Senior Managers Regime – proposed "u-turn" on the Presumption of Responsibility?
The Presumption of Responsibility was one of the key components of UK regulators' proposals for its Senior Managers Regime.
This made it all the more surprising when the UK Government published a draft bill on 15 October 2015 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"27 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".
A proposed "u-turn"?
In the early hours of 15 October 2015, 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 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 was 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,28 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 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, firms were concerned that they would find it difficult to attract people to fill Senior Manager roles. There was a risk that 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.
Regulators may privately consider this u-turn as a setback for their enforcement agendas. They will need to re-think carefully the approach they were proposing to take to enforcement action against Senior Managers.
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.29 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, it seems unlikely that we will see a reintroduction of the Presumption of Responsibility before March 2016.
Other last minute updates
Other proposed amendments that will impact investigations include:
- scrapping the statutory requirement that breaches and suspected breaches of the Code of Conduct committed by all employees must be reported to the regulators; and
- changing the application of the Code of Conduct, so that it applies to all non-executive directors.
The draft bill also laid the path for the extension of the new regime to other firms, such as asset managers.
No statutory requirement to report breaches and suspected breaches of the Code of Conduct
Firms were going to be required to report breaches and suspected breaches of the Code of Conduct committed by all employees to the regulators. Many saw this as a potentially onerous requirement for firms. In particular, concerns were raised about the low legal threshold for a "suspected" breach in this context. It was feared that this would result in firms having to report lots of individuals to the regulators, with allegations against many turning out to be unfounded.
Over the past few months, the regulators have been steadily watering down their proposals relating to notifications of breaches and suspected breaches of the Code of Conduct. However, the Government has taken this one step further and decided to scrap the statutory requirement for these notifications altogether. According to a policy statement published by HM Treasury,30 the rationale for this decision was that it would "result in a reduction in the cost to business of complying with" the new regime.
The Financial Services and Markets Act 2000 (FSMA) (s64C(1)) still requires firms to notify the regulators if they take disciplinary action against an employee for conduct which amounts to a breach of the Code of Conduct. However, it is not clear what additional or amended guidance (if any) the regulators will now publish about notifications of breaches of the Code of Conduct. Instead of publishing further guidance, the regulators may simply rely on firms' existing obligations under FCA Principle 11 and PRA Fundamental Rule 7 to notify them of issues relating to employees.
Applying the Code of Conduct to all nonexecutive directors
Earlier this year, the regulators decided that only certain nonexecutive directors (the chairman and those chairing board committees) would be covered by the new regime. This meant that all other "standard" non-executive directors would not be subject to the new regime – including the new Code of Conduct.
However, this has now changed. The draft bill published last week extends the scope of the Code of Conduct so that it will apply to all those sitting on the board of an in-scope firm (including all non-executive directors).
It is fair to say that most – if not all – "standard" non-executive directors would prefer not to have been subject to the Code of Conduct. However, hopefully this proposed change will not create too much unrest amongst these individuals. Non-executive directors are already subject to the FCA's Statement of Principle and Code of Practice for Approved Persons (APER) and risk enforcement action if they breach one of its provisions. As a result, firms may be able to position this change in policy as a slight shift in the rules that existing non-executive directors are already required to comply with, as opposed to a significant overhaul of their obligations and potential personal liability.
Laying the groundwork for the extension of the new regime to other firms
The Fair and Effective Markets Review recommended that the Senior Managers and Certification Regime should be extended to apply to a broader range of firms. Asset managers, MiFID firms and brokerdealers were all mentioned.
The draft bill lays the groundwork for the extension of the Senior Managers and Certification Regime to other firms. HM Treasury justified the proposed extension of the new regime by saying that it "will create a fairer, more consistent and rigorous regime for all authorised financial services firms".
The FCA and the PRA will need to consult on the specifics of how the new regime might apply to other types of financial institution, including how it will apply to larger and smaller firms.
However, in any event, it looks like the Senior Managers and Certification Regime is some way off for other types of firms. HM Treasury has said that the new regime should come into force for these firms in 2018.
Where on the web
A version of this article first appeared on the Allen & Overy Investigations Insight Blog: http://www.aoinvestigationsinsight.com/.
27 See: https://www.fca.org.uk
29 As is described here: http://services.parliament.uk/bills/20 15- 16/bankofenglandandfinancialservice s.html.