Changing Banking for Good - Parliamentary Commission on Banking Standards

Changing Banking for Good - Parliamentary Commission on Banking Standards Contents

6 A new framework for individuals

The contribution of governance

537. The previous chapter considered the extent to which the problems of standards and culture in banks can be tackled through the improved operation of the market. This chapter, and the subsequent two, considers the degree to which those problems can be addressed through changes to the governance of banks, supported where necessary, by oversight. This chapter considers the current and possible future frameworks for individuals working within banks. Chapter 7 examines the formal collective structures within banks for their governance and control, and the more informal elements in play in helping to determine standards and culture in banks. Chapter 8 considers remuneration.

Taking individual responsibility

538. Chapter 3 examined the extent to which the underlying problems of standards and culture could be attributed to the structures and incentives affecting the behaviour of individuals. A common thread of that analysis was a pervasive sense, reinforced by much of the evidence, that a culture exists in banking which diminishes a sense of personal responsibility. The Commission expressed concern, in particular, about the "accountability firewall" which seems to have developed to prevent those in senior positions having a strong sense of personal engagement with and responsibility for failings and misconduct within their line of management. The collective nature of official decision-making has also served to insulate individuals from a sense of individual responsibility. We also noted that the ties of professional identity, which can serve to inculcate a sense of pride and personal responsibility, were not as strong in banking now as in the past or as in some established professions.

539. Regulatory oversight of the banking sector is principally exercised through a relationship with firms, founded on the powers of authorisation, as considered in Chapter 9. There also exist mechanisms for regulatory engagement with individual bankers. This chapter first considers the principal framework for such engagement—the Approved Persons Regime (APER)—and its effectiveness. It then examines the role played, and that could be played, by professional bodies, drawing in part on evidence relating to professions such as medicine, accountancy and law. Finally, it sets out conclusions and recommendations on a new framework.

The Approved Persons Regime

OVERVIEW

540. Regulators have the power to require certain individuals within banks to seek pre-approval from the regulator before taking up their positions. Such individuals are known as "Approved Persons" and the arrangements under which they are approved are referred to as the Approved Persons Regime (APER).

THE STATUTORY FRAMEWORK FOR APPROVAL

541. The statutory framework for approval can be summarised as follows:

· The regulators specify certain functions within a financial services entity (such as a bank) as "controlled functions";[974]

· The bank concerned applies to the regulators for approval for a named individual to carry out a particular controlled function or functions;[975]

· The regulators decide whether to grant the approval based on consideration of whether the candidate is "a fit and proper person" to perform the function to which the application relates, subject to a right of appeal;[976]

· The regulators may withdraw approval of a person as "fit and proper", subject to appeal, and impose penalties on individuals who carry out controlled functions without approval;[977] and

· The regulators can issues statements of principle, adumbrated in codes of practice, relating to the conduct expected of persons approved to carry out controlled functions ("Approved Persons").[978]

THE CONTROLLED FUNCTIONS

542. Under the Financial Services and Markets Act, the controlled functions that require individuals to become Approved Persons can be of two types:

· A "significant-influence function" (SIF), which means a function "that is likely to enable the person responsible for its performance to exercise a significant influence on the conduct" of the affairs of the authorised entity;[979]

· A "customer-dealing function", which means a function that will involve the person performing it in dealing with the bank's customers or the property of the bank's customers "in a manner substantially connected with the carrying on of a regulated activity".[980]

543. There are 9 Significant Influence Functions directly relevant to banks, which are shown in the table below.[981]

Ref Controlled Function

CF1 Director function

CF2 Non-executive director function

CF3 Chief executive function

CF8 Apportionment and oversight function

CF10 Compliance oversight function

CF10A CASS operational oversight function

CF11 Money laundering reporting function

CF28 Systems and controls function

CF29 Significant management function

544. These functions are a mixture of positions (Director), generic responsibilities (compliance oversight) and specific responsibilities (money laundering reporting). The list of functions has evolved over time. For example, the FCA announced proposals in December 2012 to created two additional controlled functions in response to LIBOR manipulation: one a "benchmark administration function" (CF50), being the individual overseeing the team responsible for calculating and corroborating daily benchmark submissions; and the other a "benchmark submission function" (CF40), being the individual managing the team responsible for LIBOR submissions. The introduction of CF40 and CF50 took place from 2 April 2013.[982] It is illustrative of the complexity of the regime that the FCA themselves provide conflicting information on the categorisation of these new functions: the FCA handbook defines them as SIFs,[983] whereas the FCA website describes them as neither SIFs nor Customer Dealing Functions but a completely separate category called "LIBOR functions".[984]

THE APPROVAL PROCESS

545. Where a bank identifies that a person is to undertake a function or functions bringing them within the APER, they make an application to the regulator. The regulators have regard to a number of criteria when assessing the fitness and properness of Approved Persons, the most important of which are (i) honesty, integrity and reputation, (ii) competence and capability and (iii) financial soundness.[985] The regulator has a statutory obligation to determine applications within three months. However, the FSA committed to try to complete the processing of 85 per cent of applications within five (for customer function) or ten (for SIF) working days of receipt, depending on the nature of the application.[986] For those in Significant Influence Functions, the regulator may conduct interviews in order to assess the technical experience of the applicant, a system introduced since the onset of the financial crisis in 2007.[987]

