Heads on the Block: Personal Accountability in the New Regulatory Regime

By Elly Proudlock, WilmerHale

Tracey McDermott, former director of enforcement and financial crime at the Financial Conduct Authority (“FCA”), recently spoke of the agency’s commitment to “make clear to those at the top of firms that by their accepting their jobs, and the rewards that come with them, they take on personal accountability”. This sentiment is not new – the FCA, like its predecessor, has for some time declared itself committed to holding members of senior management to account and to pursuing more cases against individuals.

The Financial Services (Banking Reform) Act 2013 (“the Act”) has introduced a number of important changes to the financial regulatory regime, aimed precisely at assisting the FCA (and its sister organisation, the Prudential Regulation Authority) in this objective.  The FCA has historically encountered evidential difficulties establishing personal culpability – as illustrated, for example, by its 2012 defeat in the case of UBS banker John Pottage.  The new regime sets out to make such obstacles a thing of the past.

Due to come into force in March 2016, the provisions will apply to all UK-incorporated banks, building societies, credit unions and investment banks.  It will also cover UK branches of foreign firms.

Presumed guilty

Elly Proudlock

A key feature of the new regime is a reversal of the burden of proof in relation to senior managers,who will be liable to enforcement action if a breach occurs in an area for which they were responsible at the time, unless they can demonstrate that they took all reasonable steps to avoid the breach.  For the first time, the burden is on the individual to rebut a presumption of guilt – not on the FCA to prove it.

Whilst the new “senior management function” (“SMF”) is designed to capture a smaller population than the existing “significant influence function”, there is nevertheless a substantial list of key functions to which the FCA expects it to attach. These include board members, executive committee members, the heads of key business areas, the heads of key control functions and anyone performing a “significant responsibility” SMF- broadly one for which responsibility has been delegated by the board and in relation to which the person performing it is accountable to the board.  A number of specified non-executive roles will also be covered.

The FCA will expect to see a “statement of responsibilities” accompanying all applications for approval in respect of senior management functions, and firms will be required to notify the FCA whenever there are significant changes to those responsibilities. In bringing enforcement action, the FCA will rely on those statements as evidence of what an individual signed up to.  It is therefore critical, for both firms and individuals, that such statements are carefully drafted and expert legal advice sought as appropriate.

A new criminal offence

It will become a criminal offence for a senior manager of a financial institution to take (or agree to the taking of) a decision, or fail to take steps to prevent the taking of a decision, which when implemented causes the institution to fail. The offence will apply only to senior managers in UK-incorporated banks and investment banks.  Unlike the other features of the senior managers regime, it cannot be extended to non-UK firms.

The offence was introduced following a recommendation by the parliamentary commission on banking standards, which found that regulators were almost powerless to bring sanctions against those who presided over catastrophic failures within banks. However, the reality is that the new offence will be difficult to prosecute.Not only is liability severely limited by the required state of mind (the senior manager must have been aware at the time that the relevant decision may cause the institution’s failure) but the relevant threshold – the failure of the institution – is very high.  Causation will also be a substantial hurdle to overcome – it is difficult to imagine many cases, if any,where it will be possible to prove that the implementation of a single decision has caused the failure of an entire bank.

So whilst the new criminal offence may be superficially attractive in this post-crisis era, it will do little to change the enforcement landscape.  In contrast, new the regulatory measures on the horizon represent a significant additional burden for firms and will undoubtedly make it far easier for the FCA to bring and win action against senior individuals.  Armed with signed job descriptions and divested of its burden of proof, we should expect the FCA to apply itself with renewed vigour to the task of holding individuals to account.

Elly Proudlock is counsel in WilmerHale’s London office,… specialising in white collar crime and financial services enforcement. She acts in Serious Fraud Office (SFO) and Financial Conduct Authority (FCA) investigations, representing companies and individuals facing allegations of fraud, bribery and corruption, insider dealing, market manipulation and other misconduct.  She was recommended in the 2014 edition of The Legal 500 UK for her “excellent understanding of the regulatory issues” and “confident accuracy.”