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Joint consultations address reckless behaviour

01 August 2014

The PRA and FCA have launched two joint consultations which address reckless behaviour as well as remuneration in the banking sector.

Aiming to improve individual responsibility and accountability in the banking sector, changes the consultations propose include a new approval regime for the most senior individuals whose behaviour and decisions have the potential to bring a bank to failure, or to cause serious harm to customers; and introducing new rules on remuneration to strengthen the alignment between long-term risk and reward in the banking sector.

The proposals will make it easier for firms and regulators to hold individuals to account, which will include prison time as well as the usual punishment of fines.

In the joint consultation paper, ‘Strengthening accountability in banks: a new regulatory framework for individuals’, the PRA and FCA proposals include: introducing a new Senior Managers Regime clarifying the lines of responsibility at the top of banks, enhancing the regulators’ ability to hold senior individuals in banks to account and requiring banks to regularly vet their senior managers for fitness and propriety; a Certification Regime requiring firms to assess fitness and propriety of staff in positions where the decisions they make who could pose significant harm to the bank or any of its customers; and a new set of Conduct Rules, which take the form of brief statements of high level principle, setting out the standards of behaviour for bank employees.

In the accompanying joint consultation paper ‘Strengthening the Alignment of Risk and Reward: New Remuneration Rules’, the PRA and FCA proposals include increasing the alignment between risk and reward over the longer term, by requiring firms to defer payment of variable remuneration (e.g. bonuses) for a minimum of five or seven years depending on seniority, with a phased approach to vesting.

The ability of firms to recover variable remuneration will be further enhanced, even if paid out or vested, from senior management if risk management or conduct failings come to light at a later date.Options have been included to address the problem that employees can sometimes evade the application of malus – reductions in unvested awards – by changing firms.

The proposals also strengthen the existing presumption against discretionary payments where banks have been bailed out.

Martin Wheatley, Chief Executive of the FCA said: ‘How a firm conducts its business and treats its customers must be at the heart of how it operates. This has to start at the top. Today’s consultations mark a fundamental change in the regulators’ ability to hold individuals to account, which is what the public expects of us. It will also build on the cultural change we are beginning to see in the boardrooms of firms across the country.’

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ICSA: The Governance Institute
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