THE STATEMENTS OF PRINCIPLE FOR APPROVED PERSONS

546. The Approved Persons Regime serves in part as a mechanism for establishing standards of conduct for individuals working in banks. Once approved, an Approved Person is subject to the regulatory Statements of Principle for Approved Persons which are set out below.[988]

There are seven Statements of Principle (of which Statements of Principle 1 to 4 apply to all Approved Persons and Statements of Principle 5 to 7 apply only to those performing Significant Influence Functions):

· an Approved Person must act with integrity (Statement of Principle 1);

· an Approved Person must act with due skill, care and diligence (Statement of Principle 2);

· an Approved Person must observe proper standards of market conduct (Statement of Principle 3);

· an Approved Person must deal with the FSA and other regulators in an open and co-operative way and disclose appropriately any information of which the FSA would reasonably expect notice (Statement of Principle 4);

· an Approved Person must take reasonable steps to ensure that the business for which he is responsible is organised so that it can be controlled effectively (Statement of Principle 5);

· an Approved Person must exercise due skill, care and diligence in managing the business of the firm for which he is responsible (Statement of Principle 6); and

· an Approved Person must take reasonable steps to ensure that the business of the firm for which he is responsible complies with regulatory requirements imposed on that business (Statement of Principle 7).[989]

547. An accompanying code of practice defines in more detail what is meant by the principles.[990] These Principles for Approved Persons are designed to dovetail with the 11 Principles for Business which apply to the regulated entities themselves. These were developed to serve as "a general statement of the fundamental obligations of firms under the regulatory system", and cover similar issues such as acting with integrity and due skill care and diligence, treating customers fairly, avoiding conflicts of interest and dealing with regulators in an open and cooperative way.[991] Individuals carrying out significant influence functions have an obligation under Statement of Principle 7 above to ensure that businesses for which they are responsible comply with the Principles for Business.

RELATIONSHIP TO THE REMUNERATION CODE

548. The Approved Persons Regime is separate to the system of "code staff" to whom the Remuneration Code applies, although confusingly there is a high degree of overlap. We describe the Remuneration Code in more detail in the following chapter. The FCA/PRA Handbook sets out that:

992

In practice code staff will therefore include any individuals who hold significant influence functions under the Approved Persons Regime, even though there is no explicit link with the Approved Persons Regime functions. The Remuneration code also covers other individuals who are not SIFs, where they are material risk takers or high-earners (so for example star traders). The overlapping and circular definitions highlight the complexity and confusion of the current regimes, which are illustrated in simplified form in the figure below:[993]

The table below shows information obtained from the PRA on the number of individuals covered by the Approved Persons regime and the remuneration code in the largest 19 banking groups operating in the UK:[994]

Number of individuals

In the Approved Persons regime 26,575

Of which, Significant Influence Functions 1,180

Of which, Customer Dealing Functions 25,395

Covered by the remuneration code 2,743

What's wrong with the Approved Persons Regime

A NARROW SCOPE

549. The table above shows that only a relatively small proportion of the 450,000 or so people working in banks in the UK are subject to the Approved Persons Regime. The numbers in the table reflect only staff in the largest 19 banks, but other estimates of how many bankers are in the Approved Persons Regime suggest that coverage is still likely to be less than 10 per cent overall.[995] The Approved Persons regime covers those at the top of the organisation, a few specific functions at the next rung down, and then a wider population (often several rungs down) who deal directly with clients. It therefore misses out a number of groups who might nevertheless play important roles in banks and contribute directly or through weak supervision and control to both prudential and conduct failures in standards.

550. Inclusion within the Approved Persons Regime is the foundation of many elements of the enforcement regime described in Chapter 10. The Statements of Principle only apply to bank staff who are Approved Persons,[996] and in consequence the majority of bank staff who are not Approved Persons cannot be the subject of enforcement action for departure from those principles. The regulators can only use their full range of enforcement powers against individuals who are Approved Persons. In the case of individuals outside the Approved Persons Regime the only available sanction (apart from distinct offences such as insider trading or money laundering) is a prohibition order which prevents an individual from undertaking any regulated activity. It is harder to justify exercise of this severe power because an extended set of criteria needs to be met.[997] Anthony Browne told us

an awful lot of people in banks are not part of the Approved Persons Regime and so do not fall subject to its sanctions. For example, the people who submit LIBOR data and the people who are trading on the back of LIBOR data would not have been part of the Approved Persons Regime. That is why we said that one of the first things that we think needs to be looked at is expanding the regime to cover the sort of people you would expect to be covered by it and make it more public and visible.

