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SMR: A better system of justice

03 May 2016

SMR: A better system of justice - read more

Directors need the freedom to apply judgement, says Francis Kean

The theme of personal accountability is one which other developed economies have also adopted. See, for example, this from Sally Yates, the US Deputy Attorney General: ‘Corporations can only commit crimes through flesh and blood people… it’s only fair that the people who are responsible for committing those crimes be held accountable. The public needs to have confidence that there is one system of justice and it applies equally regardless of whether that crime occurs on a street corner or a boardroom.’

But will the UK SMR lead either to ‘one system of justice’ or, more importantly, to a better system of justice? The impetus for the new regime is best explained by reference to the regulatory failures under the old light-touch regulatory system.

In simple terms, it proved enormously difficult to hold any single person to account under the old regulations – a point illustrated by Andrew Green QC in his report on the regulatory failures relating to the collapse of HBOS. In that report, Green noted that under guidance from the Financial Services Authority, disciplinary action could only be taken against an individual where there was evidence of personal culpability. 

Now, through a combination of the requirement for senior managers to sign individual statements of responsibility and enhanced duties and reporting obligations, it will be much easier for regulators to point the finger at individual senior managers. They will be asked to explain what steps they have taken to avoid regulatory breaches, many of which may surface years later. From a regulatory enforcement perspective that makes perfect sense. It should avoid what Martin Wheatley, former CEO of the Financial Conduct Authority, described as the ‘Murder on the Orient Express Defence’ (it was not me, it could have been anyone).

Whether the SMR will encourage the change of behaviours that the regulators want to see is far less clear. Although it may be the case that those senior managers who choose deliberately to fly too close to the sun might now think twice before doing so, the majority who are trying to do the right thing may be adversely affected. Is it true, as the regulators suggest, that they should have nothing to fear?

The system of justice administered by the courts, as opposed to the regulatory system, may have something to teach us here. Common law has long recognised the principle of collective board responsibility. Judges have also shown a marked disinclination to second-guess decisions taken in good faith by directors. This self-denying ordinance recognises directors need to have the freedom to apply business judgement even when that judgement is shown by subsequent events to have been wrong.

The new regulatory system, although paying lip service to these principles, comes with no guarantees. All the indications are that, having been stung by strong and persistent criticisms by politicians, the regulators will be keen to use some of the powerful additions to their toolkit to show that ‘personal accountability’ is more than simply a slogan.

Yet far from encouraging better decision making, the new regime could encourage senior managers to become risk averse and to collaborate less when making decisions; their concerns about being held personally accountable may be stronger than doing what they truly believe to be the right thing.

In case you think this is just a problem for banks, building societies and insurance companies, the SMR will be rolled out to apply to all financial intermediaries and asset managers regulated by the FCA in 2018.

Francis Kean is Executive Director, Financial and Executive Risks, Willis Towers Watson

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