The Financial Conduct Authority and the Prudential Regulatory Authority have recently been showing signs of gearing up for the new regime which is intended to have the effect of making senior bankers and other financial services managers accountable for failings within their institutions. The intention, of course, is to avoid the kind of meltdown we all (apart perhaps from the bankers who had caused it) endured for some time after October 2008.

The Parliamentary Commission on Banking Standards (PCBS) reported in June 2013. It made some trenchant criticisms of banking standards and culture, and came up with a raft of measures designed to ensure that trust is restored in banking and that standards improve: “Reform across several fronts is badly needed”, they said, adding that this had to be achieved “in ways that will endure when memories of recent crises and scandals fade”.

The proposals the Commission put forward had five themes, of which the first was: “Making individual responsibility in banking a reality, especially at the most senior levels.” Under the heading: “Making Individual Responsibility a Reality”, they described the problem in the following terms:

Too many bankers, especially at the most senior levels, have operated in an

environment with insufficient personal responsibility. Top bankers dodged

accountability for failings on their watch by claiming ignorance or hiding behind

collective decision-making. They then faced little realistic prospect of financial

penalties or more serious sanctions commensurate with the severity of the failures

with which they were associated. Individual incentives have not been consistent with

high collective standards, often the opposite.”

Few, save perhaps those in the banking sector, would disagree with the sentiments expressed in that pithy paragraph. The British public has been baying for blood, and wanting to see bankers banged up in prison for long sentences. No senior banker has, however, been prosecuted. For those who believe that they do things better in the US, the cold truth is that neither the SEC nor the DoJ took action against senior banking management for offences arising out of the global financial crisis either.

The Financial Services (Banking Reform) Act 2013, Part 4, outlined a series of reforms designed to put this right under the heading: ‘Conduct of persons working in the financial services sector’. This included the section 20 provision concerning ‘statements of responsibility’, which is intended to identify the straight line accountability of named board members for specific aspects of the bank’s activities. Section 36 creates a criminal offence ‘relating to a decision causing a financial institution to fail.’ While one might applaud the sentiments behind this section, it is surely unlikely that it will ever be capable of being deployed.

The full detail of Parliament’s response to the PCBS Report is now becoming apparent, with legislation due in the autumn, and with implementation of the ‘Senior Managers Regime’ planned to come into effect on 7 March 2016. The impact will be felt not only by UK banks, but also by the managers of all banks operating in the UK, and by insurance companies, as set out in a press release issued by the FCA and the PRA last week.

So how will all this work out in practice?

The most obvious effects will be that (a) a good deal more paperwork will be generated, and (b) being a senior banker will be much less attractive than it once was.

The amount of paperwork will keep regulators and line managers busy, but it should lead to some useful consequences. For example, the fact that a senior manager has signed up to oversee, say, the bank’s money laundering polices and implementation may have the effect of ensuring that the Board is made aware of the number of SARS filed with the National Crime Agency, and this should result in better control over the level of money laundering that passes through the City of London. Allocating responsibility for anti-bribery controls to a main board director should ensure that this gets the attention it deserves from a bank’s management. Appointing a director to lead on financial crime prevention could have the effect of achieving just that. Such a range of ‘Senior Management Functions’ could help to improve both the conduct of the bank, and its capacity to influence others. It will be an outward sign of high ethical standards and a good culture at the top.

However, some have commented that the regime will give rise to unforeseen consequences. For one thing, there may be significant difficulties in negotiating terms with Senior Managers, in particular in defining in the ‘Statement of Responsibility’ what their responsibilities are. Any Senior Manager faced with the prospect of signing up to a statement of responsibility and making an attestation will surely seek legal advice, and will try to limit the level of risk they may run. At the same time, the firm’s HR department will want to include a detailed and comprehensive list of responsibilities to ensure that it complies with regulations. Once this process is complete, a system of recording actions and decisions will be put in place, and this will require extra staff, as well as involving the senior manager in a greatly increased work-load. A culture of note-taking and finger-pointing will develop. Staff at all levels may become unnecessarily risk averse. Compliance departments, which have grown exponentially over the last few years, will increase in size even more. A new breed of ‘compliance directors’ masquerading as Senior Managers may come into existence, leaving the real work of making profits to be done by Bankers who don’t sign up to anything.

What changes will we see when a future regulatory or criminal breach is detected in a bank’s systems?  It can be asserted with confidence that there will be new and different and as-yet undreamed of types of misconduct aimed at increasing a bank’s profitability and bankers’ bonuses. The PCBS spoke of reforms “that will endure when memories of recent crises and scandals fade”. Maintaining control over new business models and technological advances (this month’s bright shining means of out-performing the market is next month’s criminal activity), deciding which broadly accepted ‘practices’ are dubious (LIBOR manipulation, FOREX fixing and PPI were all broadly accepted by major financial institutions), or simply identifying and investigating misconduct, are no doubt all part of a good compliance regime, and the new measures are essential to emphasise the need for senior management to pay proper attention to compliance issues, new and old.

Proposed measures in the UK to defer bankers’ bonuses, in some cases, according to the Governor of the Bank of England, for a very long time, and the capacity to claw back remuneration where unacceptable risks have been taken or other conduct issues arise; and the implementation in the US of Dodd-Frank requirements to disclose the ratio of the CEO’s pay to that of its ‘median employee’; are additional measures which will dampen the appetites of risk-takers to join main-stream banks. And quite right too, many will say.

The problem may be that by putting senior managers under such a high level of risk, at the same time as curbing their compensation, there will be a dearth of applicants for senior posts, and those who do apply will simply satisfy a risk-averse appetite – which is probably not going to appeal to shareholders looking to maximize the profits of a bank and push up the share price. The fate of Anthony Jenkins, until a couple of weeks ago the ‘safe pair of hands’ installed as CEO at Barclays to replace the investment banking guru, Bob Diamond, perhaps illustrates the problem. A safe pair of hands is not necessarily what you need if you want to see a bank making profits, and to retain senior staff who drive the bank forward, and therefore Jenkins was axed. Chairman John McFarlane said the bank needed to become more efficient: “What we need is profit improvement. Barclays is not efficient. We are cumbersome.” Where will banks draw the line between ambition and being cumbersomely safe?

One can predict that the new regime will probably make it easier to call senior bankers to account for the failings of their institution, although there may be trouble ahead. The PCBS complained that it had been difficult in the past to take action against senior managers. Reports into the Financial Services Authority’s handling of investigations into the conduct of senior management in RBS leading up to the financial crisis concluded that it had not been possible to take enforcement action against Fred Goodwin and his fellow directors. The long awaited report into the handling of potential allegations of misconduct arising out of the collapse of HBOS may also find that the FSA was justified in not taking action against any top level management; it may, on the other hand, be highly critical. What it will undoubtedly show is how immensely complex the process of enforcement might have been. The few attempts the FSA had at taking action against senior managers in the wake of the crisis were almost universally, and expensively, unsuccessful. The new regime will undoubtedly facilitate the scapegoating of a named individual for failing to spot misconduct in a designated area, but unless that individual can also be linked to the misconduct, the punishment will simply be for inefficiency. A substantial fine and prohibition from working in the financial sector, coupled with reputational damage, are serious penalties which should have a deterrent effect, but if the purpose of the regime is partly, at least, to assuage the public’s demand for bankers to be pilloried for allowing misconduct in a bank, I fear that a regulatory fine for a technical failure is not going to cut the mustard.