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Brian McDonnell

Brian McDonnell and Paul Harris of Addleshaw Goddard LLP

News of the resignation of two non-executive directors at HSBC has reverberated around the City. Their departure is, arguably, just the beginning of the reaction to the imminent regulatory changes that will redefine the liability of senior managers within the banking sector by introducing the new Senior Managers’ Regime, which is on track to come into force in 2015. The most significant measure is likely to be the reversal of the burden of proof for senior managers. They will now have to show that they took reasonable steps to avoid a contravention occurring in their business area in order to avoid a sanction which could, ultimately, end their career – senior managers will have their heads on the block.

The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) are further seeking to significantly ramp up individual responsibility and accountability in the banking sector by introducing Senior Manager and Certification Regimes, together with a new Code of Conduct which will apply to the majority of staff – bank employees now subject to direct regulation by the FCA number only about 5-10%.

What is the likely impact?

Brian McDonnell

Brian McDonnell

The impact will be significant; a high percentage of a firm’s staff will be brought within scope of the Code of Conduct, with a larger number of people becoming a Senior Management Function (SMF) holder or Certified Person than are approved persons under the current regime. Directors and other senior managers will have to focus on their increased personal liability. Some of the main impacts are as follows:

Gap analysis: to determine who will fall under the new regimes and in order to complete a Management Responsibilities Map. This will describe management and governance arrangements helping to satisfy regulators that a firm has a clear organisational structure, and identifying who has responsibility for particular aspects of firm’s activities.

Governance systems and controls: these will relate to policies, regulatory reporting, training, assigning responsibility for the production of reports, and demonstrating to regulators that systems and controls are robust and effective.

Significantly widened scope: all employees (other than prescribed ancillary employees) would be subject to compliance with the new Code of Conduct, giving rise to a number of issues for HR departments. In particular, there are likely to be increased regulatory notifications where a firm knows, or suspects, that there has been a breach of the Code of Conduct.

Statements of responsibility: for those carrying on a SMF and having systems in place for responding to requests from regulators for personal attestations from such individuals.
Risk aversion: the new regime may result in individuals being discouraged from taking senior roles; greater risk aversion in the business; more defensive decision-making; and greater reliance on external advice.

Paul Harris

Paul Harris

Institutionalising risk reviews: firms need to consider practical steps that they can take to mitigate their liability and that of their SMFs and Certified Persons, in particular, in connection with a new reversed burden of proof for disciplinary action. This is likely to result in an increased need for initial, periodic and “handover” reviews of governance and risk. The Upper Tribunal case of John Pottage v FSA in 2012 established a regulatory expectation that senior management should undertake reviews and assessments of governance and risk in the business for which they are responsible. These reviews may also become common at the handover of a function as exiting managers seek to protect their position by providing handover statements. Reliance on these has increased in recent years due to requests from regulators for personal attestations.

Employment law impact: there may be a need to amend employment contracts and procedures, including indemnities, D&O insurance, legal representation at meetings, employee access to relevant documents during and after leaving a role, notification of staff disciplinary action to regulators, the handling of reference requests and record keeping.

Remuneration Code relationship: the need to consider how the developing responsibilities interact with the Remuneration Code responsibilities.

Corporate Governance disruption: the need to consider the interaction of the new regime with corporate governance principles. Where does the buck actually stop? Given the increased focus on individual responsibility and liability, there will be a tension between collective board responsibility and individuals’ roles in decision-making. Firms should also anticipate more decisions being raised to the board, and greater challenge amongst senior managers.

Who is affected?

• The population covered by the new regime will primarily be determined by the rules made by the PRA. The scope of the FCA rules then includes certain additional individuals, for example, compliance oversight.

• The Senior Managers Regime affects those carrying on what will be known as a SMF, i.e. similar to the current approved persons regime, in that an individual fulfilling an SMF will need the regulators’ prior approval based on a fit and proper test.

• PRA-required SMFs would include the Chief Executive, Chief Finance function, Chief Risk function, Head of Internal Audit, Group Entity Senior Manager (where there is a “significant influence”), Head of Key Business Area, as well as certain key non-executive roles. Some roles may not be necessary for smaller non-complex entities. The PRA also proposes introducing a ‘Head of Key Business Area’ SMF, covering individuals managing a business area so large that it could jeopardise a firm’s safety and soundness.

• FCA SMFs include the Compliance Oversight function, MLRO, and any board member not designated as a PRA SMF; but will also include individuals in a role which is not otherwise an SMF specified by either the FCA or the PRA but who have ‘overall responsibility’ for one or more key functions, or identified risks, listed by the FCA in its rules (referred to as Significant Responsibility SMFs).

