Governance Watch - Issue 13

By Dina Medland in London

Regulation and Accountability

It has been an eventful fortnight in UK financial regulation, spewing food for thought on a whole spate of issues around accountability and trust, and their role in better corporate governance.

Almost exactly nine months ago Andrew Bailey, CEO of the UK regulator the Financial Conduct Authority (FCA), spoke out for the first time in the media via an opinion piece in The Guardian to firms that were not applying the senior managers regime that had been in place since March 2016.

“Since the regime was introduced, we have been undertaking work to ensure that senior manager responsibilities are properly allocated and understood in firms. In some cases, we have seen evidence of overlapping or unclear allocation of responsibilities. In other cases, firms appear to be sharing responsibility amongst more junior staff, obscuring who is genuinely responsible. This goes against the intention of the senior managers and certification regime and should not continue” he warned.

The regime would be extended in 2018 to cover all financial services firms, including asset managers and hedge funds, he wrote. “This means that the same high standards will apply in both the banking and the “shadow banking” sectors and supports a level playing field for competition.”

Trust in financial services will only be rebuilt, Mr Bailey said at the time, “when the public truly believe that senior managers in our financial institutions are taking responsibility for the actions they take.”

Earlier this week the FCA announced plans to continue that accountability drive by extending the Senior Managers And Certification Regime (SM&CR) to cover all parts of the UK’s financial services industry, including investment managers, insurers and trading firms. 

“This is about individuals, not just institutions,” said Jonathan Davidson, the FCA’s director of supervision. “The regime will also ensure that senior managers are accountable both for their own actions, and for the actions of staff in the business areas that they lead.” 

While not quite the abandoned ‘reverse burden of proof’ plan of two years ago that would have required senior managers to demonstrate they had done the right thing if wrongdoing emerged on their watch, the FCA’s renewed emphasis on the individual is clear.

The regulator’s proposals – under consultation until November 3 and expected to come into force next year –will affect far more people, as they apply to more than 50,000 additional firms, and include those foreign firms with operations in the UK.

Journalist’s inboxes are already filling up fast with bids to get media coverage on calls for a “proportionate response” to this latest initiative from the FCA.

And yet – the latest proposals seem to point out that there is accountability and there is accountability. The last Governance Watch here looked at the FCA proposals for a rule change that would allow ‘state-owned companies’ (insert Saudi Aramco) to apply for a special category of premium listing with less onerous disclosure and regulatory requirements.

The Financial Times headline the next day was ‘London opens wide for the Saudi Aramco Listing’ – and the sub-heading, in case you cannot access it, was: How much is reputation worth for a national stock exchange? 

The protest was also loud and clear from institutional investors. ‘Investors have rounded on plans unveiled by the Financial Conduct Authority (FCA) …’ began this story by The Daily Telegraph. 

Chris Cummings, CEO of the Investment Association, wrote to the FCA to say the IA would not tolerate any listing that did not adhere to the market’s rules and standards. He did not mention Saudi Aramco by name, but then neither did the FCA in its original proposal, which might seem absurd to anyone who is not British.

In a letter widely publicised by the media, Mr Cummings warned the regulator not to make an exception to rules requiring companies to list at least 25% of their shares to qualify for inclusion in the FTSE indices.

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