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HEADS ON THE BLOCK: PERSONAL ACCOUNTABILITY IN THE NEW REGULATORY REGIME

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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

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.”

Business

Bank of England sets out interim ‘bail-in’ debt targets for banks

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Bank of England sets out interim 'bail-in' debt targets for banks 1

via Reuters

LONDON (Reuters) – The Bank of England on Tuesday set out interim levels of special debt that banks including HSBC, Barclays and Lloyds must issue over coming years for writing down in a crisis to avoid taxpayer bailouts.

The BoE said it would review how the minimum requirement for own funds and eligible liabilities or MREL is calibrated, and the final compliance date before setting “end state” amounts.

“In doing so, we will have regard to any intervening changes in the UK regulatory framework,” it said in a statement.

(Reporting by Huw Jones; Editing by Andrew Heavens)

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British firms call for immediate $10.3 billion in COVID aid

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British firms call for immediate $10.3 billion in COVID aid 2

via Reuters

By William Schomberg

LONDON (Reuters) – British firms called on Tuesday for another 7.6 billion pounds ($10.3 billion) of emergency government help, saying they cannot wait until finance minister Rishi Sunak’s March budget to learn if they will get more pandemic support.

With Britain back under lockdown and companies adjusting to life after Brexit, firms are taking big decisions about jobs and investment and need to know if their financial lifelines will be extended, the Confederation of British Industry said.

“We just have to finish the job. Now would be a very odd time to end that support,” CBI Director-General Tony Danker said in a statement.

Sunak has extended his support measures several times already and has said his response to the pandemic will cost 280 billion pounds during the current financial year, saddling Britain with a peacetime record budget deficit.

But he is facing calls on many fronts to spend yet more including from lawmakers, some from his Conservative Party, who want an emergency welfare benefit increase to be prolonged.

The CBI said Sunak should extend until June his broad job retention scheme, which is scheduled to expire in April, and then follow it up with targeted support for jobs in sectors facing a slow recovery such as aviation.

He should give firms more time to pay back value-added tax which was deferred last year, grant a similar deferral for early 2021 and extend a business rates tax exemption for companies forced to close by the lockdown as well as their suppliers.

“The rule of thumb must be that business support remains in parallel to restrictions and that those measures do not come to a sudden stop,” Danker said.

The CBI said its longer-term priority was an overhaul of the business rates system that it said was outdated and discouraging investment in low-carbon energy.

Danker said it was too soon to start raising Britain’s corporation tax rate, one of the lowest among rich economies after a Times report that Sunak was drawing up plans to increase it to start fixing the public finances.

“It would be wrong to raise business taxes when we don’t have a recovery,” Danker said.

($1 = 0.7380 pounds)

(Writing by William Schomberg; Editing by Alexander Smith)

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BOJ’s policy review may make ETF buying more flexible – Reuters poll

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BOJ's policy review may make ETF buying more flexible - Reuters poll 3

via Reuters

 

By Kaori Kaneko

TOKYO (Reuters) – The Bank of Japan will likely focus on measures to make its purchases of risky assets, such as exchange-traded funds (ETF), more flexible as the economy comes under growing strain from a spike in COVID-19 infections, a Reuters poll found.

Analysts polled also revised down their economic projection for the fiscal year ending in March on expectations a recent resurgence of coronavirus infections would dent growth.

Economic activity could stall in the world’s third-largest economy from pandemic curbs and the BOJ may have to look at more effective ways to achieve its 2% inflation target as renewed infections force it to maintain its massive stimulus longer, analysts said.

The central bank said last month it would undergo an examination of its yield curve control and quantitative easing policies to seek ways to make them more “effective and sustainable”. Its findings will be released in March while new GDP estimates will be issued at its Jan. 20-21 policy meeting.

“The BOJ may be thinking of correcting distortions caused by its policy that could become an obstacle for maintaining its current framework through Governor (Haruhiko) Kuroda’s term that ends in early 2023,” said Izuru Kato, chief economist at Totan Research.

Asked what steps the BOJ would take when the central bank unveils its findings in March, 31 economists said the central bank would “make its ETF, J-REIT buying more flexible,” the poll conducted between Jan. 7-18 showed.

Eight analysts said the BOJ would revise its three-tiered deposit rate system that applies negative interest rates only to marginal excess bank reserves and two said the central bank would change the 10-year bond yield target to other durations.

The question allowed multiple answers.

The central bank will discuss ways to scale back a controversial programme that buys massive amounts of exchange traded funds without stoking market fears of a full-fledged retreat from ultra-loose policy, sources have told Reuters.

 

RENEWED STATE OF EMERGENCY

Japan expanded a state of emergency it declared for the Tokyo area earlier this month to seven more prefectures last Wednesday amid a steady rise in COVID-19 cases.

Many analysts expect the latest measures to inflict less damage to the economy than the stricter and broader curbs imposed in April and May last year.

In the poll, taken before the government’s decision to expand the state of emergency beyond the Tokyo area, analysts expected the economy to contract 2.4% in January-March. The poll had predicted a 2.1% expansion in December.

For the current fiscal year ending in March, the economy was forecast to shrink 5.5%, the poll found, slightly weaker than a 5.3% contraction projected last month.

The economy was expected to expand 3.3% in the fiscal year beginning in April, starting with 4.1% growth in the April-June quarter, the poll showed.

“Restrictions under the renewed emergency status are relatively moderate, so it could take a long time for infection numbers to fall,” said Hiroshi Namioka, strategist and fund manager at T&D Asset Management. “Downward pressure on prices could strengthen.”

Core consumer prices, which exclude volatile fresh food prices, will slip 0.5% this fiscal year before rising 0.2% next fiscal year, the poll found.

Economists were split on which direction the BOJ will move when it next changes policy.

Twenty-one of 39 analysts forecast the BOJ would scale down stimulus, while 18 said it would ramp up monetary support.

Sources have told Reuters the BOJ was likely to slightly revise up next fiscal year’s economic forecast and hold off on expanding stimulus at its Jan. 20-21 policy meeting.

 

(For other stories from the Reuters global economic poll:)

 

 

(Polling by Shaloo Shrivastava, Editing by Leika Kihara and Jacqueline Wong)

 

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