UK Edition
With great power comes great responsibility. The spectacular comic book world of Spiderman rarely overlaps with the more prosaic one of finance – other than the web-slinger occasionally foiling a bank robbery – but his famous motto is something that banks and regulators are taking to heart.
The words passed down to Peter Parker, which were first uttered by the founders of the French Revolution, neatly sum up the key principle behind one of the most significant reforms to take place in recent years. The Senior Managers Regime (SMR) and Certification Regime, both of which come into force next week, seek to clearly define lines of personal responsibility at the top and ensure individuals are accountable for their decisions.
These new rules are being brought in to address a toxic legacy of the financial crisis: the widespread belief that justice has not been seen to be done. The public are understandably angry that so few senior individuals have been held to account in recent years. The Parliamentary Commission on Banking Standards’ final report in 2013 identified the need to increase personal responsibility and put an end to the “Murder on the Orient Express” defence – the claim that no individual could be squarely to blame for a mistake because everyone was party to a decision. In their inquiry, MPs were frustrated that they couldn’t pin down who was actually responsible for some of the clearly disastrous decisions that had been made.
Like many walks of life, the danger is that without clear personal responsibility, you can often get collective irresponsibility. When things go wrong, everyone points to everyone else (or to quote another saying, failure is an orphan).
The new regime creates a very clear bridge between corporate responsibility and individual accountability. It’s been a long journey since the Commission’s original recommendations, which have subsequently been widened in scope to other parts of financial services. The banking industry has worked with regulators to deliver a framework that supports our shared goal of ensuring the UK sets the gold standard for accountability.
The SMR ensures that ignorance can no longer be an excuse if failure or misconduct falls inside a senior manager’s area of responsibility. Senior bankers have a statutory duty to prove they took reasonable steps to prevent a problem. It’s important to note that the overall objective of the regime has not changed despite the debate over the decision to remove the reverse burden of proof last year. Regulators now have the power to bring criminal prosecutions for the most serious lapses under the SMR. The Bank of England and FCA have rightly stressed that this will not be about taking high-profile scalps - unless warranted - but rather a tool to concentrate minds and encourage responsible governance.
Separately, the Certification Regime is shifting the onus onto firms for other staff who could pose a significant risk to the business or customers. Every year banks will be required to assess whether these individuals are fit and proper to perform their duties. This will enable the regulators to focus on a narrower group of senior individuals than the discredited Approved Persons Regime. This means that regulators will be able to do a suitably thorough assessment of people aspiring to run a bank as a senior manager.
These new rules come on the back of the Fair and Effective Markets Review last year, which sought to address the root causes behind misconduct in wholesale markets that has taken place in recent years. The reforms that it proposed will help to ensure markets operate for the good of society – rather than the personal gains of traders.
Of course, good governance is not simply about regulation. Culture is also a crucial component when it comes to ensuring that individuals act in a way that best serves their firm, shareholders and customers. Bob Diamond, the former Barclays boss, memorably defined culture as the way people behave when they know no one is looking. You can have perfect rules on paper, but if the culture rubs against the spirit of the rules, things will still go wrong.
A huge amount of work has been done by banks to ensure that the tone from the top ripples down through all levels of their institution. This is a complex challenge, especially given some large banks employ tens or hundreds of thousands of people around the globe. Nevertheless it is one the industry is rising up to. Cultural reform is a growth business in banking. Incentive structures have been overhauled to discourage excessive risk-taking and ensure that staff no longer get rewarded for failure. Banks are deferring bonuses, paying more in shares and are able to claw back pay if it subsequently emerges up to 10 years later that it was not deserved.
The industry has also become a lot more customer-focused. Sales commissions are out for frontline staff, who are no longer given bonuses on the amount they sell, but rather for having high levels of customer satisfaction. There is a new independent Banking Standards Board, to ensure high professional and ethical standards in banks, which will also be publishing its first report shortly. The regulator will also be engaging with firms on a bilateral level to ensure their culture is up to scratch.
The SMR, Certification Regime and the Banking Standards Board provide a comprehensive new framework for ensuring clear accountability and more ethical cultures in banks. Far from resisting this sweeping cultural revolution, the bankers are embracing it.
In my private conversations with members about the SMR, they enthuse about the benefits of setting out clear internal lines of responsibility. Top executives know exactly what is expected of them. Some have told me that it is already making internal management much easier, because it deters empire builders – ambitious staff know they can no longer take on management of extra areas of business without being accountable to the regulator. Indeed, the industry is so supportive that many have said to me it would have been good to have this regime a long time ago.
The UK’s position as a world leading financial centre has been built on a long and hard-won reputation for fair dealing and high standards. The crisis showed starkly that standards had slipped, and they had to be raised. Paying more attention to Spiderman’s personal code of conduct is a leap in the right direction.
Anthony Browne is chief executive of the BBA
Banks could learn a lot from Spider-Man