551. Some individuals involved in LIBOR manipulation are being investigated by the Serious Fraud Office for possible criminal offences, and the FCA is also continuing its investigation into individuals. Neither have yet confirmed what action will be taken. However, Martin Wheatley confirmed that the scope of the Approved Persons Regime was one of the factors inhibiting their ability to take action:

998

Tracey McDermott also acknowledged that, if more individuals who were aware of LIBOR manipulation—as opposed to just those directly involved—had been covered by the Approved Persons Regime, it might have been possible to bring action against them for breaching Principle Four which requires that they "must disclose appropriately any information of which the FSA would reasonably expect notice".[999]

552. The scope of the Approved Persons Regime is restricted in part because it is attempting to fulfil two, quite distinct, functions. On the one hand, it is the route through which bankers have to abide by the Principles and can be subjected to enforcement action for a breach, which would suggest that it should have fairly broad coverage. On the other hand it is a pre-approval mechanism for verifying the fitness and competence of bank staff. Since this can be a burdensome and resource-intensive process, there is therefore a case for restricting it to only those performing key roles. It should be noted that the regulators already recognise that not all people within the Approved Persons Regime need the same level of pre-approval. Individuals performing customer-dealing functions are treated differently from those performing significant influence functions, and Martin Wheatley told us that even many SIFs are no longer interviewed:

1000

ABSENCE OF INDIVIDUAL RESPONSIBILITY

553. The regulators acknowledged that the existing regime is ineffective in identifying responsibilities within banks of significance when things go wrong. The FSA referred to "unclear, complex and confusing allocation of responsibilities amongst SIF holders".[1001] Tracey McDermott suggested that the low number of enforcement cases against senior managers in large banks was "partly to do with the problems of complexity in structures and a lack of clarity in structures about which senior management are directly responsible for individual decisions".[1002] The FSA wrote:

1003

The FSA added that it has proved difficult to bring cases against individuals in large organisations in part because

It is unclear who was responsible for a decision (or series of decisions) because lines of accountability are unclear or confused, or because they pass, at some point, through people who are not approved (and are not required to be).

554. The FSA has already taken action to clarify responsibilities in one specific area, when in October 2011 it required medium and large firms to appoint a new senior manager function—the client asset oversight function (CF10a). In proposing this, the FSA explained:

1004

555. The ability to establish clear individual responsibility is an essential pre-cursor to effective enforcement, a matter considered further in Chapter 10. Martin Wheatley said :

1005

556. The primary purpose of the significant influence functions within the Approved Persons Regime as currently designed is not to assign responsibilities, but rather to verify whether individuals are fit and proper to take up fairly broadly-defined roles. To some extent this may be appropriate, since it should not be for the regulator to specify how a firm should organise itself and divide responsibilities. However, it means that the Approved Persons Regime is not currently a mechanism for instilling a sense of personal responsibility among senior bank staff. Nor can it be used as the basis for identifying who is responsible for key activities, and for requiring them to take corrective action or holding them to account when things go wrong.

A ONE-SHOT APPROACH

557. The focus of the Approved Persons Regime at present is very much at the "approval" stage. Individuals must remain fit and proper while they are in post, but the FSA explained how it is harder to remove someone's authorisation than to deny it in the first place:

1006

558. Individuals have to seek new approval if they take up a new controlled function, but not if the nature of their existing function changes. For example, if an individual were approved to be a manager of a particular division which then grew significantly in size, there would be no opportunity to formally re-assess whether they were suited to handling the associated responsibilities.[1007] Similarly, if the regulator had some concerns about an individual being put forward for approval, for example about their competence, it would either have to turn them down completely or approve them. When approving someone, the regulator could set out its concerns and suggest a learning and development plan, but would lack formal powers to follow up on whether the concerns were subsequently addressed.

BUREAUCRATIC COMPLEXITY AND INERTIA

559. The Approved Persons Regime has been amended various times since its creation, but it has grown into a complex and unwieldy tool which further incremental changes alone seem unable to reform. The FSA had intended to introduce new SIFs relating to more specific positions following the Walker Review of Corporate Governance in late 2009, having concluded that the then existing structure of SIF roles did not contain sufficient segregation of key roles within bank governance structures.[1008] A consultation paper issued by the FSA in January 2010 identified nine possible new SIF roles such as chairman, chairman of specific board committees, and executives in charge of finance, risk and internal audit.[1009] The policy commitment to place these new roles within the Approved Persons Regime was confirmed in a policy statement issued by the FSA in September 2010, which included a timetable for implementation by firms, largely by July 2011.[1010]

560. However, in March 2011, the FSA issued a press releasing stating:

1011

In October 2012, the FSA confirmed that a separate proposal to add another, non-SIF, role was also being delayed for an unspecified period due to the higher priority attached to "an essential Information Systems programme of work".[1012]

561. The Approved Persons Regime is operated via an online notifications and applications platform (ONA).[1013] There has been some industry criticism about the effectiveness and adaptability of ONA, in response to which the FSA has stated "The complex changes around the reform of the UK regulatory structure have had an impact on our regulatory system, including the online notification and applications system".[1014] It is perhaps notable that the application process for the new controlled functions CF10a (introduced in October 2011) and CF40 and CF50 (introduced in April 2013) are paper-based rather than using ONA.[1015]

562. In April 2013, the FCA provided further information on progress on the reform ideas that first emerged in January 2010. It stated that, while these changes had "had to be deferred for operational reasons [...] we are now considering these plans in the light of the new regulatory framework". After outlining possible further reforms relating to the identification of key roles, the FCA stated that "All proposals will be consulted on as necessary, in due course".[1016]

