From global crisis to individual accountability – how to deal with financial services getting personal

It may have been ten years since the financial crisis unfolded but the regulatory and political fallout is still driving change for the financial services sector. The UK has been at the leading edge of developing a new approach to individual accountability – the Senior Managers and Certification Regime (SM&CR) – which is rolling out in the UK and beginning to be used as a blueprint around the world.

‘Ultimately, we need more individual accountability. Good corporate governance is forged by the ethics of its individuals. That involves moving beyond corporate “rules-based” behavior to “values-based” behavior. We need a greater focus on promoting individual integrity.’

Source: Christine Legarde, managing director, IMF in conversation with Janet Yellen, chair of the Board of Governors of the US Federal Reserve System (May 2015)

The focus on individual accountability and personal liability is entwined with a shift towards the consideration of culture and conduct risk as inherent parts of evolving regulatory expectations. The requirements around SM&CR are set out in detail in the rulebooks of the Financial Conduct Authority and the Prudential Regulation Authority. The requirements and expectations around culture and the management of conduct risk are, quite deliberately, not in any rulebook and are left to the firm to determine what ‘good’ might look like.

The mix of quantitative and qualitative expectations in terms of individual accountability is all part of a supervisory approach seeking to improve standards, ensure consistently good customer outcomes and discourage excessive risk taking and short-termism.

‘People capabilities are becoming more and more important to having the right culture. It’s not enough to be motivated to behave in a new way; people also need to understand how to be successful with the new behaviours. The accountability regime reinforces this view of culture and its key drivers. It sets a standard for the outcomes of culture and has an important impact on senior managers, on how a firm is governed and on people’s capabilities.’

Source: ‘Culture and conduct – extending the accountability regime’, speech by Jonathan Davidson, Director of Supervision – Retail and Authorisations, Financial Conduct Authority (September 2017)

Continuing Regulatory Change

The SM&CR has been in place for banks since March 2016 and is being rolled out to insurers in December 2018 and almost all other financial services firms a year later. Firms and their senior managers simply cannot afford to under estimate the level of skilled resources and effort needed to implement robustly all aspects of the SM&CR. A potentially substantial investment which will need to be made against the backdrop of continuing, wider, regulatory change.

A point borne out by the Thomson Reuters Regulatory Intelligence 9th annual report on the Cost of Compliance where over 800 respondents reported that the greatest compliance challenges the board expects to face in 2018 is/are:

Conduct and Accountability in Financial Services: A Practical Guide is aimed primarily at senior managers and practitioners in financial services firms operating in, from, or into, the UK. It provides a deeply practical, plain English overview of evolving regulatory expectations, obligations and resulting potential liability which will be of benefit to all staff in financial services firms. In particular, it sets out practical insight as to what senior individuals can and should do to identify, mitigate and manage their own personal regulatory risk.

Specifically, the guide is not by, or for, lawyers, rather it focuses on the qualitative aspects relating to personal liability and accountability.

Overall, the book demystifies and takes the undue complexity out of the seemingly profound changes arising from not only the roll-out of the SM&CR but also the evolving wider conduct expectations in financial services.

The authors, Stacey English and Susannah Hammond, are experienced compliance and risk professionals with the best part of 50 years of practical experience between them as practitioners in regulated firms, advisers and regulators.