Despite efforts, financial institutions continue to have gaps in their governance models and control structures, and are therefore prone to exposure to potential rogue behaviors which can pose serious challenges to their financial objectives and reputation.
Focus on part 4: Conduct on persons working in the Financial Services sector
In response to such challenges in order to decrease conduct risk by restoring confidence, shifting the focus to individual accountability and fostering cultural change within the financial services sector has taken a center stage within the regulatory agenda.
Part 4 of the Financial Services (Banking Reform) Act 2013 (the Act) could come into force as early as May 2015 and will transform the UK banking culture (and is likely to be extended to other financial institutions too). The aim of this Banking Reform is to decrease reputational damage, and therefore reduce indirect and direct costs as well as creating greater market efficiencies and transparency. This new banking culture will provide opportunities for success but the right processes, talent retention and robust management plans will be key to sustainably shifting the UK banks’ DNA and ensuring their competitiveness.
The new reality for reducing conduct risk: a cultural change
The Act (and its related secondary legislation) will apply for now to:
- UK-incorporated banks, building societies and credit unions;
- UK-incorporated PRA-designated investment banks (i.e.: investment firms that have regulatory permission to deal in investments as principal and are regulated by the PRA); and
- UK branches of third country banks and certain third country investment firms by statutory instrument and imposed an obligation to consult representative organizations and other appropriate persons.
The main requirements set out in Part 4 of the Act are structured around the:
- Senior Manager Regime
That will replace the Significant Influence Function in the existing Approved Persons Regime and will be applied to individuals holding a Senior Management Function (“SMF”). This regime requires banks to continuously monitor the propriety and fitness of the individuals who carry out SMFs.
- Certification Regime
That will require banks to certify staff performing roles relating to the bank’s regulated activities as fit and proper on an annual basis based on qualifications, competence and personal characteristics. In practical terms, the Certification Regime will bring a much wider group of individual employees within the scope of the FCA and PRA.
- Conduct Rules
Divided across first tier and second tier rules, Conduct Rules will require banks to provide tailored training to Senior Managers and Certified Persons and to notify breaches to the CFA and PRA.
Key challenges: ready to navigate through?
Part 4 of the Financial Services (Banking Reform) Act 2013 will pose challenges across five dimensions for ensuring that an effective governance model within banks is being implemented. These five dimensions are:
- Reporting lines and responsibilities;
- Effective management information and information storage systems;
- Talent attraction and retention;
- Reduced risk taking behavior; and
- Regulatory uncertainty and aggressive timeline.
Key next steps: ready to get started?
Banks should already start defining and following a robust management plan to ensure that an appropriate governance model is implemented. The general actions across banks for ensuring that their cultural DNA is shifting effectively should include:
Robust Management Plan for Shifting Banks’ Cultural DNA