Top Bankers Are on Hook as U.K. Conduct Rules Get Personal

  • Reforms make senior managers accountable when things go wrong
  • RBS says new rules may make it harder to hire top candidates

Starting Monday, U.K. regulators’ efforts to crack down on misconduct in the City of London will get personal.

The Senior Managers and Certification Regime is intended to make people working in financial services, from banks to payday lenders and investment firms, directly accountable for misconduct that occurs on their watch. Firms have to spell out to regulators the responsibilities of each senior manager along with a blueprint that shows how their areas intersect. Top employees must be pre-approved by regulators.

The rules are part of the government’s response to the financial crisis, when authorities struggled to prosecute individuals who had led their firms into taxpayer-funded bailouts because their responsibilities weren’t clearly defined.

“This gives some certainty and should result in more effective governance and monitoring of the way the firm manages its employees,” said Michael Potts, managing partner of London law firm Byrne and Partners. “However, individuals identified as senior managers will be rightly alarmed by the rigidity in this framework.”

Some controversial measures have been scrapped, such as a “reverse burden of proof” that would have forced bankers to prove they were unaware of wrongdoing at their firms. This will be replaced with a “duty of responsibility” extending across the entire financial-services industry.

‘Bad Behavior’

“Only time will tell if it works,” Mark Garnier, a Conservative Party lawmaker on the U.K. Parliament’s Treasury Committee, said in an interview. “There won’t be an overnight change, but hopefully it will signify an end to bad behavior.”

Also coming in on Monday is part of the 2013 Banking Reform Act that makes the reckless management of a bank leading to it failing a criminal offence. That’s a measure designed to catch individuals who lead their institutions to disaster and ensure that someone goes to jail -- if it works.

“The new criminal offence for failure to prevent a bank failure is a paper tiger,” said Louise Hodges, criminal litigation partner at Kingsley Napley in London. Prosecutors would have to prove an individual was responsible for the collapse and took unreasonable steps, she said. While “it may give senior officers pause for thought and emphasize their personal accountability in the decisions they make, I can’t see many bankers being jailed as a result.”

Increased Departures

Bankers have raised concerns that the new measures could discourage people from working in financial services, damaging London’s standing as a financial center.

In its annual report, Royal Bank of Scotland Plc said the rules “may contribute to reduce the pool of candidates for key management and non-executive roles, including non-executive directors with the right skills, knowledge and experience, or increase the number of departures of existing employees.” 

The rules may have played a role in the timing of Tom King’s departure from the post of Barclays Plc’s investment bank chief, according to people with knowledge of his plans.

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