563. The Approved Persons Regime was established in the Financial Services and Markets Act in 2000 under the sole control of the FSA. The regime has not been changed significantly following the division of the FSA into the FCA and the PRA under the Financial Services Act 2012, but new arrangements have been put in place to address the fact that both regulators have an interest in the people who run banks. The Act requires the regulators to specify functions in a way which minimises the likelihood of a person requiring approval from both bodies. This has resulted in a complex division of responsibilities:

· The PRA will authorise people for roles CF1, CF2, CF3, CF4, CF5 CF6 or CF28 in relation to banks;

· The FCA will authorise people other than these in relation to other controlled functions;

· Where a PRA-authorised person also performs a CF8 function, which would normally fall under the FCA, they do not need to make a separate application to the FCA but must notify them of when they begin or cease to perform the role; and

· Where a PRA-authorised person also performs functions other then CF8 which fall under the FCA, they must seek separate authorisation from the FCA.[1017]

CONCLUSIONS: THE FAILURE OF THE APPROVED PERSONS REGIME

564. As the primary framework for regulators to engage with individual bankers, the Approved Persons Regime is a complex and confused mess. It fails to perform any of its varied roles to the necessary standard. It is the mechanism through which individuals can notionally be sanctioned for poor behaviour, but its coverage is woefully narrow and it does not ensure that individual responsibilities are adequately defined, restricting regulators' ability to take enforcement action. In principle, it is the means by which the regulator can control those who run banks, but in practice it makes no attempt to set clear expectations for those holding key roles. It operates mostly as an initial gateway to taking up a post, rather than serving as a system through which the regulators can ensure the continuing exercise of individual responsibility at the most senior levels within banks. The public are rightly appalled by the small number of cases in which highly-paid senior bankers have been disciplined for the costly mistakes they have allowed to occur on their watch.

565. The PRA has announced that it intends to undertake a fundamental review of the Approved Persons Regime in order to ensure that it is fully aligned with, and effective in delivering, the PRA's statutory objectives.[1018] The FCA has entered "the first (pilot) stage" of a review of Significant Influence Functions involving a sample of 8 firms, and intends "the results of this pilot review" to serve as the basis "to consider our approach to a full review".[1019] Faced with the weaknesses of the Approved Persons Regime laid bare by the failures of individuals in recent years, the FSA responded to the need for reform with dilatoriness, seemingly paralysed by the operational deficiencies of the existing system and unwilling to contemplate moving away from the familiarity it represents. Changes first mooted in January 2010 and agreed in September that year have gone back to the drawing board and been made subject to a further consultation, preceded by a pilot review and then a full review.

566. The FSA and its successors have proposed changes to the Approved Persons Regime, but there is a risk that these may be pursued with the timid approach of recent years. We have considered the case for reform of the Approved Persons Regime, but have concluded that incremental change will no longer suffice. A new regulatory framework for individuals within banking is urgently needed, and it cannot be secured by adding new layers on the rickety foundations of the Approved Persons Regime.

The role of professional bodies

IS BANKING A PROFESSION?

567. In view of the ineffectiveness of the Approved Persons Regime as a control on the standards of individuals within banks, the Commission considered evidence on the role that professional bodies might play in taking up the slack. The Chartered Insurance Institute suggested that professions generally embodied "the so-called three pillars of professional standards", which it listed as:

Qualifications:

Continuing professional development (CPD):

Ethics and integrity:

1020

To these three pillars might be added a fourth pillar in the form of "professional standards bodies"—organisations which provide qualifications and training, set out the expected code of conduct and police behaviour.

568. Some witnesses suggested that banking exhibited characteristics that would make it a profession, even if, at the moment, all of the necessary components of a profession did not exist.[1021] The Chartered Banker Institute said:

1022

The Chartered Insurance Institute agreed that information asymmetries inherent in financial services are the reason why professional standards are a crucial ingredient.[1023] The Chartered Institute for Securities and Investment said:

banking has to decide whether it is a profession or a trade. If it believes it is a profession, then it has to behave like one and accept or adopt the generally recognised requirements of a profession.

569. However, Neil Jeffares, a former senior City banker, warned:

Banking is a strictly profit-making business, and is not, and never has been, a profession in the sense that, say, medicine or the law is. Many in the City, including myself, have been confused about this, and have attached undue attention to the protection of reputation and sought to impose what we saw as professional standards on staff in the mistaken belief that such values would attract business.

He went on to point out that the crucial difference in banking is that customers are rarely buying the knowledge and services of an individual, but instead are transacting with a corporate entity:

1024

QUALIFICATIONS AND TRAINING

570. Many professions require a common qualification or set of qualifications which all practitioners must hold. This may involve a common degree, such as in law or medicine, or qualifications undertaken as part of entry to the profession such as in accountancy or teaching.

