The UK Targets Senior Managers in New Accountability Regime: Be Prepared

Monday, October 19, 2015

New UK regime to strengthen senior management accountability will apply to banks and insurers in 2016 and to all other financial institutions in 2018.

With significant shortcomings in governance and accountability within the UK banking industry revealed by the global financial crisis of 2008, Parliament introduced framework legislation for a new regime governing senior managers whose actions have a significant impact on the banking sector and its customers. UK regulators have since been elaborating on that framework. The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) are still consulting the industry on certain aspects of the rules, but the bulk of them were published this summer. The new regime will apply to UK banks, building societies, credit unions, investment banks, and the UK branches of foreign banks, all of which are subject to conduct regulation by the FCA and prudential regulation by the PRA. There are three parts to the new rules: the Senior Managers Regime, the Certification Regime, and Conduct Rules. Scheduled to take effect in March 2016, these rules clarify the lines of responsibility at the top of relevant firms and encourage senior personnel to take greater responsibility for their actions. The rules also make it easier for both the firms and the regulators to hold individuals accountable.

Regarding insurers, the FCA and PRA were mandated to update their approved person regimes by the EU Solvency II directive regardless of actions being taken in the banking sector and have been developing a bespoke regime for insurers that is materially lighter than its banking counterpart and will also apply in March 2016.

On October 15, the UK government announced its decision to extend the new regime beyond the banking and insurance sectors to all other financial services firms, including asset managers, advisers, and stockbrokers in 2018. In a startling u-turn, the government also announced it would abandon the controversial “reverse burden of proof” that would have applied to senior managers in the banking sector next year. Instead, the government has decided to introduce a statutory duty on senior managers to take reasonable steps to prevent regulatory breaches in their areas of responsibility, but the burden of proving any misconduct will be on the regulators.

One of the key takeaways from these new rules is that regulators will expect greater levels of responsibility from more people than ever before—initially from March 2016 across the banking and insurance sectors and in 2018 across all other financial sectors. The new regulatory framework will apply to the UK branches of non-UK banks and insurers. Furthermore, a senior manager working outside of the UK may still potentially fall within the scope of the regime if that manager takes operational decisions affecting the UK business or its customers. Accordingly, the new regulatory framework cannot be ignored by any insurers or banks targeting customers in the UK.

The financial services team at Morgan Lewis is a strategic partner for each segment of the sector, working across borders and disciplines to help clients seize competitive advantages and provide strategic advice on how to prepare for new regulatory requirements. Our lawyers routinely provide regulatory guidance to banks, broker-dealers, funds, insurance companies, and other financial institutions worldwide, and efficiently resolve government investigations and enforcement actions resulting from the ever-evolving regulatory environment. When necessary, we mobilize quickly and assemble a fully scalable team, whether the issue is one of a threatened injunction, responding to regulators, or assisting our clients in crisis management. From London, we advise on operational, regulatory, and compliance matters such as authorization, conduct of business, financial promotion, anti-money laundering, market abuse, regulatory capital, systems and controls, cross-border business, and changes of control.

William Yonge, a partner in London who specializes in UK and European financial services regulatory advice, discusses which global companies and firms are most directly impacted and how Morgan Lewis’s leading regulatory group can assist.

William works closely with Morgan Lewis’s labor and employment practice to provide a comprehensive and integrated “one stop” service for our clients and to ensure the burdens of complying with the new regulatory regime are considered in the context of employment law, human resources and data privacy obligations in the UK.

Morgan Lewis provides creative thinking and practical guidance on managing these issues, including overseeing global restructuring programs where this is viewed as the right solution to a client's needs.