(Bloomberg) -- The U.K.’s effort to hold top bank officials personally accountable when things go wrong on their watch is turning out to have some teeth. Just ask Barclays Plc boss Jes Staley. Regulators in mid-May ripped a chunk out of his wallet -- and left his reputation in tatters -- for attempting to find out the identity of a whistle-blower. Staley is the first top manager to be ensnared by new rules known as the Senior Managers and Certification Regime. They will soon be applied to the rest of the financial-services industry, putting thousands of managers on notice that they, too, could see a bite taken out of their bank accounts and their careers damaged. Lawyers say regulators in other countries are watching to see if the rules might be a template for them.
1. What gives regulators this authority?
The Financial Conduct Authority has broad powers to point the finger at specific people when things go wrong -- and to make them financially and reputationally responsible -- even if the wrongdoing was committed by junior employees. Staley’s fine of 642,430 pounds (about $865,000), or roughly 15 percent of his 2016 compensation, generated newspaper headlines that included the word “shamed.” The bank also reduced his 2016 bonus by 500,000 pounds.
2. What did the Barclays chief executive do?
The FCA said Staley broke personal-conduct rules in seeking to identify the author of anonymous notes sent to the Barclays board. The writer was raising concerns about Staley’s recruitment of a former JPMorgan Chase & Co. colleague. The letter flagged issues of a personal nature -- details of which the regulator hasn’t revealed -- and Staley’s role in dealing with those concerns while at JPMorgan in 2012. The regulator said Staley should have recognized he had a conflict of interest when he used the bank’s internal security team to try to unmask the whistle-blower.
3. What’s the reason for the rules?
Like much else in financial regulation, they are the result of the financial crisis of a decade ago. Back then, authorities didn’t have a clue who was responsible for what in financial companies, allowing executives to deflect blame for the disaster. One specific aim is to stamp out the practice of giving incompetent or dangerous staff members a bland reference in exchange for a quiet exit, creating “rolling bad apples.” Companies must have on file six years of references for new senior managers, for example.
4. How does this work?
Since 2016, the rules have required banks to clearly delineate each senior manager’s responsibilities. This has affected 30 to 40 people at each large bank, and 15 to 25 people at the U.K. branches of big European banks, says Jake Green, a regulation partner at law firm Ashurst LLP in London. The rules also apply to board members of U.K. units, including non-executive directors who may be based in New York, Tokyo or elsewhere. Banks must confirm annually that senior managers are “suitable” for their jobs.
5. So what’s the certification part?
Senior managers are responsible for certifying annually that a wide swath of staff are “fit and proper to perform their role.” This includes anyone who could potentially harm the public or the firm, as well as those who are high-earners or handle client money. It also includes proprietary traders (those trading securities for the firm’s own profit), as well as securities dealers and their supervisors. Green estimates that between 25 percent and 40 percent of employees will require certification. There are also personal-conduct rules, some of which apply to practically everyone in financial services, while others -- such as the one about not going after whistle-blowers that Staley violated -- apply only to senior managers.
6. What about the rest of the industry?
Insurers will probably be covered later this year. Other financial-services companies, from money managers that run billions of dollars to the smallest family offices, will follow in 2019 or early 2020. Eventually, more than 58,000 companies will need to follow the rules. The regulator has divided them into three categories. The largest will be subject to an “enhanced regime,” and will include the biggest banks, insurers and investment firms. They must have “responsibilities maps” that name the senior managers responsible for every area, activity and management function, and formal handover procedures for management changes. A second, or “core” layer, which will face a less onerous set of requirements, is expected to include most asset managers, consumer-credit firms and other vendors of financial services. The smallest, or “limited scope,” firms, including solo traders, vehicle dealerships, some not-for-profits, financial advisers and the like, will be subject to easier rules.
7. Are there drawbacks?
From the banks’ viewpoint, you bet. A major issue is documentation. Because managers must be able to demonstrate they acted correctly, a paper trail must exist -- and it must be maintained. The banks complain that this has increased bureaucracy and skewed the culture so that employees act to cover their backs rather than in the interests of the firm. Industry-wide, the rules will cost about 550 million pounds to implement at first, and as much as 190 million pounds a year afterward, says the regulator. That’s on top of the cost in management time and external advice, says Michael Thomas, a financial-services partner at law firm Hogan Lovells in London. Regulators rebut such complaints by pointing to the cost to the public -- and to financial-services firms -- of misbehavior by employees.
8. What do managers say?
The banks say senior staff are demanding higher base salaries to compensate for the increased risk they’re assuming. John Purcell of headhunters Purcell & Co. says not only has it become harder to recruit senior people, but a brain-drain is taking place as managers leave their jobs for less-regulated industries -- or to retire. “The burden of responsibility is too high and the risk-reward balance has become unreasonably skewed,” he says. “No one is condoning the egregious behaviors that went on before the crisis, but the SMR is a political hammer to crack a business nut.” The rules, by the way, bar managers and their employers from taking out insurance to cover their potential liability.
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