Senior managers fear being left on the hook under new rules

Written by: Owen Walker
Published on: 9 May 2018

Source: Financial Times, published on 26 March 2018

Managers at 47,000 UK financial services companies will carry greater accountability for failings on their watch under new reforms, which could leave certain roles harder to fill.

The so-called senior managers and certification regime (SMCR) was a response by the Financial Conduct Authority, the UK industry regulator, to a string of scandals — from Libor-rigging to payment protection insurance mis-selling — that have tarnished the reputation of the UK’s finance sector. 

In the decade since the financial crisis, global regulators have switched their attention from companies to individuals.

But the latest push for personal accountability has led to fears that experienced executives could be put off from taking up leadership positions in finance companies. 

“Every chairman of a regulated financial institution — from small financial advisers right through to large asset managers — could be held individually accountable for wrongdoing in their business,” says David Biggin, an adviser at PA Consulting Group. “We predict an increased shortage of suitable and willing candidates for these roles.” 

SMCR has its origins in similar rules that have been brought in to cover banking and building society executives since 2000. Under these rules, bank bosses have to be pre-approved by regulators and need to adhere to a code of conduct that covers culture, ethical behaviour and oversight.

The FCA has since announced it plans to roll out the updated requirements to cover all financial services companies. While not all will be treated as stringently as banks, a group of 350 of the largest and most complex companies would come under the same rules. 

Speaking at an FCA conference last week, chief executive Andrew Bailey highlighted the senior managers regime as one of the most important developments since the crisis for incentivising a positive culture in financial services.

Insurers, which already operate under a similar regime, will transfer to the SMCR in December, with other finance companies expected to join next year. The rules call on companies to outline who is responsible for important decisions and to improve staff training. 

Executive directors, board chairmen and compliance officers will need to be approved by the FCA as senior managers. At banks and the biggest companies in other industries, non-executive directors — those who do not have a management role at the company — are also classed as senior managers. 

Non-executive directors are valued for their independence from the company they oversee and for their outside perspective. But the new regime is expected to make it harder for companies to attract such individuals. 

“There is nervousness among chairmen and senior independent directors,” says Mark Turner, managing director of the UK compliance and regulatory team at Duff & Phelps, a consultancy. 

He says highly experienced people may be more inclined to look for directorships in other industries that place less emphasis on personal accountability. “Certain non-executive directors have got skills that are transferable and skills that have come out of other industries that are not as regulated,” he says. 

Mr Turner says lenders have struggled to recruit non-executive directors since they came under the accountability rules in 2016. He says he would not be surprised if candidates started demanding more money to carry out the role due to the added personal risk. 

In a recent survey of professionals who would fall under the new rules, conducted by Bovill, a regulatory consultancy, respondents were asked whether the rules would make it harder to attract quality candidates to senior roles due to increased personal liability — 44 per cent agreed or strongly agreed. Just 24 per cent disagreed or strongly disagreed, with the remaining 32 per cent neither agreeing nor disagreeing. 

Peter Wright, a partner specialising in financial services regulation at Fox Williams, a law firm, says the new rules could unintentionally make non-executive directors less independent.

“Your typical non-executive director does not have access to internal company information,” says Mr Wright, who formerly worked at the Financial Services Authority, a predecessor to the FCA. 

“The more you raise this issue of professional accountability, non-executive directors are becoming more and more engaged in the business and taking more decisions — which leads to the question of whether they are doing what they should be doing,” he says. “It’s a really big issue.” 

Mr Turner agrees, adding: “If you push that too far they become de facto executives and they are less independent, which is not what they were brought in to be.”

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