571. A number of witnesses noted that there had been a decline in the level of professional qualifications held by those working in banking. The IFS School of Finance (formerly the Chartered Institute of Bankers) observed:

1025

Simon Thompson, Chief Executive of the Chartered Banker Institute, thought that there had been "a professional culture in banking, probably until the late 1980s".[1026] His organisation provided figures charting the decline in its own membership and that of another Chartered Institute:

1027

572. Professional qualifications have never been a formal requirement for being a "banker". Some specific functions within banking already entail specific professional requirements. For example, lawyers, accountants and actuaries operating in that capacity within banks are likely to be subject to the requirements and disciplines of their own professions. The FSA's recent Retail Distribution Review required retail investment advisors, some of whom will be found within banks, to meet professional requirements including qualifications and membership of an accredited body.[1028]

573. Some witnesses proposed that entry qualifications and continuing professional development should be extended and made mandatory across a wider range of individuals working within banking. The TUC argued for the "introduction of appropriate entry requirements and ongoing professional licensing",[1029] while Peter Vicary-Smith said that "you would expect them at least to have some form of qualification and training in things such as how to serve a customer and what is fair treatment".[1030]

574. Accord made a case that was more focused on the higher echelons of retail banks, proposing that "acquisition of appropriate banking qualifications" should be:

1031

Such an approach focused only on senior individuals would contrast with the legal profession where controls are at entry level and, following recent reforms, it is possible to own and manage a law firm without being a qualified lawyer.[1032]

575. The IFS School of Finance argued that a single compulsory qualification for bankers would not be appropriate:

the term 'banker' could be used to describe a range of individuals in a bank performing a very wide variety of different roles having achieved professional qualifications from a variety of professional bodies. The concept of a one-size-fits-all professional qualification for "bankers" is outmoded, unrealistic and probably inappropriate.

1033

Barclays agreed that "a single specific technical banking qualification" was inappropriate in view of the diversity of banking, but contended that there was a shared core of knowledge:

1034

576. Some banks stated that they had started placing a greater emphasis on formal qualifications. RBS referred to their programmes for relationship managers and retail bankers, which are externally accredited.[1035] Lloyds Banking Group commented on the accredited training they make available to staff.[1036] Benny Higgins, Chief Executive of Tesco Bank, stated that his organisation's aim was for "every one of our front-line colleagues to have a professional qualification related to the work they do".[1037] The IFS School of Finance said that "some of the large high-street banking firms in the UK have started to put their staff through qualifications", with its qualifications for front-line bank staff having been taken by over 5,000 bank staff, a number that was expected to more than double over the following 12 months.[1038] The Chartered Banker Institute said that 17,000 individuals held one of their professional banking qualifications, and that over the previous three years a further 17,000 individuals had completed a third-party course accredited by the Institute.[1039] Santander argued for giving more weight to the qualifications provided by existing professional standards bodies:

1040

STANDARD SETTING AND CODES OF CONDUCT

577. A second important component of a profession emphasised by witnesses was that there should be a common code of conduct, with a high level of understanding among practitioners about the expected standard of behaviour. Such a code would be embedded in training. Barclays argued for "an industry-wide 'code' of professional standards".[1041] CFA UK said "All staff should be required to abide by and adhere to a code of ethics and standards of professional conduct".[1042] Which? stated:

1043

The CBI suggested:

1044

578. Some witnesses warned not to put too much faith in codes. Gavin Shreeve, Principal of the IFS School of Finance, said:

1045

The IFS School of Finance pointed out that the banking sector has not lacked codes in the past:

1046

579. Which? pointed out that the Goldman Sachs code of business conduct and ethics in 2009 championed "integrity and honesty" as being "at the heart of our business", but contained a caveat that "from time to time, the firm may waive certain provisions of this Code".[1047] Another example of a code is the Worshipful Company of International Bankers' Principles of Good Business Conduct, which set out high level statements about honesty and integrity and were suggested by the BBA as a possible model for a new cross-industry code.[1048] However, it is perhaps telling that in the WCIB's evidence the only reference they make to how the principles are currently promulgated is that "Members of the WCIB (and their guests) are reminded of the Principles at each annual banquet as they are reproduced in full on the menu card for the event".[1049]

580. Several banks referred to the Chartered Banker Professional Standards Board (CB:PSB), which is a voluntary initiative launched in 2011 and supported by nine leading banks. The Chartered Banker Institute stated that the CB:PSB's aim is:

1050

The CB:PSB has issued a code of conduct which sets out "ethical and professional attitudes and behaviours expected of bankers", which CEOs of all member banks have agreed to subscribe to and are implementing within their organisations.[1051] It is also developing a series of professional standards aimed at bankers with different levels of expertise and specialism, which will "set clear benchmarks against which colleagues, customers and others can measure bankers' professional competence".[1052]

581. An effective code for standards of professional behaviour cannot be a document which employees simply sign and then forget about. The expected standards must be embedded in an individual's objectives, training and appraisal. Gavin Shreeve explained the role that training bodies can play in imbuing all their students with an understanding of acceptable banking behaviours:

1053

However, in the absence of true professional requirements in banking, it is questionable to what extent existing bodies focus on behaviour as opposed to the technical skills likely to be more prized by employers. A review of the syllabus for the IFS professional certificate in banking suggests that standards feature less prominently than Mr Shreeve's statement would imply. For example, the detailed syllabus of the module on business lending makes no reference to culture, standards or the need to treat customers fairly.[1054]

