Has the FCA made individual responsibility in banking a reality?

Statistics recently obtained by Herbert Smith Freehills call into question whether the Senior Managers Regime has been effective in allowing UK regulators to pursue enforcement against senior individuals in financial services.

Nine years ago, the Parliamentary Commission on Banking Standards (PCBS) recommended a new approach to enforcement against senior individuals, after identifying an “accountability firewall of collective responsibility” that acted as a blocker to such enforcement action.

As a result, since 2016, senior managers in banks have been subject to the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA)'s Senior Managers Regime, with the rest of the financial services industry brought on board since.

But has that regime given the regulators the tools that were found to be lacking in 2013?

Recent statistics obtained from the FCA by Herbert Smith Freehills cast doubt on whether that “accountability firewall” has been successfully penetrated.

Those statistics show that, as of 28 March 2022, the FCA had 47 open investigations into individuals holding a Senior Management function. This accounts for just 12.6% of the FCA's 374 total open investigations into individuals.

That said, the vast majority of those 374 open investigations pre-date the Senior Management & Certification Regime (SMCR), and only 120 cases into individuals have been opened in total since 2016. This is a sad reflection of the reality of how long these investigations run, which is a particularly important consideration in investigations relating to individuals, where the investigations impact people's lives and, often, livelihoods.

On a more positive note for senior managers, the statistics show that an investigation into a senior manager is unlikely to lead to a financial penalty or public censure: 20 of the 24 investigations which have closed did so with no formal enforcement action taken. Only two resulted in financial penalty or public censure. (Of the other two that have closed, one resulted in an undertaking, the other in prohibition).

Investigations into individuals who are not senior managers have even better odds: 32 of 33 closed cases resulted in no formal enforcement action.

Of the current 47 open investigations into senior managers, eight relate to pensions advice and eight to issues of honesty, integrity and reputation. The others cover a broad spectrum of issues, including conflicts of interest, market manipulation and money laundering controls.

Surprisingly perhaps given the focus by the regulators on this over recent years, the FCA has only two open cases into senior managers relating to 'non-financial misconduct', including behaviours such as bullying, harassment, sexual misconduct and discrimination. And it reports only one such closed case, which was closed with no further enforcement action.

Of course, these statistics do not necessarily mean that the SMCR hasn't been successful in achieving the PCBS's aims. As Mark Steward, the FCA’s executive director of Enforcement and Market Oversight, said at its 2020 Annual Public Meeting: "When the Senior Managers Regime was first mooted, it was seen very much as a big enforcement stick … In practice, though, I think it’s been quite different, in that it has led to firms really remediating their internal systems and controls to ensure that senior managers have much greater line of sight and much greater traction over what is happening in their business. To the extent that it’s had the effect that you’d want a new regime to have, it’s actually improved the quality of management oversight in most firms."

** This article is republished with kind permission from Global Banking Regulation Review. To see the article as it was originally published, please click here. **