• The Certification Regime is an entirely new regime, applying to staff who sit below the most senior decision-makers, but who, nevertheless, perform a function which either regulator believes could pose “significant harm” to a firm or any of its customers. Firms will be responsible for certifying individuals annually that they remain fit and proper for their roles, using the same criteria as for SMFs. There are also requirements on firms to ensure SMFs and Certified Persons are fit and proper when initially recruiting them.

• A new Code of Conduct will also apply to all members of staff, unless they have been specifically excluded from its application. The current list of excluded employees is narrow and includes reception and catering staff.

• Alongside the consultations, the PRA consulted on proposed changes to the Remuneration Code. Principally, the minimum period to which variable remuneration should be subject to clawback (and malus provisions) is increased to seven years for senior managers and five years for other material risk takers.

Which organisations?

• It is proposed that most aspects of the new regime would only apply to UK incorporated deposit-takers and investment firms dealing as principal who are PRA-regulated.

• It would also apply to branches of non-UK incorporated institutions in a “proportionate and appropriate way”, but the regulators’ thinking on non-UK deposit-takers operating in the UK is still being formalised.

Timetable of implementation

• Consultations remain open until 31 October 2014.

• The PRA and FCA then expect to publish policy statements containing the final rules by the end of 2014, with the intention of the new regime coming into force during 2015.

• Given the tight timetable, firms need to start preparing. Addleshaw Goddard can advise you on what you need to do now to get ready for the future.

The future

These proposals represent a significant reform of the regime for regulating individuals working in banks, building societies and the largest investment firms. Certain proposals flowed directly from the 2013 recommendations of the Parliamentary Commission on Banking Standards, which proposed a series of measures to restore trust and improve culture in banks, following – what it considered to be – a failure of the existing Approved Persons Regime, and in particular a lack of personal accountability amongst the most senior decision-makers.

Leaving aside the overarching issue of whether, as a profession, bankers are being held to a significantly higher standard than other professions (there are rarely circumstances in which the department head in any other profession would be held personally and vicariously liable for breaches / failures in their department and be subject to sanctions which include fining and potential exclusion from the workforce) – how will the sector look in, say, five years as a result of these changes?

• The new regime will significantly add to the ever-increasing regulatory and compliance burden in the form of more defensive and regular reviews of business and more paper trails etc.

• The increased liability will make it more difficult to find good candidates for senior positions in banks, one of the UK’s most important industries, compounded by the PRA consultation on allowing for deferral of bonuses for up to 10 years in some circumstances (so that these awards are effectively discounted).

• The changes may result in regulatory arbitrage, driving business away from banks to other potentially more risky business areas.

Brian McDonnell, is a partner in the Financial Regulatory group at Addleshaw Goddard LLP. He is recognised for providing practical regulatory advice to a wide range of financial services firms, including banks (wholesale and retail), e-money institutions, payment services providers, brokerages, and asset managers. The Legal 500 describes him as “very responsive, Brian McDonnell has excellent knowledge and understands clients’ business and needs” and “Brian McDonnell ‘combines outstanding legal knowledge with business expertise’.”

Email: [email protected]

Paul Harris is a managing associate in the Financial Regulatory group at Addleshaw Goddard LLP. He has previously worked in-house for the Financial Services Authority’s General Counsel and Enforcement Divisions. He has worked on the UK’s implementation of several pieces of financial services legislation, including the UK’s Remuneration Code, and has particular experience in the banking and insurance sectors. Paul regularly advises clients on senior management and governance arrangements.

Email: [email protected]


Local authorities and business networks play a key role in small business success, and must be protected during COVID rebuild



Local authorities and business networks play a key role in small business success, and must be protected during COVID rebuild 1
  • 23% of UK’s top performing businesses have been supported by local enterprise partnerships and growth hubs
  • Similarly, 30% of Britain’s strongest businesses have obtained external finance in the last 3 years
  • New findings come as part of an independent, holistic study into small business success, commissioned by Allica Bank to support British businesses

A new study, commissioned by business bank, Allica Bank, shows that a high level of engagement and interaction with external institutions and resources, is central to SMEs’ prospects of success.

The study analysed data from over 1,000 companies and ranked their success on a scale that evaluated factors including productivity, growth, consistency and outlook. To measure SMEs’ external engagement, survey respondents were asked whether or not they had engaged with local enterprise partnerships, growth hubs, or external financial advisers, as well as whether they had obtained credit or sought re-financing advice, in the last three years.

The benefit to small businesses in making the most of external resources are clear to see, with a quarter (23%) of the UK’s top performing SMEs – those in the top tenth percentile – actively engaging their local enterprise partnership or growth hub in the last three years. This compares to just 16% of all other small businesses. With such a clear benefit to businesses, these external networks must not only be protected but prioritised by any Government plans to rebuild the economy post-COVID.