DISCIPLINE AND CONTROL

582. In some established professions, professional bodies have an important and sometimes leading role in the exercise of control on individuals within the profession. Standards based on the code of conduct and the required qualifications are set and given force by the fact that breaches can result in disciplinary action, up to and including exclusion from the profession. Some witnesses proposed that a professional standards body should be given a comparable role in enforcement in banking. Mike Dailly, from the FSA Consumer Panel, believed that such a body would overcome the problems the FSA faced in enforcement because "having a profession [...] gets round all the legal problems about criminal sanctions and civil sanctions.[1055] The Church of Scotland also advocated giving a professional body for banking enforcement powers,[1056] as did the consumer group Which?:

1057

583. The BBA made the case for the establishment of a Banking Standards Review Council (BSRC), which it argued would need "some statutory or regulatory support" in order to be "credible and effective", but was cautious on whether this would constitute a disciplinary body.[1058] It noted that the BSRC would "need to have some statutory or regulatory support, be independent of the industry and be universally applicable to all sectors of the banking industry".[1059] However, it acknowledged it to be "difficult to see how the Banking Standards Review Council could have a role in individual cases of misconduct without duplicating the existing Approved Persons Regime and encountering difficulties with employment law and Human Rights legislation".[1060]

584. Barclays thought that some of these difficulties could be overcome. It made the case for a professional standards body with disciplinary powers, arguing that a BSRC could establish a code and then "enforce requirements for sanctions against breaches of the code". It acknowledged that:

1061

Sir David Walker explained how this approach could provide more effective enforcement than a regulator:

the core proposition [...] is to have a concept that everyone working in banking is, to an appropriate degree, part of a professional body. This would be alongside, but much bigger than the Approved Persons regime.

[...] The disciplinary process that I would have in mind and would commend is that those banks—let's take Barclays—that participate, and I imagine that most banks would wish to participate in such an arrangement if it were set up, would undertake that when someone is fired or separated because they do not conform to the standards, we would have an obligation to indicate to the register, or whatever it is called, that that individual had left our employment because of a breach. It would still be open to that individual to appeal and say to us, "I have been dismissed unfairly", and employment law would persist.

It is very important that we not only are able, but have an obligation to put on the register that the individual has been separated for a particular reason. The counterpart of that is that there would be an obligation on any bank that wished to employ that individual to consult the register and take a view about whether they wanted to employ the individual—he or she having a mark against them.

RBS also supported the proposal for a professional standards body having disciplinary powers, referring to the Chartered Banker Professional Standards Board (CB: PSB) established under the Chartered Banker Institute:

1062

585. In contrast, the City of London acknowledged that no answer had yet been found to the question of how far and in what form a new body should undertake enforcement:

1063

586. It is notable that the existing professional standards bodies in banking have to date failed to make use even of what limited enforcement action is already within their powers—removal of membership. The President of the Chartered Banker Institute confirmed that Fred Goodwin was still a member of the Institute, even though this was "a matter of very considerable concern to the great majority of our members", as well as being "a legitimate matter of public interest". He explained that Fred Goodwin had "not been judged to have breached the FSA's Principles for Approved Persons, to which the Institute's Code of Conduct has been mapped", and thus could not be judged to have breached that Code of Conduct without a separate investigation. The Institute had no statutory powers of investigation, and no power to ensure a fair hearing for a member subject to disciplinary proceedings.[1064] Fred Goodwin had his knighthood removed without any judicial process, and it was reported that even a golf club had taken a decision to refuse him membership, but the relevant professional body felt constrained from acting.[1065] This is despite the fact that membership of the Chartered Banker Institute has little or no effect on an individual's ability to act as a banker.

LESSONS FROM OTHER SECTORS

587. In order to consider what role a professional standards body could play in providing an individual enforcement regime, we looked at how such bodies operate in other sectors, in particular in the professions of law, medicine and accounting. Representatives from the relevant bodies argued that they had credible and effective sanctioning regimes, with a range of sanctions very similar to those available to the FSA. Vernon Soare, Executive Director of the Institute of Chartered Accountants in England and Wales, said:

We can give various levels of reprimand. We can give a consent order, which is a fine and an admission of wrongdoing. Those are published. If it is a serious matter, a consent order is probably not appropriate, so it goes through to our full disciplinary committee, a tribunal of which will hear the case in public. The outcome can be unlimited fines with exclusion from membership for a period.

[...]If we have licensed somebody for audit—in the parlance, a "responsible individual" who is licensed to sign off on company audits—our sanctions go right up to taking away the licence from the individual and de-registering the firm, but there are various conditions we can place on their licence and fines as well. There is quite a range of penalties that we can introduce.

588. Professor Sir Peter Rubin, Chairman of the General Medical Council, told us:

We have a range of powers, which include the power to stop a doctor practising immediately if there is a prima facie case while we are waiting for the case to be heard. Then we have got powers to give letters of advice, letters of warning, conditions on practice and either to suspend from the medical register or to erase from the register. [...] Under the Human Rights Act there has always got to be the right of appeal at some point down the line.

