Reform of the Banking sector has been embedded in the public agenda since the height of the financial crisis in 2008. Revelations of scandal after scandal in the banking industry have further fuelled the desire for effective and tough reform of the sector.

The government, regulators and think tanks have for the last six years worked to solve and craft an answer to the question : After so much scandal in the financial services industry, how do we restore trust in the banking sector?

The PRA published the final rules on clawback this week, these rules introduce a seven-year minimum period for clawback for banks to reclaim undeserved bonuses from the date of award. The rules come into force on 1 January 2015.

Furthermore, the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) have also published on 30 July 2014 two joint consultation papers which aim to improve individual responsibility and accountability in the banking sector.

The Consultation

In June last year, the Parliamentary Commission for Banking Standards (PCBS) published a report entitled “Changing Banking for Good”. This set out proposals for legislative and other action to make improvements in professional standards and culture in the UK banking sector.  What followed from these proposal was new legislation in the form of Banking Reform Act 2013.  Moving forward, the PRA and FCA are now consulting on recommendations that incorporate and build on the Banking Reform Act, and are also looking at ways to further the recommendations made by the PCBS.  The recommendations were announced this week, and intend to make it more simple for firms and regulators to hold individuals to account.

Increased Accountability

In the joint consultation paper “Strengthening accountability in banks: a new regulatory framework for individuals” the PRA and FCA propose introducing:

A Senior Managers Regime which will; clarify where responsibility lies at the top of banks, give regulators enhanced ability to hold high-ranking individuals in banks to account and require banks to regularly vet their senior managers for fitness and propriety;

A Regime of certification which will require firms to assess whether staff are fit and proper persons to carry out their role positions where the decisions made could pose significant harm to the bank or customers; 

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.

Rewards for Good Behavior

Furthermore, the PRA and FCA have proposed creating greater correlation between performance and remuneration. The second joint publication: ‘Strengthening the Alignment of Risk and Reward: New Remuneration Rules’ outlines the key proposals to achieve this;

Creating greater alignment between risk and reward over the longer term. This will require firms to defer payment of variable remuneration such as bonuses, for a minimum of five or seven years. This will be dependent on seniority and will be a phased approach to vesting;

Enhancing further the ability of firms to recover bonuses from senior management if risk management or conduct failings come to light at a later date.

Making s the presumption against payments which are discretionary stronger where banks have been bailed out.

Comment

Chief Executive of the PRA, Andrew Bailey, said:

“Holding individuals to account is a key component of our job as regulators of banks. The combination of clearer individual responsibilities and enhanced risk management incentives will encourage individuals in banks to take greater responsibility for their actions. We believe that enhancing individual accountability and improving the alignment of risk and reward should have a positive impact on behaviour and culture within banks and will help to ensure that they are managed in a way that promotes the safety and soundness of individual institutions.”

Chief Executive of the FCA, Martin Wheatley, 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.” The PRA and FCA aim to publish final rules at the beginning of 2015. 

Contact Lewis Nedas Specialist Solicitors

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This blog post is intended as a news item only – no connection between Lewis Nedas and the parties concerned is intended or implied.