Compliance Blog

Are you prepared for increased individual accountability?

Individual accountability

This week, Mark Steward, the FCA’s Director of Enforcement and Market Oversight gave a speech at New York University. The theme was ‘The expanding scope of individual accountability for corporate misconduct’.

Here we summarise his speech, and look at how you can prepare for a future where individuals are increasingly held accountable for good corporate governance.

Good conduct creates tension

Steward started by highlighting the tensions that can be brought about by a focus on good conduct.

These can be:

  • Firms sensing perceived injustice in terms of regulatory scrutiny
  • Staff feeling ‘scapegoated’ for corporate failings
  • Consumers believing that authorities are too soft on corporate responsibility

Steward highlighted the Senior Managers and Certification Regime as ‘an important and decisive shift in the right direction in tackling these issues’. You can read more here about the Senior Managers Regime, one year on from implementation.

Steward told three anecdotes to illustrate his points, which showed different levels of willingness to take responsibility at a corporate and individual level.

Steward said that ‘Most firms have a commercial imperative to minimise harm to reputation and so a greater willingness to accept responsibility in order to do resolve public disputes as quickly as they can’. Individuals, on the other hand, ‘are more likely to fight which means different proceedings and hearings of the same evidence inevitably run the risk of different results’.

So whether accountability sits at a corporate or individual level will impact the way it is handled – and the way any regulatory compliance breaches are responded to.

What do we have to consider when looking at accountability?

The examples Steward used – all based on court cases – also aimed to show the inter-connectivity between firms and individuals.

This inter-connectivity, he said, highlights the need for any investigator or prosecutor to assess the conduct of all parties ‘in the round and to avoid a piece-meal approach’.

The examples also show that accountability isn’t a matter of ‘policy or attitude’. There are many grey areas that affect the way decisions are made and ultimately, impact regulatory compliance or transgression. 

He identified five key questions firms – and regulators – need to consider:

1.  How the rules of attribution really operate – i.e. in practice, when is conduct an individual’s responsibility and when is it the firm’s

2.  How responsibility is allocated between the firm and employees, where the employee is acting or believes to be acting within the scope of his or her duties and
     functions

3.  To what extent, and how, does firm culture, especially governance rules, systems and processes (or the lack of them), affect conduct?

4.  How responsibilities are allocated in practice among employees, especially senior management

5.  What are the rules, standards and obligations that an individual employee owes to their firm? Can an employee ever owe wider responsibility than the firm
     itself?

He cites the last question as a particularly important one ‘because it is asking a more basic question. What kind of wrong is committed by firms and what kind of wrong is committed by individuals? Are they different, mutually exclusive or co-relatives of one another?’

How do individual and firm responsibility inter-relate?

Steward believes that the Senior Managers Regime marks a turning point in the inter-relativity between individuals and corporates.

It ‘provides a clear framework in which the responsibilities of senior managers are identified and allocated’. 

Steward also stated that it helps to align the responsibilities of key senior managers to those that are owed by the firm more generally to the whole community’.

Because of the nature of their decisions, failings at senior manager level are more likely to impact others outside the firm – in the wider community – than decisions made lower down the organisation.

The Regime addresses this, he says. Its overriding purpose is to clarify lines of responsibility, removing ‘ambiguous or bureaucratic structures that have impeded or obfuscated clear lines of responsibility’.

A step on from the FCA Handbook

Steward pointed out that while the FCA’s Handbook includes conduct rules for individuals in authorised firms, the Regime is different in that specific senior management responsibilities have now been mapped to identified individuals within firms. This level of detail has not existed before.

Conduct rules that apply to all staff in the firm support the Regime. Any employee undertaking a role which could pose a risk of significant harm to the firm or its customers is also required to be certified by the firm as fit and proper.

Four points about the Regime

The speech made four specific observations about the Senior Manager’s Regime.

  1.  Senior management liability remains inextricably linked to firm liability. There is no opportunity to separate the individual from the firm, as the liability   depends on the firm’s wrongdoing. Any action against a senior manager therefore needs to consider whether there’s also a need for corresponding action   against the firm.  

  1.  Just because the firm has breached a requirement, this does not make a senior manager automatically liable. The senior manager’s liability arises   specifically because he or she has failed to take reasonable steps to prevent the firm from being in breach. The Regime is not designed to make senior   managers scapegoats, or make them liable for all misconduct within a firm.  

  1.  The Regime requires that a ‘failure to take reasonable steps’ by the senior manager is identified as being the cause of any regulatory breach. This means   that not only can management failure cause a firm to be in breach but, in Steward’s eyes, the breach must be able to be attributable to this management   failing.

The Regime applies not just to acts but also to omissions. So, a failure to act might constitute a breach in the same way as acting in a way that breaks the rules.

The Regime isn't a shifting of responsibility

Steward addressed the fact that some have seen the SMR as shifting corporate liability onto individuals.

This is not the case, he argues. Action against firms – including heavy financial penalties – will continue for those who fall short of the FCA’s standards.

Shifting priorities, but no let up

If the speech has one message, it is probably that while regulatory focus and responsibility may be shifting, the spotlight on good conduct shows no sign of easing up. 

The SMR will change the way breaches are dealt with, and the increase in individual accountability will see firms needing to up their game in terms of clear roles and responsibilities. 

The requirements of the Compliance role are changing constantly – and not getting any less. If you’d like a refresher on how to communicate compliantly with your customers and contacts, download a copy of our Compliance Guide to Financial Promotions. The free guide is available here.

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