The new regime for banks individual accountability. Simon Morris & Alison McHaffie October 2014

Transcription

1 The new regime for banks individual accountability Simon Morris & Alison McHaffie October 2014

2 Looking at 1) The new regime 2) Rules & enforcement 2

3 The new regime 3

4 Individual approval background Barings & Morgan Grenfell weak management oversight FSMA 2000 Individual approval focus on probity Collapse Northern Rock, B&B, RBS & HBOS more collective managerial responsibility Focus 2008/09 shifting to competence and ability Failure of FSA/FCA to act against senior managers But no-one was responsible, & concerns over LIBOR & FX Further changes for banks 4

5 The policy drivers for the change Parliamentary Commission on Banking Standards 1. Individual approval did not cover enough staff under 10% of bank staff were individually approved 2. There was a lack of clarity over who was responsible for individual decisions at financial institutions lines of responsibility were too often unclear or confused 3. The regulator focused on the approval stage of the process with the burden of proof resting on the regulator to take action for subsequent misconduct. 4. Overall, the system of individual approval was a complex and confused mess which failed to perform to the necessary standard. 5

6 Who s in scope? APER is replaced for Banks Building societies PRA-regulated broker dealers 6

7 What s in scope? 1. Senior manager regime Board, ExCo layer & significant managers Prior approval Statement of responsibility 2. Certification regime Risk of significant harm Bank must certify 3. Most other staff Subject to code Need to train 7

8 What s the timetable? 31 October 2014 current consultation closes 31 December 2014 final rules 30 June 2015 All SIFs grandfathered if no change Rules commence for SMFs & certified 31 December 2015 Complete certification exercise Rules commence for remaining bank staff 8

9 What s the project? 1. Major regulatory change project a) Establish the project team b) Manage expectations 2. Scope the impact a) Employment issues b) Holding companies & overseas companies c) Non-banks in the group d) Individuals at the margin e) Overlaps f) Embedding F&P tests g) Adapt rather than create 3. Document process & procedures a) What s changed? b) What governance/oversight? c) What templates? d) With an eye on deliverables I. Statement of responsibility II. Responsibilities map e) What do we do differently? 4. Identify affected staff a) Procedures b) Training c) Assurance 9

10 Running the project The key issues 1. Scope the changes 2. Procedures 3. Train 4. Assure The key points 1. The scoping 2. The templates 3. The midway review 4. The final QA 10

11 Senior manager regime The test 1. Responsible for managing = take/participate in taking decisions 2. One or more aspects of firm s regulated activities 3. With risk of serious consequences The process 1. Statement of responsibility 2. Satisfied F&P with annual refresh The consequence 1. Must be F&P 11

12 PRA PRA Senior Management Functions for Relevant Firms Executive Chief Executive Function Chief Finance Function Head of Internal Audit Head of key business area - 10b assets/20% revenue Group entity senior manager Reporting line Committee structure Non-Executive Chairman Chair of the Risk Committee Chair of the Remuneration Committee Senior Independent Director 12

13 Prescribed responsibilities that must be allocated to a PRA SMF 1. Implementation and oversight of regime 2. Performance under the Certification Rules 3. Compliance with management responsibilities map 4. Training senior management 5. Internal audit ops & integrity 6. Compliance ops & integrity 7. Risk ops & integrity 8. Whistleblowing 9. Allocation of all prescribed responsibilities 10.Developing culture and standards 11.Embedding culture and standards 12.Maintaining business model 13.Allocation & maintenance of capital, funding & liquidity 14.Treasury management functions 15.Financial information and regulatory reporting 16.Recovery plan and resolution pack 17.Proprietary trading activities 18.Overseeing risk management (if no CRO) 19.Overseeing outsourced internal audit function 20.Overseeing Chairman if no SID 13

14 FCA Additional SMFs 1. All other board members 2. MLRO & Compliance oversight 3. NomCo chair 4. Significant responsibility SMFs at ExCo level delegated board authority & report directly to board 14

