台灣銀行家雜誌

台灣銀行家雜誌

Banker's Digest

Banker's Digest

Individual

108.06台灣銀行家雜誌第114期 / By Olga Rakhmanina

Individual Accountability: This Time is DifferentBankers Digest
Regulators around the world are rethinking the mechanisms of individual accountability to ensure senior executives could be held to account when things go wrong on their watch. Frameworks in places, such as the UK, Hong Kong and Australia, are in their infancy but many consider them to be a well-needed step in the right direction. Compliance with new rules will no doubt add to the running costs, but should also facilitate greater regulatory clarity and enhance public confidence in the industry. The previous decade has been generously sprinkled by financial scandals. A number of banks deemed too big to fail were bailed out during the global financial crisis with a hefty cost to taxpayer. Then came the London Interbank Offered Rate (Libor) manipulation with its knock-on effect on consumer and corporate loan rates. Most large international banks have been fined for poor money laundering controls which exposed the industry to criminal transactions. Against this rather sorrowful background, consumers have also repeatedly become victims of financial mis-selling. It is perhaps no surprise that public trust in financial institutions is at a record low. Boston Consulting Group, an international management consulting firm, estimates that global banks have paid over US$320 billion in fines and legal costs for their misconduct between the financial crisis and the end of 2016. According to the Financial Stability Board (FSB), an international body that co-ordinates development of regulatory, supervisory and other financial policies, this could have supported up to US$5 trillion in lending to households and businesses. On the other hand, imposing financial penalties on companies in the environment characterised by growing capital requirements does not appear to have sound logic. Furthermore, financial corporations do not make decisions; instead, their officers do. The link between actions taken by senior management and their individual accountability, however, appears to be broken. In its ‘Changing Banking for Good’ report, the UK Parliamentary Commission on Banking Standards, which was set up to consider professional standards and culture of the UK banking sector, noted: ‘One of the most dismal features of the banking industry … was the striking limitation on the sense of personal responsibility and accountability of the leaders within the industry for the widespread failings and abuses over which they presided’. The report made for an uncomfortable read when it was released in 2013. The Commission described an ‘accountability firewall’, which precluded senior staff from developing a strong sense of personal responsibility for failings within their line of management. Complex operational structure enabled senior executives to claim defense of ignorance; in circumstances where misconduct was within their knowledge, individual accountability was avoided by attributing responsibility to collective decision-making to ensure that no officer could be individually held to account. The UK is by no means the only country where personal liability proved ineffective. Criminal cases against top executives in the US following the financial crisis were a rarity too. Australia emerged from the crisis in solid shape; more recently, however, the country has been rocked by misconduct scandals, which were in some aspects attributed to the lack of personal responsibility: ‘Too often, it was unclear who within a financial services entity was accountable for what. Without clear lines of accountability, consequences were not applied, and outstanding issues were left unresolved’. BRIDGING THE GAPIt remains an open wound that few senior executives have been held responsible for their role in the financial crisis and misconduct scandals. The now-replaced Approved Persons Regime proved insufficient to hold management to account in the UK. Pursuing directors under company law duties, such as promoting interests of the company, did not prove to be an effective mechanism either. Duties are not owed to the public, but to the company, which precludes authorities from holding individuals to account in the interest of the society generally. In the words of Martin Wheatley, former CEO of the UK’s Financial Conduct Authority (FCA), financial industry itself faced the impossible task of justifying ‘an environment where rewards appeared to be individualised, but responsibility and costs mutualised and publicly distributed’. He added that ensuring individual accountability offers an opportunity to bridge the gap between the frustrated public and the banking industry. The UK Parliamentary Commission made a series of recommendations in 2013 which translated into the Senior Managers and Certification Regime (SM&CR) launched for the UK’s banking sector in March 2016. Firms now have to develop Statements of Responsibilities for each senior manager clearly identifying their areas of responsibility; these feed into Management Responsibilities Maps that capture firm’s governance arrangements and structure. What on first sight appears to be self-explanatory and good housekeeping practice is an essential element of effective accountability enforcement. UK regulators have complained in the past that it may take weeks just to work through line management responsibilities.Regulators also have the power to fine or suspend senior managers for failing to take reasonable steps to prevent a regulatory breach at their firms. The UK briefly flirted with reversing the burden of proof whereby senior managers would be presumed guilty of the breach, but the idea proved too controversial and was subsequently shelved. Separately, senior managers whose actions