Non-executive directors (NEDs) with specific responsibilities, such as chairman, will come under the new Senior Managers Regime (SMR), the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) have said.
Following a consultation across industry and with stakeholders it was also decided the regime would not apply to those NEDs who do not perform delegated responsibilities.
Martin Wheatley, chief executive of the FCA, said: “Our approach is driven by wanting to ensure firms are managed in a way that reflects good governance and promotes the right culture and behaviours. Having a narrow SMR will also allow the FCA to focus regulatory resources on those responsible for key business areas and board committees. We want those senior individuals to be held accountable for the decisions they make and oversee. This is what people inside and outside the banking sector expect.
“NEDs play a vital role in providing challenge to and an independent oversight of the executive directors. Including all NEDs in the new regime would risk the unintended consequence of changing the whole nature of this vital role.”
The NED roles that will be in scope of the SMR are: chairman; senior independent director and the chairs of the risk, audit, remuneration and nominations committees.
The individuals performing these roles will be subject to all aspects of the Senior Managers Regime, including regulatory pre-approval, the FCA’s and PRA’s new conduct rules and the presumption of responsibility. Those NEDs who fall outside of the SMR will no longer be subject to regulatory pre-approval, will not be subject to the conduct rules nor the presumption of responsibility.
Within the regime, senior executives will be expected to take accountability for the conduct of the business for which they are responsible. They are in a position to exercise a strong influence on the business and its culture through incentives and the messages that they give to staff.
Thed regulators said this clear line of accountability can have a positive effect on the culture of firms and on outcomes for consumers and markets.
This paper also includes general guidance on the role and responsibilities of NEDs as well as consulting on the FCA’s approach to NEDs in Solvency II firms, which the FCA proposes to align to the approach being taken for deposit takers and PRA designated investment firms.
The FCA and PRA also published a consultation on proposed whistleblowing rules for banks, building societies, credit unions and insurers. This includes a requirement for firms to appoint a whistleblowers’ champion, who will be responsible for overseeing the effectiveness of internal whistleblowing arrangements, preparing an annual report to the board on their operation, and reporting to the regulator where an employment tribunal finds in favour of the whistleblower. The importance of robust internal whistleblowing procedures within firms was a key conclusion of the Parliamentary Commission on Banking Standards’ report.
Andrew Tyrie MP, chairman of the Treasury Committee and former chairman of the Parliamentary Commission on Banking Standards, said: “The Parliamentary Commission on Banking Standards concluded that the Approved Persons Regime was a bureaucratic box-ticking exercise. It served as little more than an initial gateway into the industry with no subsequent meaningful oversight. It was the worst of all worlds – creating the illusion of regulatory oversight but the reality of none.
“This is why the Banking Commission concluded that the APR had to be abolished for banks. In its place the Commission concluded that there needed to be a much more targeted regime, covering a smaller number of senior individuals, with a clear allocation of responsibilities.
“The Government and regulators have taken significant steps towards implementing the Commission’s recommendations on senior individuals in banking. But the proposals initially put forward by the regulators on the Senior Managers Regime – particularly the FCA – would have diluted its effectiveness by extending its scope beyond the Commission’s recommendations. What is needed a robust form of continuous scrutiny targeted on the most senior key people in banks. The proposals would have meant many more people than the Commission intended being subject to tougher sanctions.
“The FCA’s decision to narrow the scope of the SMR is therefore very welcome. It will ensure that the new regime is tough, but also focused on the right people. The regulators now need to exercise judgement in their continuous supervision in order to ensure that the SMR does not inherit the failings of discredited old regime.
“The Commission restricted its focus to banking but similar criticisms apply to the APR in the rest of the financial sector. The Treasury Committee has subsequently concluded that the APR should be scrapped completely. It remains in place, however, for around 75% of the individuals working in the financial services sector – those who work outside of banking and insurance.It is now important that the APR – a pointless piece of regulatory architecture – be scrapped completely.”