Guest comment from Isabelle Santenac, head of audit for financial services EMEIA, EY
Many have celebrated the recent efforts in the UK to establish criminal liability for the irresponsible management of banks. Arguably, such measures are unavoidable given the public pressure regulators in the UK are under to emulate the US’s power to prosecute. But it is important that we recognise that the focus on individual accountability is introducing yet more red tape as senior bankers seek to protect themselves. Supervisors need to be sure that banks’ core function – to take managed risks in order to provide credit to the real economy – is not damaged in the pursuit of greater accountability.
The logic for greater personal accountability for senior bankers is sound. It has been hard to point the finger at a single individual for every incident of wrongdoing at the banks; the failures or mistakes were very often because of a failure of process, and, in some cases, insufficient or even entirely absent systems and controls, with no clear individual owner within the business. After extensive enforcement proceedings, UK regulators are painfully aware of this and, as a result, are pushing for greater personal accountability on those controls at a senior level.
The Financial Services Banking Reform Act, which entered into law last December, established the direction of travel. A new criminal sanction for reckless behaviour leading to the failure of a bank now exists, and senior bankers are now subject to a more demanding approval regime than before.
This development has received less attention than issues such as ring-fencing – separating supposedly riskier investment banking businesses from retail banks – and remuneration caps. But personal accountability is the real game-changer in the Act. Indeed, the introduction of criminal sanctions against senior bankers make the UK one of the strictest regulatory regimes in the world. While that’s not necessarily a bad thing, we need to consider the consequences for both innovation and risk-taking -a reduction in either will result in less lending at a higher cost.
It is also worth noting that senior bankers are now effectively faced with the reversal of the burden of proof. It is a core presumption in UK law that guilt has to be proved, but it is now incumbent on bankers to demonstrate that they did the right thing. This will have meaningful consequences for internal processes within firms as internal decisions will now have to be checked and checked again, with the bigger ones independently validated.
In concert with legislative reform, the banking regulator has also started bearing its teeth on personal accountability at a senior level. The Financial Conduct Authority has started to require senior executives to provide written assurances – known as “attestations” – establishing responsibility for good practice amongst senior management.
In relation to Libor, the FCA has already started levying fines based on written submissions about systems and controls, with senior figures at the regulator publicly observing that written attestations will form a key plank of enforcement policy in the future. It’s true that senior management could in theory refuse to provide written assurances, but the likely result would be the regulator choosing to impose more intrusive powers of oversight.
So if attestations are now a fact of life in an environment where senior bankers now face potential criminal action, what does this mean in practice?
First, a broad swathe of individuals are likely to fall under the ambit of the new rules for senior managers. Consultation is still ongoing but we believe this will include CEOs, CROs, CFOs, functional and divisional heads, members of key committees and non-executive directors and board members.
These individuals will have to provide statements of responsibility, linking them personally to specific risks, which will in turn allow the regulator to hold them accountable if things go wrong. In asserting that any outstanding remedial actions have been taken and that other controls are appropriate, they will need to ensure they are familiar both with the FCA’s requirements and with systems within their own organisations, ensuring that the right governance framework is in place.
When the worst happens and a successful enforcement action is taken against a firm, senior persons who have put their names to written assurances will have to show that they took all reasonable steps to prevent or contain the effects of a specific failure of process, or face the consequences.
A lot is not yet clear – much of the detail on accountability is likely to be finalised through secondary legislation once Sir Richard Lambert has provided his report on banking standards – but it is a safe assumption that a new era of personal, senior accountability is the future for banking in the UK.
While efforts to take undue risk out of the financial system should be applauded, the industry and regulators alike must remember the core purpose of banks: to lend, lend wisely and lend often. Which means to take risks. As an auditor I know what it means to sign my name at the bottom of a complex financial statement; it makes us careful, quick to challenge and risk-averse. A bank which is not taking risks can’t generate the profitability which will sustain its growth and hence can’t survive in the long term. What is important is to find the right balance between personal accountability and sensible risk-taking, if we want the banks to continue to exercise their main role: funding the real economy.
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