15 Significant responsibilities that must be allocated to an FCA SMF 1) Establishing and operating systems and controls in relation to financial crime 2) Safekeeping and administration of assets of clients 3) Payment services 4) Settlement 5) Investment management 6) Financial or investment advice 7) Mortgage advice 8) Corporate investments 9) Wholesale sales 10) Retail sales 11) First line quality assurance of sales 12) Trading for clients 13) Investment research 14) Origination/syndication and underwriting 15) Retail lending decisions 16) Wholesale lending decisions 17) Design and manufacturing of products intended for wholesale customers 18) Design and manufacture of products intended for retail customers 19) Production and distribution of marketing materials and communications 20) Customer service 21) Customer complaints handling 22) Collection and recovering amounts owed to a firm by its customers/arrears 23) Middle office 24) The firm s information technology 25) Business continuity 26) Human resources 15

16 Combined list of PRA and FCA Senior Management Functions Chief Executive function SMF1 PRA Chief Finance function SMF2 PRA Executive Director SMF3 FCA Chief Risk function SMF4 PRA Head of Internal Audit SMF5 PRA Head of key business area SMF6 PRA Group Entity Senior Manager SMF7 PRA Credit Union SMF (small credit unions only) SMF8 PRA Chairman SMF9 PRA Chair of the Risk Committee SMF10 PRA Chair of the Audit Committee SMF11 PRA Chair of the Remuneration Committee SMF12 PRA Chair of the Nominations Committee SMF13 FCA Senior Independent Director SMF14 PRA Non-Executive Director SMF15 FCA Compliance Oversight SMF16 FCA Money Laundering Reporting SMF17 FCA Significant Responsibility SMF SMF18 FCA 16

17 Responsibility: Statements & Map Statement of responsibilities Prepare & lodge when seeking approval Contents Responsibilities map To ensure collective allocation of responsibilities complete Single, comprehensive up-to-date document Describing management and governance arrangements Detailed lines of reporting and responsibility and of the persons who perform them, including where they are shared or divided between persons. Details of management and governance relating to the firm s main business areas and governance functions 17

18 Significant harm certification regime Test Could the person cause significant harm to firm or customers ( SMF) Not PRA/FCA approved but firm certifies F&P annually refreshed Who s caught PRA significant risk takers (as in Remuneration Code) FCA material risk takers plus 18

19 FCA specified significant harm functions CASS oversight Benchmark submission and administration Proprietary trader Senior manager such as head of unit or member of the decision-making committee with significant responsibility for a significant business unit that Carries on credit related activity Makes material decisions on the commitment of the firm s resources Processes settlements or client money Carries on other designated business activities Functions requiring qualifications within TC Managers of certification employees Functions with a material impact on the firm s risk profile and which might involve the risk of significant harm to the firm or its customers. SYSC

20 Fit & proper Core test for senior management Employer must be satisfied certified staff fit & proper Target for wider bank staff What s it mean Honesty Competence Gets the new standards Firms due diligence will be scrutinised Supervision will measure ongoing use of F&P criteria 20

21 Referencing Firms seeking to appoint someone to either an SMF or a certification function must request a reference from the candidate s past employer(s) covering their previous five years employment history. These references will need to disclose, if applicable: facts that led a previous employer to conclude that the candidate breached a Conduct Rule, and a description of the basis and outcome of disciplinary action taken in relation to a breach by the candidate of any of the Conduct Rules. 21

22 Rules & enforcement 22

23 Individual conduct rules Industry-wide To shape firms culture, standards and policies Common to both regulators (but different guidance) Applies to conduct as employee Limited application to incoming branches, especially EEA firms PRA SMF & certification staff FCA SMF, certification staff & most other staff 20 classes of exclusion (reception, security, cleaners ) 23

24 First tier Individual Conduct Rules Rule 1: You must act with integrity. Rule 2: You must act with due skill, care and diligence. Rule 3: You must be open and cooperative with the FCA, the PRA and other regulators. FCA only additional Individual Conduct Rules Rule 4: You must pay due regard to the interests of customers and treat them fairly. Rule 5: You must observe proper standards of market conduct. 24

25 Rule 1: You must act with integrity. Similar issues to APER a. Misleading the regulator during an investigation, or false returns b. Knowingly breaching rules c. Dishonest personal gain overcharging client, secret profit d. Deliberately concealing losses e. Acting against customer interests deliberate or reckless breaches f. Breaching internal policies false MI 25

26 Rule 2: You must act with due skill, care and diligence. Similar issues to APER a. Inadequate oversight of sales operations b. Not consulting compliance before dealing c. Making unfair customer communications d. Recommending a product you did not understand 26