Similarly, of the top performing SMEs in the country, 30% have obtained external credit in the past three years, compared to less than a quarter (24%) of all other businesses. This figure drops even further for the weakest performing businesses – those in the ninetieth percentile – where just 12% of businesses have obtained external financial support in recent years.

Chris Weller, Chief Commercial Officer, Allica Bank, said:

“At Allica Bank we understand that no two businesses are the same. We also know that no-one knows a business as well as its owners and managers. But they can’t be expected to be experts on everything.

“In the UK there is a wealth of external advice and support for small businesses and we urge each and every business out there to tap in to the external resources around them. Third-parties, such as business clubs, chambers of commerce, local enterprise partnerships and trade bodies, can be invaluable sources of advice and further resources. And although they have excelled in their given field, business owners may still lack knowledge in many other areas of running and growing a business. Therefore, engaging with third parties can give business owners the kinds of insight – and fresh perspectives – they need to succeed.

“As the economy and the country comes to terms with the impact of the COVID-19 pandemic, it is important these vital SME resources are protected and given the funding they need to continue providing invaluable insight and support to small businesses up and down the country.”

Allica Bank’s SME Guide to Success identified six ‘rules to success’ that were more likely to be displayed by top-performing SMEs compared to their counterparts. The full report contains a wealth of additional data and insight into each of these topics.

As part of its mission to empower small businesses, Allica Bank is making the findings freely available and running a series of free online workshops with relevant partner organisations for businesses to attend.

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Do we really need banks? Yes, but digital transformation industry-wide is vital



Do we really need banks? Yes, but digital transformation industry-wide is vital 2

By Charley Cooper is Managing Director at enterprise blockchain firm, R3

The Coronavirus crisis has taught us that we are capable of going digital quickly when we need to. As the banking sector faces a second wave, the ability for individual firms to grow and succeed will be reliant on better connectivity and efficiency at the industry-level, writes R3’s Charley Cooper.

The sudden and dramatic pace of change has been seen globally over the last six months. Decades of paper-based practices are being updated, digitised and overhauled as the whole word adapts to working online. As of today, countries are accepting “alternative arrangements” for original paper export certificates, New York is allowing notary services by video, and global banks are accepting “original” documents and acceptances by email.

Over the coming months, we will see this digital transformation extend from individual use cases and firm-level deployment to entire industries. And perhaps in no other industry is this more critical than in financial services, where the role of banks continues to be challenged because of the inefficiencies they face as a result of decades of siloed technology deployment.

While unquestionably an improvement over reliance on manual processes, regular “digital transformation” as implemented by a single bank has limited benefits. These typically include greater automation of business processes, acceleration in adoption of electronic channels, elimination of manual processes, standardisation of non-value-adding business practices and a focus on driving up data quality and speed of information flows.

Now consider achieving digital transformation at the level of the entire market, rather than on a bank-by-bank basis. Whilst a digital transformation project for a single bank might automate a business process between a front and back office, a digital industry transformation project might optimise the trading and settlement of the asset between buyer and seller and their custodians too.

Of course, such things have been attempted before. But there have been many failures and the successes are notable by how they have resulted in new dominant centralised providers – for example for market data, messaging or settlement. The advent of blockchain architectures showed us there was a new way to tackle the problem, one that worked with the grain of existing markets.

Done right, the prize is a huge “productivity dividend” as entire markets are unshackled from their analogue histories.

Tackling interbank reconciliation at the industry level

The Italian financial services industry provides a pertinent use case of digital industry transformation. 32 banks in Italy went live in March with one of the first real-world deployments of enterprise blockchain technology in interbank financial markets. 23 more banks went live in May, with further institutions scheduled to go live this autumn. Built by the Italian Banking Association, ABI, the Spunta Banca DLT app on R3’s Corda Enterprise platform tackles the market-wide issue of interbank reconciliation.

The traditional reconciliation process for interbank transactions in Italy—formerly governed by the “spunta” process— is notoriously complex. Resolving mismatches in transactions is a labour-intensive process, hampered by a lack of standardisation, fragmented communication and no “single version of the truth.” The Spunta Banca DLT app automates the reconciliation process and enables banks to pinpoint mismatches in interbank transactions quickly by sharing common data in a secure way.

Connecting such a large and diverse group of banks in a live environment to tackle a shared problem is a major milestone for digital transformation in the Italian banking sector, providing a glimpse into a brighter, more efficient and interconnected future for all financial markets.

Changing mindset

The current crisis has accelerated the launch of digital technology for many use cases across a diverse range of sectors, but those that stand the test of time will be developed with an industry-level mindset, not firm-level.

It is now clear that the age of inter-bank optimisation is over – the path forward from this crisis will be paved by software that focuses on adding real value for entire markets, connecting banks to overcome the biggest challenges they share as an industry.

Banks must adapt and start thinking about technology in new and innovative ways if they are to retain their critical role in the global economy.

