatory approval.
  • individual statements of responsibility (but will still need to be in responsibilities maps).
  • any of the conduct rules (including senior manager conduct rules).
  • the presumption of responsibility.
  • the new criminal offence for directors.

7.         “Standard” NEDs will still be subject to normal directors' duties, but will not be subject to the new certification regime (neither would non-standard NEDs).  This means that “standard” NEDs will cease to be approved persons in the currently understood sense. 

8.         Firms will still have to assess “standard” NEDs for fitness and propriety, and give relevant notices to the regulators, for example where it relates to a “standard” NED's fitness.

9.         The new concept of presumption of responsibility – including the “reasonable steps” defence - applies only to “non-standard” NEDS that is, chairmen, senior independent directors and chairmen of relevant committees.  The PRA’s expectations of such NEDs is sent out in a new supervisory statement.

Individual questions

(We respond to those questions that are potentially relevant to BSA members, but omit comment on the questions material only to the insurance industry).

Q1: [PRA]: Do you agree with the content of Part 1 of the PRA’s draft Supervisory Statement (in Appendix 2) regarding the responsibilities and accountability of NEDs in scope of the Senior Managers Regime?

10.       The BSA understands the rationale behind the introduction of the “standard” NED.  Some of our members had previously warned of the potential problems of attracting and retaining quality NEDs.  This proposal and the accompanying reduced set of requirements certainly go some way in reducing those concerns.

11.       But there is a clear risk the dual status of NEDs could introduce behavioural differences at board level: some NEDs could feel a higher level of personal responsibility and risk than others.  There is a possibility that this divide in behaviours could potentially undermine the collective decision-making responsibility of the board.  In addition, it may become increasingly difficult, or disproportionately expensive, to attract NEDs to “non-standard” roles.

12.       One way to address this concern, if only partially, is to require all - that is “standard” and “non-standard” - NEDs to observe the conduct rules.  This would ensure board decisions were based on the same underpinning principles and culture.

Q2: [FCA]: Do you agree with the guidance in Appendix 3 concerning the role and responsibilities of NEDs within the FCA SMR?

13.       It is appropriate that the FCA acknowledges (1.3G) that its view of the role of a NED is consistent with the legal duties of NEDs and the description of their role in the UK Corporate Governance Code.  Consistency across relevant authorities is important.  (On a minor drafting point, we question the use of the older terminology ie “the Combined Code”). 

14.       In this spirit, while we have not carried out a gap analysis against the Code’s provisions concerning NEDs, it is important that the individual provisions in CO CON are consistent with those in the Code.

15.       The BSA supports the helpful clarifications (in CO CON 4) about the limitations on the expectations regarding NEDs.  For example, it is absolutely right to acknowledge that NEDs do not individually manage a firm’s business in the same way as executive directors and that they are not expected to assume executive responsibilities.  We also welcome the fact that these, and other helpful, clarifications are carried forward in the draft supervisory statement (in Appendix 2 – see question 9 below).

16.       For reasons set out above, we believe that the CO CON provisions should apply to all NEDs, both standard and non-standard.

Q8: [PRA]: Do you agree with the proposed notification requirement for Standard NEDs in relevant authorised persons, including the draft form set out in Appendix 5?

17.       We agree with the proposed notification requirement for “standard” NEDs in relevant authorised persons.   The draft form set out in Appendix 5 seems to be clear, the information requested to be reasonable and proportionate.  One building society has requested clarity on section 3.03 which refers to the definition of appointments to be declared.  We support that request.

Q9: [PRA]: Do you agree with the clarifications and expectations set out in Part 2 of the Supervisory Statement in Appendix 2 regarding the PRA’s proposed application of the presumption of responsibility?

18.       As the PRA is aware, there are a number of concerns about anything that amounts to a reversal of the onus of proof in civil proceedings.  Other commentators have discussed the jurisprudential and human rights aspects of this matter, so we concentrate below on certain practical issues.

19.       Regulatory attestations are an increasingly significant part of the overall picture in respect of individual accountability and responsibility.  The FCA has provided some information and guidance on this mechanism and it would be useful to know whether the PRA plans to provide its own information on this important matter.

20.       We welcome the potentially helpful guidance on the “reasonable steps” defence in paragraphs 3.18 – 3.22.  However, we support the request by one of our members for some further clarity, for example, in relation to record-keeping.

21.       Although covered in a separate consultation, we refer again to a related matter concerning individual responsibility that gives rise to significant concern.  In PRA CP 28/14, the PRA proposed that the seven day deadline for notification of conduct rule breaches should apply not only in respect of senior managers, but also to notifications relating to employees performing certification functions specified by the PRA.  

22.       Seven day reporting gives rise to numerous logistical challenges and risks of unintended consequences.  As this response will probably be the last formal opportunity to address this point before the joint rules are finalised, it is worth repeating the practical challenges, which include the following:

  • proper investigations take time. 
  • it may well take more than seven business days to establish ‘reasonable grounds’ to believe or suspect that a breach has occurred.
  • there are potential HR and employment law issues.
  • what if the senior manager in question is unavailable eg out of the country, say on leave, at the point in time when the firm is first alerted to the possibility of something being wrong?
  • in respect of verbal notifications (see above), how are firms to act should the regulatory supervisor be uncontactable - ie on a visit, on holiday or sick?
  • what about C3/C4 firms that do not have a named FCA supervisor – do they report to the FCA contact centre or to their PRA supervisor?

None of these points is necessarily easy and they will require careful consideration.

23.       The BSA accepted that, in light of events over the last 7 years or so, such draconian reporting in respect of senior managers was probably inevitable and would simply need to be managed by regulated firms. 

24.       But broadening the requirement out to certification staff potentially goes too far.  In combination with the FCA’s junior staff conduct rules proposal, the overall strengthening accountability in banking package now exceeds the sensible parameters set by the Parliamentary Commission on Banking Standards and by Parliament itself. 

25.       The BSA continues strongly to support the initiative and most of the proposals from both the PRA and the FCA, and is working closely and constructively with BSA members to help ensure compliance with the final rules, but we urge the regulators to reconsider these two proposals.