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Antony Townsend estimated that between 50 and 100 solicitors were struck off each year, with around 200 to 300 cases going to tribunal, adding that "quite a lot of sanctions in the lower category do not get as far as the tribunal".[1067]

589. In some established professions there is normally a clear distinction between functions such as professional development and the mechanism for investigating breaches and imposing sanctions, with the latter being on a statutory basis. Dr Timothy Johnson of Heriot-Watt University noted that:

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The key reason for such separation is that, if a professional standards body is to be able to impose meaningful sanctions such as removal of livelihood or fines, under Article 6 of the European Convention on Human Rights (ECHR), individuals have a right "to a fair [...] hearing by an independent and impartial tribunal".

590. As some witnesses noted, other professions have had to reform their structures and enforcement mechanisms in response to scandals, in order to restore or maintain trust. Sir Peter Rubin of the General Medical Council stated:

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Vernon Soare of the Institute of Chartered Accountants in England and Wales added:

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591. In order to ensure that the procedures for imposing sanctions are robust and effective, reform in other professions has increasingly meant giving a statutory basis to disciplinary powers. Professor Sir Peter Rubin told us: "There is still a role for professional self-regulation within teams and organisations but, in my view, and certainly as far as my profession is concerned, there has to be a statutory backstop that can oversee the whole process".[1071] Vernon Soare explained how, in the accountancy profession, bodies such as the Institute of Chartered Accountants in England and Wales have taken over many of the statutory individual enforcement responsibilities from the FRC:

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Making a choice

592. The Commission received strong encouragement to put a great many eggs in the professional standards basket. The Chancellor stated:

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After the Commission concluded taking oral evidence, Anthony Browne expressed confidence that we would make proposals in this area:

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593. In a number of established professions, the disciplinary framework for individuals has developed organically over a long period, alongside a professional ethos, professional standards, and the associated knowledge, learning and behaviour. Some of the evidence received by the Commission envisaged the fast-track creation of a professional body for banking which would establish a new disciplinary framework while simultaneously raising the level of professional standards and associated knowledge.

594. Martin Taylor was very sceptical about the timetable over which a professional standards body could add value in banking:

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Malcolm Crow, a long-standing employee of a Swedish bank, identified the risks associated with concentrating on creating a new professional code and body for bankers:

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595. The Institute of Chartered Accountants in England and Wales considered that, while a professional standards body could play a useful role in some areas, enforcement would need to remain the responsibility of the regulators for the foreseeable future:

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The FSA emphasised the risks associated with placing formal responsibilities on a professional standards body:

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Simon Thompson, the Chief Executive of the Chartered Banker Institute, echoed the view that a choice had to be made:

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596. Poor standards in banking and the public's response to them have generated an impetus within the banking industry to make proposals for professional banking standards. This impetus is welcome and must be harnessed. Some progress can be achieved through the emergence of a credible professional body in banking, and the next section identifies important milestones in such a process.

597. However, it is questionable whether the business of banking possesses sufficient characteristics of a profession to lend itself to direct control through a professional body. "Banking" involves a wide range of activities and lacks the large common core of learning which is a feature of most professions. It is a long way from being an industry where professional duties to customers, and to the integrity of the profession as a whole, trump an individual's own behavioural incentives. A professional body alone does not guarantee high standards, as illustrated by the varied scandals in a range of other sectors where such bodies exist.

598. There are also very substantial risks of duplication between the powers and role of a professional standards body and those of regulators, as well as risks that the creation of such a body could become a focus of public policy, diverting attention from the changes that are urgently needed within the existing regulatory framework.

Milestones for a professional body

OUR APPROACH

599. If a unified professional body for banking in the UK is to emerge, the onus should lie on the industry itself to maintain the impetus for its development. Such a body needs first and foremost to be created through the will, and with the resources, of banks and those who work in the UK banking sector. The Commission's aim in this section is to identify milestones for its development and to assist in fostering its establishment and growth. However, the emergence of a professional body should be consistent with the wider regulatory and legislative reforms needed in banking. It must not be seen as a necessary precursor to those reforms, still less as a substitute for them.

CODES OF CONDUCT AND ENFORCEMENT

600. Banks maintain that there would be benefits if they were to adopt, implement and commit to enforce a single code of conduct prepared by a unified professional body, which reflected a higher set of standards and expectations for individual behaviour than those required by the regulator. Providing statutory powers to a professional body would mean either stripping away many powers from the regulators, including the new powers that we propose in this and subsequent chapters, or risking double jeopardy for individuals. No proponents of a professional body have come forward with a plan which the Commission believes is credible for how to address this problem.

601. While we support the creation of a professional standards body to promote higher professional standards in banking, the case for it to share or take over formal responsibility for enforcement in banking will only gradually be able to prove itself and so we do not recommend the establishment of such a body as an alternative to other regulatory measures. However, preliminary work to establish a professional body should begin immediately as a demonstration that commitment to high standards is expected throughout banking and that individuals are expected to abide by higher standards than those that can be enforced through regulation alone. On the basis of our assessment of the nature of the banking industry, we believe that the creation of an effective professional body is a long way off and may take at least a generation. It is therefore important that the trajectory towards professionalisation is clearly signalled immediately and that initial practical proposals for such a body are tabled at an early stage. Work can begin immediately on bodies for the most readily identifiable parts of banks which would benefit from professional standards. These include retail banking, the most senior levels and specialist areas such as insolvency and debt recovery.

