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13 Oct 2014

The New Regulatory Regime for Individuals: 'Embrace the new rules, or quit'


Regulatory litigation alert email

Tuesday 14 October 2014

Recent reports that senior executives in banking are considering stepping down, on account of prospective implications of the new regulatory regime for individuals, illustrate the impact that these most recent reforms are already having in the City.

The governor of the Bank of England has made clear that Regulators will not back down. Mr Carney's response to reports of senior resignations has been widely reported this week as "embrace the new rules, or quit".

In this series of three short briefings, Tony Woodcock and Alan Ward consider the most significant elements of the proposed new regulatory regime for individuals in banking, including:

1) The Senior Managers Regime;

2) The Certification Regime; and

3) The Conduct Rules.

The New Senior Managers Regime

“Maybe they were not at the best tables in society after [the financial crisis], but they’re still at the best golf courses. That has to change.”

Mark Carney, October 2014

In its report of June 2013 – "Changing Banking for Good" – the Parliamentary Commission on Banking Standards (“The Commission”) recognised that:

"The public are rightly appalled by the small number of cases in which highly-paid senior bankers have been disciplined for the costly mistakes they have allowed to occur on their watch”.

The Commission’s proposed solution was:

“A Senior Persons Regime to replace the Significant Influence Function element of the Approved Persons Regime. This should provide far greater precision about individual responsibilities than the system that it replaces.”

On 30 July 2014 the Prudential Regulatory Authority (“PRA”) and Financial Conduct Authority (“FCA”) released a joint consultation paper – "Strengthening Individual Accountability in Banking; a new regulatory framework for individuals" (“The Consultation”) – setting out how the regulators proposed to give effect to the new regime.


The new Senior Managers Regime will replace "Significant Influence Functions" for “relevant firms”, which are: UK banks, building societies, credit unions and PRA-designated investment firms. Elsewhere in financial services, for the time being, the existing Approved Persons regime will remain in place.

As per the Commission’s recommendation, the new Senior Managers Regime will apply to "a relatively small number of individuals at the very top of the organisation". In practice, this will mean "the board, plus the executive committee, i.e. the top two layers of governance".

Also included will be the heads of key business areas, and those responsible for important control functions, such as Money Laundering Reporting and Compliance Oversight.

In practical terms, whereas at present there are around 1,200 individuals in banking authorised to undertake Significant Influence Functions, a smaller number of Senior Managers will require approval under the new regime.

Documenting Responsibilities

One of the main drivers behind the new regime is a desire to "make individual responsibility a reality".

In furtherance of that aim, when applying for an individual to be approved for a Senior Management Function, or whenever there is a significant change in a Senior Manager’s responsibilities, a firm will need to submit:

  • A Statement of Responsibility: which is “a statement setting out the aspects of the affairs of the [firm] which it is intended that the person will be responsible for managing”;
  • A Responsibilities Map, which sets out how various responsibilities interact; and
  • Further information, including CVs, job descriptions and organisational charts.

It is likely that the identification and allocation of responsibility to specific individuals, and the creation of responsibility maps, will represent a significant undertaking for compliance departments in relevant firms.

Enhanced Senior Accountability

The Commission echoed and adopted a criticism that has been widely made of regulatory process since the financial crisis, regarding the low number of enforcement cases brought against those responsible for significant failings in banks.

To address this perceived shortcoming the new framework will introduce a "Presumption of Responsibility".

If a firm breaches a regulatory requirement, the Senior Manager responsible for the area of the firm in which the breach occurred will be presumed to be individually responsible, unless they are able to satisfy the regulators that they had taken “reasonable steps” to stop, prevent, or remedy the breach.

Enforcement action against Senior Managers may now come from three different directions:

  • An individual breach of the (new) Conduct Rules;
  • Being “knowingly concerned” in a contravention by the firm; or
  • A contravention of the Rules in an area of the firm which that Senior Manager is responsible for.

Practical Implications

One of most important practical imperatives created by the new regime for Senior Managers will be to ensure that the suite of documents envisaged by the Regulators are not only clear, accurate and precise as to where responsibilities lie, but are understood and signed-off by all relevant Senior Managers.

In addition, Supervisors will expect to see these materials treated as “living documents”, widely disseminated to all concerned, and kept scrupulously up-to-date.