Fix the process not the principles of senior banker rules
Call it Schrödinger’s regulation. In the absence of enforcement action, a set of financial rules can be simultaneously considered a success and a failure without any great contradiction.
The UK’s senior managers and certification regime was introduced after the financial crisis in response to public anger that the leaders of failed banks hadn’t been held accountable for reckless risk-taking and irresponsible behaviour.
On the face of it, it hasn’t been used much. There has been just one penalty ostensibly imposed under the regime (on former Barclays boss Jes Staley in 2018) from 124 investigations opened, according to the Financial Conduct Authority, of which 67 have yet to be resolved. Senior figures are sanctioned by other means. But the enforcement rate, in the view of Ben Blackett-Ord, the founder of regulatory consultancy Bovill, suggests that regulators have failed to use the tools for their intended purpose.
The opposing view, espoused by an uneasy alliance of regulators, firms and advisers, is that this is a tough regime used extensively behind the scenes in day-to-day supervision. The original hope — beyond primeval urges to make bad guys pay — was to force clearer allocation of responsibilities at senior levels, tighten oversight, and change culture and behaviour. Enforcement action isn’t a complete guide to success.
This is now all up for debate: the government, as part of its so-called Edinburgh reforms, has pledged to review the regime early next year. There are issues to be fixed but its survival and importance shouldn’t be in any doubt.
The senior managers’ regime, for the record, has nothing to do with Brexit. In fact — get us, with our world-beating regulatory thinking — it has been emulated in jurisdictions like Hong Kong, Australia and Singapore, according to Eleanore Hickman at the University of Bristol.
It involved two major changes compared to its predecessor regime. First, it aimed to stop the industry’s bad apples rolling from job to job, requiring companies to self-certify many staff and introducing regulatory references to make sure wrongdoing wasn’t quietly swept under the nearest board table. Second, it aimed to puncture what had been called the “accountability firewall”, imposing potential liabilities on those individuals who must take “reasonable steps” to ensure effective control over their areas.
Neither, now, is particularly controversial; certainly neither should be weakened, still less scrapped. Many City practitioners quietly concede that the warnings about “terrified” bankers refusing to take on senior jobs haven’t really come to pass.
The loudest complaints about the regime are process ones: that the senior approvals take too long, making it hard to move staff between jobs, and that the regime can feel something of a black box. The latter is somewhat the nature of the beast: companies and candidates hardly want a transparent process. The regime’s very low level of rejections is partly because applications are simply withdrawn when the going doesn’t look too good.
But everyone agrees that the regime should be more timely. Its expansion in December 2019 prompted a spike in applications, an increase of more than 1,000 a month at the peak, and a huge backlog. More staff and faster processes have cut that by nearly half, says the FCA, even as it has toughened up its reviews. But the logjam has caused huge and justified frustration from companies left waiting months for routine approvals.
This is doubly unfortunate: it risks tarnishing the regime as one of painful bureaucracy and pen-pushing, rather than a spur for cultural change or useful oversight.
With the regulator testing a more automated system, the forthcoming review could usefully consider how to improve efficiency, possibly through streamlining of some approvals, or better signposting and feedback in the process. Murmurings of discontent about the expansion of vetting into non-financial areas, including past allegations of bullying and harassment, should be squashed. And the quid pro quo must be reiteration and strengthening of the commitment to individual accountability, and ultimately more enforcement.
After all, the government is on the hunt for dead cats to distract from the lack of pizzazz in its post-Brexit reform efforts overall. A watering down of the senior managers’ regime should not be one of them.