Financial services: making individuals accountable

New individual accountability regimes have recently been introduced in a number of jurisdictions globally to address ever-increasing concerns about significant misconduct in the financial services industry. In July, proposed legislation was published in Ireland, the Central Bank (Individual Accountability Framework) Bill, which aims to introduce an individual accountability regime modelled on the UK Senior Managers and Certification Regime (SMCR) introduced in the UK in 2016.

The Irish Bill is also similar to the Banking Executive Accountability Regime, introduced in Australia in 2018, as well as to other regimes recently introduced in Hong Kong and Singapore, together with a forthcoming one in Malaysia.

Culture of accountability

Key elements of the proposed new Irish regime include in-scope firms ensuring that senior executives have a documented statement of their individual responsibilities, mapped against the responsibilities of others; a duty of responsibility to take reasonable steps to ensure no regulatory breaches occur (aimed at ensuring there is no wilful blindness to misconduct); conduct standards for firms, individuals and senior executives; annual certification of fitness and probity for certain roles; and new powers for the Central Bank of Ireland (CBI) to impose sanctions including fines of up to €1m on individuals.

As noted by a senior director in the UK Financial Conduct Authority (FCA), commenting on the SMCR, the aim of these regimes is to establish 'a culture of accountability for conduct at the heart of a firm’s activities'.

But are these new individual accountability regimes likely to give rise to improved behaviours and more ethical cultures in the financial services industry? Or, on the other hand, do they risk introducing elaborate processes and ‘box-ticking’ exercises without giving rise to any material improvements in behaviour and culture in financial services?

Evidence from various surveys, including from the UK regulators, relating to firms in the UK and Australia that have been subject to an equivalent regime for a few years, suggests that this type of regime may well give rise to at least some level of improvement in behaviours.

A 2020 Prudential Regulation Authority (PRA) evaluation, for example, found that 'the SMCR is widely considered to have had a positive impact on culture and behaviour'. More specifically, a 2020 survey by the academics Elizabeth Sheedy and Dominic Canestrari-Soh of the Australian regime found that it had an 'empowering effect, so decisions get made, problems get resolved and there is greater care and diligence. Risk/compliance functions are getting a bigger say as their line colleagues consult them more.'

Enforcement activity

It is important to note, however, that the UK experience to date has been that the SMCR has not given rise to a significant increase in enforcement cases against senior executives.

Indeed, there has only been one case to date in which an individual has been sanctioned under the SMCR. Jes Staley, then CEO of Barclays Group, was fined a total of just over £642,000 by the PRA and FCA for his conduct in dealing with potential whistleblower communications.

Also, under Australia’s Banking Executive Accountability Regime, the regulator currently lacks powers to impose fines on individuals and, as noted in the Sheedy and Canestrari-Soh report, the BEAR 'anticipates that executive accountability will be achieved primarily through financial consequences imposed by the board'.

Accordingly, these new regimes are not primarily about seeking senior executive 'heads on spikes'.  It is essential to emphasise that their key purpose is to bring about culture change, and enforcement is merely one of the range of levers that can be used to seek to generate cultural change.

Increasing professionalism

Researching this area with Dr Joe McGrath, an assistant professor at the Sutherland School of Law at University College Dublin, we have argued that an important element of generating cultural change involves efforts to normalise improved ethical standards and good behaviour throughout the industry; as noted by the Dutch regulator, the DNB, 'peer pressure regulates behaviour'.

This can be done through, for example, industry generated codes of conduct and expectations on members as a form of 'trajectory towards professionalisation' (to use the term proposed in a report from the UK’s Parliamentary Commission on Banking Standards).  This recommended that 'the trajectory toward professionalisation [in banking be] clearly signalled immediately'.

This could include, for example, higher industry expectations (beyond minimum requirements imposed by regulation) in relation to continuing educational development, particularly for senior executives in relation to ethical standards of behaviour.

Industry-wide efforts

Some work in this area has already started. Banks in Malaysia, for example, have signed a commitment with the Asian Institute of Chartered Bankers (AICB) to enrol key staff, including board directors, on AICB programmes and to complete courses on ethics and professional standards.

A 2019 UK Finance report, which assessed the impact of the SMCR on the industry, recommended that further guidance should be made available on the conduct rules, and that such guidance 'is unlikely to be provided by the regulators and may be an action for industry to pursue itself'.  The Financial Services Culture Board has published SMCR-related good practice guidance documents that provide more detail on the conduct that is expected, including in relation to the 'reasonable steps' that senior managers should take under the SMCR.

Industry-generated codes (for example, the Global FX Code) are becoming more common in the financial services industry and could be a useful means of increasing engagement to improve standards and provide more clarification on the standards of expected behaviour.

In summary, while the new individual accountability regimes in financial services, including the forthcoming Irish regime, will likely give rise to some improvements in behaviours in the industry, 'the law alone cannot compel cultural change' – as noted in a recent speech by Derville Rowland, deputy governor consumer and investor protection,  at the CBI  – and the financial services industry itself has a significant role to play in order to normalise improved standards of behaviour throughout the industry.