27 Rule 3: You must be open and cooperative with the FCA, the PRA and other regulators. Similar issues to APER a. Intentionally submitting inaccurate regulatory return b. Confirming capital was adequate without getting injection arranged c. Failing to advise that firm was in breach of capital requirement d. Lying to a regulator, obstructing an investigation or concealing documents 27

28 Rule 4: You must pay due regard to the interests of customers and treat them fairly. Similar issues to Tribunal cases on breach of fit & proper a. Turning a blind eye to obvious problems and failing to follow up suspicions; b. Introducing customers to unregulated overseas insurers; c. Pressuring advisers to sell without regard to suitability; d. Wilful disregard of statements inconsistent with what customers are being told; e. Failure to appreciate a conflict when giving advice; f. Approving financial promotions for an overseas firm ignoring warning signs that it would not treat customers fairly; and g. Effecting unauthorised transactions and transfers between client portfolios. 28

29 Rule 5: You must observe proper standards of market conduct. Similar issues to APER a. Abusive short selling impacting non-eu market b. Selectively disclosing pre-publication research c. Disclosing client confidential information without wall-crossing them 29

30 Second tier Senior Manager Conduct Rules SM1: You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively. SM2: You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with relevant requirements and standards of the regulatory system. SM3: You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively. SM4: You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice. 30

31 Senior manager conduct rules Control comply delegation Similar issues to APER a. FD overseeing 50m unrecorded debit balances b. Chief Exec knowing retail suitability of only 60% c. Chief Exec running high risk business knowing weak controls d. Chief Exec expanding business without skills or systems 31

32 The FCA will able to enforce: All senior managers all Conduct Rules (1 5 & SM 1 4). FCA Certification regime Conduct Rules 1 5 All non-ancillary employees Conduct Rules 1 5 The PRA will be able to enforce: All senior managers Conduct Rules (1 3 & SM 1 4) PRA Certification regime Conduct Rules

33 FCA disciplinary action 1. An approved person, or an employee of a relevant authorised person failed to comply with FCA rules of conduct 2. An approved person, or an employee of a relevant authorised person, has been knowingly concerned in an authorised person s contravention of a relevant requirement 3. A relevant authorised person contravened a relevant requirement which fell within the responsibility of a senior manager to perform a designated senior management function unless he can show he took reasonable steps to avoid the contravention 33

34 PRA disciplinary action 1. An approved person, or employee of a relevant PRA-authorised person, has failed to comply with PRA rules of conduct 2. An approved person performing a relevant senior management function, or employee of a relevant PRA-authorised person, has been knowingly concerned in a PRA-authorised person s contravention of a relevant requirement 3. A relevant PRA-authorised person contravened a relevant requirement which fell within the responsibility of a senior manager unless he can show he took reasonable steps to avoid the contravention 34

35 And a new criminal offence A person who performs a senior management function commits an offence if He takes, agrees to the taking of, or fails to take such steps that he could to prevent being taken A decision by or on behalf of the institution as to the way in which the business of a group institution is to be carried on When he is aware of a risk that the implementation of a decision may cause the group institution to fail The implementation of that decision actually causes the failure of the group institution His conduct falls far below what could reasonably be expected of someone in his position. 35

36 So what should each senior manager do? Carry out a detailed initial assessment and continuous monitoring Assess operational risk framework Assess governance and controls Due diligence on appointment and clarity on role and responsibilities Ensure MI covers risks not restricted to commercial and financials Reassess as business changes Think wider implications at all times 36

37 Responsibility will be personal Defences such as the following will be unlikely to succeed 1. Unfair to pick me out 2. My conduct was not beyond the range of plausible judgement 3. The FCA/PRA never criticised us 4. The strategy was agreed by the Board 5. I didn t design the controls 6. It was the deteriorating economy that caused it 7. I did take some steps to improve things 37

38 At all times considering... What did you know What did you do On what information Who did you ask How did you monitor What improvement? What were the governance arrangements? UK / UK /

39 And for firms... A notification obligation if aware or suspect a person has breached the rules when they have taken formal disciplinary action following breach of the rules (with 7 days for some or quarterly for others) UK / UK /

40 The new regime Any questions? 40