Government signals the dawning of a new regulatory era – whilst providing a damning indictment of the current regime
The Parliamentary Commission on Banking Standards has proposed to bring about significant change in the banking sector.
As noted in Steven Francis' recent blog, that change would involve the introduction of the Senior Persons Regime and the Licensing Regime. In its response to the proposals, the Government not only approved the future model for the banking sector but proposed introducing the changes industry wide. Whilst these changes may signal the dawning of a new regulatory era, they also highlight the current defects of a regime that lacks both clarity and punch.
The Senior Persons Regime envisaged by the Commission is designed to bring about a culture change in the financial services sector by targeting senior office holders – with the rationale that a shift in mind-set at the top will percolate down the ranks. The Senior Persons Regime will see the "reversal of the burden of proof" – meaning that Senior Persons (as defined) will be held liable for contraventions of regulatory requirements in their areas of responsibility unless they can positively demonstrate that they took all reasonable steps to prevent the contravention occurring or continuing in the part of the business for which they have responsibility. This is a bold step and follows quite closely the "adequate procedures" defence of which firms can avail themselves under the Bribery Act 2010. This forward-thinking approach is to be welcomed yet opens up awkward questions regarding the current FCA regime and FSA regime it replaced – namely, why have individuals that have presided over failure – often cataclysmic failure – not been held to account to date?
The Licensing Regime would replace the existing statements of principle and codes of practice for Approved Persons – effectively doing away with the current Approved Persons regime and replacing it with a far more prescriptive style of regulation in which rules are tailored appropriately to the functions performed by individuals and the business carried out. Implicit in these proposals is the recognition that, to-date, individuals in the financial services sector have often not understood what exactly is expected of them and by whom. It is a damning indictment on principles-based regulation.
In addition, the Licensing Regime will also be broadened to cover office holders who are not subject to current regulatory approval. In its published response, the Government stated that the new regime will now apply to "all persons whose actions could seriously harm its firm, its reputation or its customers". Why are individuals with such an ability to cause damage not already covered by the regulatory umbrella? One only needs to consider the example of the unregulated LIBOR submission process to see the harm that can result if a regulatory system fails adequately to assess risk.
The Government will no doubt publicise the extension of banking standards to the wider financial services industry as its way of ensuring joined-up and consistent regulation. Yet one really does have to ask how the defects in the current system were allowed to remain un-remedied for so long.