Proposed ‘u-turn’ on the Presumption of Responsibility?
16 October 2015
Although controversial, the Presumption of Responsibility has been one of the key components of the regulators’ proposals for the Senior Managers Regime. This made it all the more surprising when the government published a draft bill yesterday that proposed to abolish the Presumption of Responsibility (even before it has come into force).
Why all the fuss about the Presumption of Responsibility?
The Presumption of Responsibility has been the most headline-grabbing aspect of the new Senior Managers Regime. It was intended to reverse the burden of proof in enforcement cases against Senior Managers. Senior Managers would need to prove to the FCA or the PRA that they had taken all reasonable steps to prevent a breach from occurring or continuing. Failure to do so could result in enforcement action being taken against a Senior Manager personally.
The FCA and the PRA have been fully supportive of the Presumption of Responsibility, which came from a recommendation made by the Parliamentary Commission on Banking Standards. The FCA said that it would address ‘a key concern… that bankers have not taken their regulatory responsibilities seriously… while, at the same time, making it easier for us to take action against individuals who have not’ properly discharged their responsibilities. The FCA also said that the Presumption of Responsibility would ‘enhance governance within deposit-taking institutions and reinforce the importance of meeting regulatory obligations’.
In the early hours of yesterday morning, press stories started to appear which suggested that the government had decided to scrap the Presumption of Responsibility. This news came out of the blue - even to those of us who have been closely following the regulators’ plans for the new regime.
Shortly afterwards, the government published a draft bill – the Bank of England and Financial Services Bill. The draft bill was put before the House of Lords a couple of days ago for its first reading.
The draft bill proposes deleting the section of the Financial Services and Markets Act 2000 (s66A(6)) which contains the Presumption of Responsibility. It proposes a new provision in its place (s66A(5)(d)). This new provision states that, in order to take enforcement action, the regulators must show that a Senior Manager: ‘did not take such steps as a person in the senior manager’s position could reasonably be expected to take to avoid the contravention occurring (or continuing)’. This concept (to be known as the ‘duty of responsibility’) essentially codifies the current position regarding the burden of proof on the FCA in enforcement cases against individuals.
The draft bill is due to be debated by the House of Lords on 26 October 2015.
But it ‘was never a panacea’ says the FCA
Both the FCA and the PRA have acknowledged the proposal to abolish the Presumption of Responsibility. In a statement, Tracey McDermott (acting CEO of the FCA) admitted that the Presumption of Responsibility ‘could have been helpful’ but added that it ‘was never a panacea’. Ms McDermott also described the Presumption of Responsibility as ‘one, small element of the reforms’ which is perhaps an understatement given the emphasis that the FCA has previously placed on this aspect of the new regime and the implications that it would have had in practice.
Why has the government changed its mind so late on?
The Presumption of Responsibility had been on the legislative cards since the enactment of the Financial Services (Banking Reform) Act 2013 in December 2013. So why – almost two years later and a mere four months before the new regime comes into force – has the government suddenly decided to get rid of it?
It is likely that a number of factors have been at work here:
- A distraction? First, as the FCA has acknowledged, the Presumption of Responsibility ‘risked distracting senior management within firms from implementing both the letter and spirit of the regime’. In practice, we were certainly seeing Senior Managers within firms spending increasing amounts of time mulling over their potential liability under the new regime. In addition, firms were gearing up to put in place very extensive arrangements around their Senior Managers to ensure that all of their key discussions and decisions were documented in detail. All of this may well have distracted firms and Senior Managers from being able to get on with their business.
- Recruitment issues? Second, I think firms were concerned that they would find it difficult to attract people to fill Senior Manager roles. There was a risk suitable candidates would prefer to work overseas or in other industries, where they may not be caught by the new regime. These concerns were voiced by firms and practitioners to the regulators, as well as to HM Treasury.
- A new era? Third, perhaps the u-turn about the Presumption of Responsibility is a sign of things to come. There have already been indications that, under the new Conservative government, HM Treasury is keen to move away from the harsh enforcement approach that we have seen the regulators take in relation to the banks over the past few years. It will be interesting to see what impact this has when HM Treasury is considering who should be Martin Wheatley’s successor as CEO of the FCA.
- Human rights concerns? Fourth, there were concerns about the Presumption of Responsibility and potential infringements of Senior Managers’ human rights. Such concerns received little air-time, but perhaps would have become more prominent if the FCA had attempted to take enforcement action against an individual relying on the Presumption of Responsibility.
Behind closed doors I would not be surprised if the regulators see this u-turn as a setback for their enforcement agendas. They will need to carefully re-think the approach they were proposing to take to enforcement action against Senior Managers.
So can Senior Managers now breathe a sigh of relief?
Not quite yet. The draft bill is at a very early stage in the legislative process and may be subject to further amendments (as is described here). However, it appears that a clear policy decision has been taken by the government regarding the Presumption of Responsibility and that this has been accepted by the regulators. As a result, I would be surprised if we see a re-introduction of the Presumption of Responsibility before March 2016.