The Treasury has announced it is to extend the scope of new rules designed to make senior banking staff personally responsible for any wrongdoing within their organisation to cover the wider financial sector, but has dropped the burden of proof of required from top executives
The rules of the Senior Managers & Certification regime, due to be introduced on 7 March 2016, are to be extended to cover all investment companies, insurers, asset managers and consumer credit firms by 2018.
Originally the regime was set to apply to around 1,000 banks, building societies, credit unions and investment companies regulated by the Prudential Regulation Authority (PRA).
In addition, the Treasury has said it is to replace the original ‘reverse burden of proof’ requirement which meant the onus was on bankers to demonstrate either that they did not know of any wrongdoing or that they had acted to prevent it. There will now be a less onerous 'duty of responsibility' for such employees.
The duty of responsibility means senior managers are still required to take the appropriate steps to prevent a regulatory breach from occurring. However, it will be up to the regulators to prove that this did not happen, rather than the individual having to show they had no knowledge or did take action.
In a statement, Andrew Bailey, PRA chief executive, said: ‘This change is one of process, not substance. The focus for firms and individuals should be on complying with both the letter and the spirit of the rules rather than considering ways to circumvent them.’
Tracey McDermott, acting chief executive of the Financial Conduct Authority (FCA), said: ‘Extending the senior managers’ and certification regime is an important step in embedding a culture of personal responsibility throughout the financial services industry.
‘While the presumption of responsibility could have been helpful, it was never a panacea. There has been significant industry focus on this one, small element of the reforms, which risked distracting senior management within firms from implementing both the letter and spirit of the regime.
‘The senior managers’ and certification regime is intended to deliver better decisions to help avoid problems arising. We remain committed to holding individuals to account where they fail to meet our standards.’
The new regime will extend corporate responsibility and introduces tough standards of personal responsibility but certain elements of the rules have been watered down.
Michael Ruck, a senior financial services enforcement lawyer at Pinsent Masons and formerly with the FCA said: ‘Whilst many in the banking industry are likely to consider the removal of the reverse burden of proof a weight removed from their shoulders, it is too early at this stage to breathe a sigh of relief.
‘The mindset of the regulators will likely continue to be that if a failing occurs on the watch of a senior management individual, that individual will face tough questioning around the steps they took to prevent such a failing.
‘The extension of the senior managers regime to the non-banking and insurance parts of the financial services sector had been expected. However, this will be a major change for firms from the existing approved persons regime, bringing tough standards of personal responsibility and accountability on senior managers.’
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