In the annual Mansion House speech yesterday, Bank of England governor Mark Carney pledged that from next year, senior managers of banks and insurers will be held directly accountable for failures in their areas of responsibility.
Following the publication of the Bank's Fair and Effective Markets Review, Carney said that "the Age of Irresponsibility is over"; individuals must be held to account for their own conduct, and firms must take greater collective responsibility for market practices.
Additionally, regulators should close gaps in regulatory coverage and broaden the regime holding senior management to account. He added that criminal sanctions should be updated, with market abuse rules similarly extended and maximum prison terms lengthened.
He admitted that major gaps remain, evidenced by enforcement actions which "continue to appear with depressing frequency".
"These sanctions, while necessary, aren’t the solution, not least since the $150 billion of fines levied on global banks translates into more than $3 trillion of reduced lending capacity to the real economy.
"This is a major opportunity for the industry to establish common standards of market practice that are well understood, widely followed and, crucially, that keep pace with markets. If firms and their staff fail to take this opportunity, more restrictive regulation is inevitable.
"To give these measures teeth, key elements of the Senior Managers Regime should be extended to all firms active in wholesale FICC markets, including dealers and asset managers. That means all senior managers would have clearly defined responsibilities and would be answerable for training, certifying and monitoring the material risk takers they supervise. The FCA should oversee compliance, redeploying resources to focus on Senior Persons. In turn, these individuals would be on the hook for promoting compliance within their organisations. Incentives will be aligned."
In his speech, George Osborne added:
"We have been seeking to resolve that British dilemma of being a host for global finance without exposing our taxpayers again to the calamitous cost of financial firms failing.
"I believe that in restoring the Bank of England’s role in the heart of supervision, in ring-fencing retail banking and insisting on much better capitalised firms, we have made enormous progress in solving that dilemma.
"Of course, boards and top management must live up to their responsibilities – and face the consequences if they don’t.
"But simply ratcheting up ever-larger fines that just penalise shareholders, erode capital reserves and diminish the lending potential of the economy is not, in the end, a long term answer. It also leaves those guilty of misconduct untouched.
"Our financial services industry in Britain has, in recent years, been seen as part of the problem – now it must become part of the solution."
Martin Wheatley, Chief Executive of the FCA, said:
“These markets are central to our economy and today’s recommendations will be important in rebuilding public trust in their integrity. Domestic regulatory reform is only one piece of the puzzle. Driving up global standards needs international cooperation between regulators, but confidence is underpinned by the behaviour of the firms and individuals active in them. We will know the review has truly succeeded when we see these changes being embraced at every level in industry.”
Fiona Raistrick, partner in financial services advisory, BDO, commented:
“The market will not be surprised by today’s recommendations. The ambition of the Bank of England was always to broaden the scope of the regulatory framework to cover new asset classes following recent scandals. The Senior Managers Regime is already being implemented within banks and insurance firms and will now play a key role in holding senior executives and non-executive directors of wider financial businesses to account.
"FEMR is just one of a number of regulatory drives to improve culture and conduct, and should be welcomed as it provides a framework to better police industry behaviour. However, financial services firms will be keen to avoid another box-ticking compliance exercise. Firms that have already made significant improvements should have little to fear from the report.
"Regulation is only effective if appropriate oversight and enforcement is in place. Policing this new regime to reduce the incidence of market misconduct will keep the Bank of England busy”.