Challenges arise as global banks implement new UK rules to strengthen bank governance.
“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.
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:
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.
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.
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.
© 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.