Reporting and Governance

The UK’s senior managers regime has made a difference to the behaviour of bankers, but there are still some aspects of misconduct where the authorities need to provide further clarity. By Joanna Chatterton, a partner at Fox Williams LLP

Since the global financial crisis of 2008, financial regulators have tried to tackle some of the causes of the crash. The Senior Managers and Certification Regime (SM&CR) was designed by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) to hold senior bankers to account for banks’ failings.

The rules marked an important shift in the way the financial services industry regulates its staff. Banks, not regulators, are now responsible for assessing whether their behaviour and conduct demonstrates their fitness and propriety to continue in post. They are also expected actively to consider the conduct risks their culture gives rise to and to be proactive in initiating changes across their entire organisation to overcome these.

Three years since SM&CR was implemented, we have seen considerable progress. Senior managers now think twice before saying “yes” and the “anything goes” mentality is becoming a thing of the past. Senior bankers better understand that poor conduct should not be tolerated, no matter who exhibits it and how well they perform for their employer. This was exemplified by the £600,000+ ($786,000) fine given to Barclays’ chief executive Jes Staley for attempting to expose the identity of a whistleblower.

Generally, the bankers we speak to are supportive of the regime and understand what is required of them. We have seen more engagement from senior individuals who no longer view the regime as a tick box structural exercise.

Hurdles to overcome

However, not all aspects of the regime are so clear cut.

One of the most important changes under SM&CR is the onus on banks to consider if any misconduct or performance failings amount to a breach of conduct rules and if so, the impact on an employee’s “fitness and propriety”. Firms must ask themselves if individuals in certification or senior manager functions show “honesty, integrity and reputation; competence and capability; and financial soundness”.

But how do we judge if someone has integrity? And how far reaching should this character assessment be? 

In a letter to the Women and Equalities Committee last year, the FCA’s Megan Butler declared that the regulator will “view sexual harassment as misconduct, which falls within the scope of our regulatory framework”. The letter also states that the FCA will consider “sanctions for discrimination, harassment or sexual misconduct” when deciding whether to approve a senior manager. It concludes that “sexual harassment and other forms of non-financial misconduct can amount to a breach of our conduct rules, which include the requirement to act with integrity”. 

Historically, such behaviour was not generally treated as an integrity issue, and there are no specific references to sexual harassment or bullying being a relevant factor in the hard text of the regime.

Culture in financial services is widely accepted as a root cause of the crisis. The FCA last year published a paper, titled ‘Transforming culture in financial services’, an eclectic mix of articles aimed at stimulating debate on transforming culture. It recognises that there can be no one “right” culture, though it seeks to examine what “good culture” might look like. 

The FCA has been vocal that culture, including diversity, is an FCA priority. Where historically firms turned a blind eye to harassment and bullying, or covered it up using non disclosure agreements (NDAs), they have been forced to rethink their approach. Last summer, Credit Suisse fired two senior bankers after reopening an investigation into rape allegations by a former employee first made in 2010.

How to get there

Banks must take all measures to ensure any harassment and bullying is addressed. At the very least, this should include well-drafted and well-publicised policies on harassment in the workplace, regular training and prompt and robust action when employees are found to have engaged in unwanted conduct.

A firm is more likely to properly manage conduct risk with a culture which encourages employees to “speak up” and challenge poor behaviour. Even better if senior leadership leads by example. Firms should be responsive when issues are raised, even if they appear to be relatively minor, and handle complaints in an open and constructive way. Where complaints are upheld, it is important that firms are seen to take robust action.

SM&CR is not just a regulatory project – it impacts all aspects of employee management. A close relationship between the human resources department and compliance teams will ensure that fitness and propriety assessments are carried out properly, that appropriate management steps are taken, minimising the risk of tribunal claims, and that referencing is properly addressed. 

Looking at the regime’s progress so far, there is no doubt that making senior individuals think twice before saying “yes” has been a significant achievement. But moving forward, the FCA will need to give clearer guidelines about how it defines misconduct to ensure banks and bankers are not left in the dark.

A Speakers’ Corner is an area where open-air public speaking, debate and discussion are allowed. The original and most noted is in the north-east of Hyde Park in London

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