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How open banking can drive innovation and growth in a post-COVID world



How open banking can drive innovation and growth in a post-COVID world 3

By Billel Ridelle, CEO at Sweep

Times are pretty tough for businesses right now. For SMEs in particular, a global financial and health crisis of the sort we’re currently witnessing represents a truly existential risk. Yet there is hope of a brighter future. Digital transformation is already helping organisations in countless sectors, with everything from building supply chain resilience to rolling out potentially life-saving contact-tracing schemes. Yet it’s not just delivering transformative benefits in grand projects like this.

Thanks to open banking rules, a new wave of fintech innovation is sweeping the globe, offering business leaders a new launchpad for success. Even something as simple as corporate expenses can be transformed by the power of open data — to help firms cut costs, reduce fraud risk and become more productive.

Opening up data to innovation

It’s easy to get bogged down in the technical details of open banking, and the slew of new acronyms it has ushered in: Third Party Providers (TPPs), Account Information Service Providers (AISPs), Payment Initiation Service Providers (PISPs), and Application Programming Interfaces (APIs). Yet at the heart of the open banking revolution is a simple concept: the idea that forcing banks to open up their customers’ financial data will create more competition, and fresh opportunities for market entrants to create innovative new services.

This was at the heart of the UK government’s world-leading strategy when it was introduced back in 2016. A revised EU payment services directive (PSD2) gave it legal teeth, mandating that all payment account providers in the region provide third-party access for customers that want it. The push is also about reducing banking fees and enhancing financial inclusion, of course, but it’s in competition and innovation that the benefits really shine for businesses.

Access to real-time financial data via open APIs has already resulted in a range of new services which are helping businesses ride out the current economic storm. Whether it’s capabilities that can help freelancers prove loss of income to receive targeted loans, or services designed to streamline business processes to reduce costs and fraud — examples of innovation are endless.

What’s more, it’s already global. Aside from the PSD2, open banking rules are taking shape in Australia, New Zealand, Japan, Singapore, Hong Kong, Mexico and elsewhere. According to frequently cited Gartner predictions, regulators in around half of the G20 countries will create an open banking API regime over the coming year.

In the UK alone this is set to create a £7.2 billion revenue opportunity by 2022, with 71% of SMBs and 64% of adults expected to adopt it by then, according to PwC.

Making expenses pay

Corporate expenses and travel management might not be an area one immediately associates with high levels of innovation. But here too, open banking is having a profound impact. By combining automation, in-app approvals, integration with corporate policy and secure open banking APIs, companies like Sweep are offering new ways to solve old problems.

Part of the legacy challenge relates to productivity. Managing corporate travel costs and expenses was cited last year as the biggest concern of the UK’s small and mid-sized firms. Separate research claimed that SMBs are estimated to lose over £8.7 billion annually due to the time it takes employees and managers to complete these menial tasks. By automatically integrating real-time corporate bank account information into an easy-to-use app, we can save up to 15 hours a month on data input and travel administration per employee. That’s all time they could be spending on growing the business.

Another key area of concern is fraud. According to some estimates, fraudulent expenses claims could be costing UK firms £1.9 billion each year. In the US, the figure could be approaching $3 billion annually. Whether it’s the result of submitting expense claims for personal purchases, claiming for additional mileage on work trips, or over-claiming for other items, it all adds up. What’s more, fraud tends to spike particularly during times of recession, when normally diligent employees look for ways to supplement their income.

In this use case too, there are benefits to be had from open banking-powered solutions. Traditional manual processes offer too many gaps that can be exploited by fraudsters. Submitting paper receipts to finance departments — which must then input the information into spreadsheets or accounting software — is slow, error-prone and lacks accountability. However, with modern digital systems, transactions are automatically fed through from bank account to expense management platform. Here they are seamlessly checked according to policy and automatically approved, rejected or flagged for further investigation.

The future’s open

Thanks to the power of open banking, innovative fintech use cases like this are transforming operational challenges into opportunities to cut costs and fraud risks, improve employee productivity and become more strategic. With real-time data fed through from corporate bank accounts, finance directors can better understand spending patterns, react with greater agility and gain the insight they need to run their businesses more efficiently.

So what of the future? The good news is that open banking is only just getting started. As more sophisticated machine learning algorithms are developed, it has the potential for even greater disruption by empowering SMEs with predictive analytics and forecasting tools, or more accurate fraud checks, for example. Those in Europe may benefit most as PSD2 allows businesses to use tools that work seamlessly and securely across markets, without requiring any duplication of work.

In fact, open banking is not just good for individual SMEs, it’s important for Europe as a whole if we are ever to nurture successful digital unicorns to compete with those coming out of the US and China.

Open banking been described in the past as a quiet revolution. With the right buy-in from business and the continued innovation of digital platforms, it may soon become a full-throated roar.

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