Individual Accountability Regimes in 2021
Following on from the UK’s Senior Manager & Certification Regime, other similar regulatory regimes soon followed suit.
The UK were the first to introduce greater accountability as a response to the poor governance that led to the 2007/2008 financial crisis. This same narrative has played out in several other financial markets, including Ireland, Australia, Singapore, and Hong Kong – with signs that additional regulators may not be far behind.
Australia – BEAR
In 2018 the Banking Executive Accountability Regime (BEAR) was introduced in Australia to increase accountability for senior management in the financial services sector. BEAR was heavily based on SM&CR and as its name suggest, was focused on banks who are now required to ensure that their senior executives meet “accountability obligations” which are similar to the UK’s Conduct Rules. At the beginning of 2020, the Australian Government released a proposal to extend these requirements out to all ARPA regulated entities under a new Financial Accountability Regime (FAR). The proposed FAR is very closely modelled on the UK’s SM&CR and will follow the same ‘core’ or ‘enhanced’ classification of organisation types as well as requiring accountability statements and accountability maps. This new accountability framework will be applied to banks, superannuation entities, and insurers, and is due to come into effect in early 2022.
Ireland – SEAR
In addition to the financial services crisis, the Irish Tracker Mortgage scandal broke throughout 2014. This had led to as much as €2bn being set aside by Irish banks to meet compensation claims. In response the Central Bank of Ireland published a report titled, “Behaviour and Culture of the Irish Retail Banks“, where they clearly outlined their motivations:
“Cultural failings within the banking sector were a significant contributory factor in the financial crisis. They were also a trigger for the Central Bank of Ireland’s Tracker Mortgage Examination, which found that such failings, in addition to poor systems, weak internal controls and poor governance, caused detrimental and in some cases devastating impacts on consumers.”
The resulting regulation, the Senior Executive Accountability Regime (SEAR) relies heavily on the UK’s SM&CR, similarly imposing responsibilities on firms and individuals. There have also been delays in introducing the required regulation due to Covid, Brexit and a number of other factors. It is expected imminently with the Irish Minister for Finance seeking legal advice from the Attorney General’s office towards the end of 2020 indicating draft legislation will soon be introduced.
Hong Kong – MIC
Hong Kong’s Securities and Futures Commission (SFC) introduced the Manager-In-Charge (MIC) regime in 2017. There are again similarities with SM&CR with firms needing to allocate eight pre-defined core functions to a nominated “manager-in-charge” and submitted on an organisational chart which has parallels with the UK’s Management Responsibilities Map. When introduced the regime did not feature any legal or enforcement requirements, but it has increasingly been used to identify senior managers when legal proceedings are brought. This has resulted in an increased focus on the regime by senior executives.
Singapore – IAC
The Monetary Authority of Singapore (MAS) has also introduced guidelines for its own Individual Accountability and Conduct (IAC) regime. Unlike the previously mentioned regulations the IAC does not require any additional submissions and MAS is relying on existing supervisory mechanisms instead. However, the IAC will still require firms to map key responsibilities and assign them to senior executives in the same way as the UK’s SM&CR. The effective date is currently set at the 10th September 2021.
Whilst it is too early to speculate on whether an EU wide Accountability Regime may be forthcoming, the ECB have been in ongoing consultation with regards to introducing some aspects into the Capital Requirements Directive (CRD). Elements that have been discussed in formal consultation papers have included many elements of SM&CR including key function holders, statements of responsibilities, and responsibility maps. Given developments in Ireland, and the Banker’s Oath that is required in Belgium and the Netherlands, indications are that the ECB are open to implementing a European wide scheme in the near future.
With the largest financial market in the world and many banks which played a key role in the Global Credit Crisis, the US was a key proponent of regulatory reform under the Obama administration with far reaching regulation such as the Dodd-Frank Act. The regulation of financial markets may have taken a back seat under Trump, but things are set to change under the Biden administration and with new stewardship at the Securities Exchange Commission (SEC). One topic that will no doubt be high on any progressive agenda will be the admission that individual accountability is still lacking in the US financial system. With a sharp rise in US fraud and a spike in whistleblowing it is easy to see how a regime like SM&CR could soon be attractive to the DoJ and the SEC.
From Conduct to Competence
In the UK, where these regimes are furthest along, there is a very specific link to Training & Competence, which is expected to be replicated in other regimes that model themselves on SM&CR. Under the regime a dedicated senior manager must individually be responsible for Certification. This has given an additional focus on to the process of Certification and to ensuring that staff are Fit & Proper. The key question that firms are increasingly having to answer is how can staff be considered Fit and Proper if there is no competence validation? Therefore, having the right evidence for competency is one of the key touchpoints for organisations and one that links together how firms manage their responses to SM&CR and their framework for Training & Competence. Is is really this activity which has most closely tied together Conduct, Competence, and Culture at Financial firms in the UK, and soon to be around the world.