cause failure of the financial institution face criminal liability with up to seven years’ imprisonment. Senior managers are obviously not the only important decision-makers at financial firms; UK regulators therefore introduced a certification mechanism which requires firms to certify officers who may – through the nature of their roles – cause significant harm to consumers or to the firm itself. Firms then have to confirm annually that affected staff remain fit and proper to perform their roles. In addition, all employees have to abide by the Code of Conduct with senior managers having an additional layer of standards to abide by. Following the SM&CR implementation in the UK, other countries have also been exploring mechanisms to enhance individual accountability. Terminology and scope differ between jurisdictions but the objective remains the same. In Asia, Hong Kong regulators have been leading the efforts in this space. First, the Securities and Futures Commission implemented the Manager-in-Charge Regime in October 2017, which was followed by Management Accountability Initiative launched by Hong Kong Monetary Authority for regulated institutions, including banks. Both organisations have pointed out that their guidance does not create new liabilities but rather clarifies and fleshes out the existing framework. Analysts point out, however, that new provisions will inevitably cause firms to review their governance arrangements and introduce changes.Australia introduced Banking Executive Accountability Regime (BEAR) for the country’s largest banks in July 2018 with the rest of the sector falling within scope later this year. The framework bears strong resemblance to the UK’s model as far as the obligations are concerned; liability is slightly different, however. Senior managers falling within the scope may be disqualified but pecuniary penalties for breaching the accountability obligations apply to firms rather than individuals (although the latter can see their variable remuneration reduced).The reform is gaining momentum and more jurisdictions are likely to follow, whether through a mixture of legislative and regulatory change, like in the UK, or clarifying guidance, as in Hong Kong. Ireland, Malaysia and Singapore have been publicly discussing or consulting on implementing similar provisions in recent years. To encourage reform, the FSB issued a toolkit in 2018 with a set of guidelines for firms and regulators aimed at enhancing accountability.SUCCESSES, CHALLENGES AND UNINTENDED CONSEQUENCESRegulators around the world recognise that clear allocation of responsibilities between senior managers offers only partial solution to the issue of weak accountability. Attempts to rein in remuneration – a significant factor in decision making for executives who often prioritise short-term profits at the expense of long-term risks – have become another area of focus. Remuneration Code in the UK, for example, requires that between 40% and 60% of variable remuneration is deferred for up to seven years depending on the individual’s role profile. A similar requirement was introduced as part of the BEAR initiative in Australia.The right organisational culture is essential for the individual accountability regime to bring positive results. In the virtuous circle effect, accountability framework is also likely to introduce a more robust and consistent culture. Accepting individual accountability will focus the minds of senior managers: They are likely to require better information, ask more questions and document their decisions. There is scope for a sense of empowerment too as the extent of responsibility and associated liability is clearly defined helping executives understand where they stand and what they can do.In Martin Wheatley’s view, accountability ‘makes commercial sense’, because industries where it is weak ‘are almost invariably less financially stable, and more prone to misconduct’. Research by Bovill, a financial services regulatory consultancy, adds that a clear framework governing senior management might reflect well on the country and boost its competitiveness. On the other hand, there are concerns over how attractive executive jobs will be in the future as the new generation of leaders might shun financial services if liability is disproportionately high compared to other industries. Ability to take action against senior managers located in other countries might also result in organisations choosing a structure more aligned to national borders as opposed to integrated regional or global arrangements. According to KPMG, an international professional services firm, some firms approach implementation as a box-ticking exercise overlooking the need for a comprehensive governance review and ensuring documented procedures reflect reality. Firms that approach the task seriously, on the other hand, may come across practical difficulties of being sufficiently precise without overengineering their governance arrangements. The new requirements have not been fully tested in practice; as a result, senior executives face a degree of uncertainty over how some elements would be interpreted should they face regulatory action.Successful implementation of individual accountability will certainly depend on how regulators apply the regime in their enforcement work. Robust, transparent and fair action against individuals who fail to comply with their responsibilities sends a strong message to the industry and promotes a sense of regulatory certainty. But banks remain the biggest factor in implementation success which will depend on how willing they are to follow the spirit of new rules rather than simply pay lip service by creating additional paperwork with little, if any, visible impact.

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108.06台灣銀行家雜誌第114期繁體中文、台灣金融研訓院