UK accountability rules challenge international banks | KPMG | BE
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New UK accountability rules pose challenges for international banks preparing for Senior Managers Regime

UK accountability rules challenge international banks

Challenges arise as global banks implement new UK rules to strengthen bank governance.


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“The kind of strong governance introduced by the SMR is a good thing, and by taking the right steps today, banks can both meet the challenge of achieving regime compliance and also prepare for any potential longer-term impacts.” - Bill Michael, Global Head, Banking and Capital Markets, KPMG

With regulators in the United Kingdom rolling out the Senior Managers and Certification Regime (SMR) on March 7, 2016, this groundbreaking approach to bank governance is garnering worldwide attention – and raising the prospects that the principles of this UK bank regulation will spread globally.

While the SMR will bring welcome strength and clarity to bank governance, it presents particular challenges to multinational banks with global matrix organizations, cross-border structures, staffing, systems and transactions. These global banks now must revisit and recalibrate their governance practices to accommodate the SMR’s emphasis on individual accountability and local bank legal entity.

However, some smart bank boards recognize the new senior manager, board accountability and bank conduct rules to be an opportunity to embed governance standards and enhance culture that can drive stronger long-term performance for shareholders. 

Senior Managers Regime adds individual accountability

The SMR arises from recommendations made by the UK’s Parliamentary Commission on Banking Standards (PCBS), set up following the LIBOR rate fixing scandal, which described existing regulations as a “complex and confused mess.”

Applying to all banks in the UK, whether they be locally headquartered or foreign-based banks, the new regime is designed to make senior individuals within financial firms personally accountable for breaching regulations or causing serious damage to their institution. 

Briefly, the SMR includes:

  • Senior Managers Regime: Members of bank boards and executive committees require ‘statements of responsibility’ and a ‘management responsibilities map’ and they could face both civil penalties and criminal sanctions.
  • Certification Regime (CR): Since bank employees who sit below senior managers can cause significant harm to the firm or customer through their duties, they are subject to civil sanctions for their actions and will be self-supervised by each UK bank, which must ‘certify’ them on an annual basis.
  • Conduct Rules: Applying to senior managers, certified and non-ancillary staff, all suspected and actual breaches of stricter, simpler and clearer new conduct rules must be reported promptly to the regulator.

Global banks face UK accountability regime challenges

Many UK banks face sizable challenges in light of the regime’s focus on precisely pinpointing individual accountability. Since international banks often maintain matrix management across borders, business lines and functions, with key responsibilities held by global business heads or overseas managers located offshore, it can be challenging to establishing individual accountability through a bank legal entity lens.

The problem is compounded for a number of foreign banks that run their UK operations as a bank branch in another jurisdiction, and lack formal, local governance arrangements.

Issues also arise from global banks’ cross-border transactions since they often apply remote booking models and utilize regional or global trading hubs, which make it challenging to clearly define accountability. 

UK bank regulation could trigger unintended consequences

The SMR may also drive other unintended consequences. For example, in their rush to comply, the banks may end up with added bureaucratic layers, mountains of attestations or duplicative processes but may still fail to address the core objective of improving the bank’s accountability framework. 

The SMR could also lead banks to revise their current operational structures and transactional activities, or even rethink their global operating models, ultimately shifting the balance of power and control from the head office to the local operation.   

In light of these potential impacts, it is probably appropriate that the SMR be extended beyond banking to the wider global financial services industry, and even more widely to other industrial sectors, where heightened governance practices and standards could be beneficial.

Banks prepare for accountability regime impacts and opportunities

To successfully manage the necessary structural and behavioral changes, the banks require clear senior level leadership, steering committee oversight and comprehensive work plans to be well underway by the end of 2015. 

Although some banks may treat the SMR as a ‘box ticking exercise,’ smart boards will see the new regime as an accelerator to enhance governance, gain a better line of sight across their organization and drive enhanced business performance.

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