PARTICIPATION BY BANKS

602. In his evidence, Sir David Walker, a prominent advocate of a unified professional body for banking with a wide-ranging role, indicated that he viewed participation by banks in such a body as voluntary, referring to his belief that banks would wish to participate in such a body.[1080] An important milestone on the road to the successful development of a professional standards body would be that it could claim comprehensive coverage of all banks with operations in the UK. If banks were to decline to assist in a body's development, or to seek to resile from participation in due course, the credibility and effectiveness of the body would be significantly damaged.

SCOPE

603. In describing their commitment to extend professional qualifications within banking, both individual banks and current providers of training referred variously to "front-line" staff, retail banking, "high-street banking" and "relationship managers".[1081] This approach suggests a risk that an approach will develop which concentrates on staff at lower levels or who have customer-facing roles, excluding staff involved in other crucial activities within retail banking and in wholesale market activities.

604. Just as there is a risk that a professional body might concentrate on the retail rather than wholesale banking, there is a risk that it will focus on new entrants at the most junior levels of the industry. Imposing a requirement for a mandatory qualification for all those operating within the industry without regard to past experience would impose an unfair burden upon many individuals at all levels. However, an arrangement whereby those of a certain seniority or experience were deemed exempt from any professional requirements would pay scant regard to one of the lessons of recent events. In our Fourth Report on the failure of HBOS we observed that:

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605. It is possible that, as a result of career paths that bypass commercial banking, fewer individuals rising to senior levels in recent times have had substantial direct experience of credit assessment and what causes loans to go bad. This may even be true for those who do have a background in commercial banking, as a result of increased reliance on automatic credit scoring and the creation of specialised debt recovery units. Whereas in the past senior executives would have had this essential grounding without the need for training or qualifications, there may be a greater need now to ensure that people running a bank have the right knowledge to avoid future crises. The fact that individuals can run banks and take decisions involving significant prudential risks without being required to have any formal qualification or background in the field is a particularly notable gap.

606. The main challenge in establishing a common set of standards and requirements for banking is that this is an industry which carries out a diverse and rapidly evolving set of activities. In professions such as medicine, law and accountancy there is a large common core of skills and values inculcated in the course of pre-qualification education or training. Banking is not currently a profession in the same way and cannot become so by the stroke of a pen. The wide variety of roles in banking, and the focus on commercial transactions rather than individually-provided services, represent significant barriers to a process of professionalisation.

607. The starting point for the successful development of a unified professional body for banking must be a commitment to identify the core common skills required of those working in banking, with particular emphasis on the skill set required of those at the very top of banks. At the same time, it must address the challenge that there is likely to be no one-size-fits-all solution to an industry as diverse as banking. It will only establish and maintain its credibility if it establishes qualifications or professional requirements which are relevant at various levels and in various forms of banking. A set of expected qualifications which forces bank clerks to night school for years to come, but gives a free pass to those working in wholesale banking or at more senior levels—the groups which most conspicuously failed in recent years—would ignore the lessons of the crisis.

TRAINING AND CONTINUING PROFESSIONAL DEVELOPMENT

608. The professional bodies already operating within banking have forged their reputation on their role in providing the training necessary to secure professional qualifications. Indeed, one of those bodies, now renamed the IFS School of Finance, has effectively transformed itself into a training provider. A unified professional body might play a role, alongside other providers, in offering training and continuing professional development. However, we believe that a unified professional standards body should on no account be accorded a role as a monopoly supplier of certain training to the banking industry. A unified body's distinct contribution is more likely to be in helping to shape a curriculum for bank qualifications and for the accreditation of those qualifications.

FUNDING AND INDEPENDENCE

609. A key indicator of independence for professional bodies is whether, in addition to setting standards, they are also responsible for representing the interests of their members to government and in the media. The SRA and GMC were clear that they did not undertake such activities on behalf of their members. In the case of the medical profession a separate body, the British Medical Association, undertook such representative activities. While the Law Society represented the legal profession, there was a clear statutory division of responsibility for regulation to the SRA for solicitors and across the profession to the Legal Services Board. The ICAEW combined both functions, but defended the position as follows:

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610. The method by which a professional body is funded is also a factor which influences independence or at least the perception of whether or not a body is independent. All three professional bodies who gave evidence to us are funded mainly by membership fees but did not see this as an impediment to their independence. The GMC thought that funding through a membership fee was a better system than other options, such as taxation.[1084] The SRA supported this view and emphasised the need for the board of a professional body to be independent of its members:

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The BBA, in making the case for a new professional body in banking, acknowledged the need for the body to be independent both of the BBA and of individual banks.[1086]

611. A unified professional body for banking should have no need of public subsidy, either directly or indirectly. We would expect such a body to be funded by participating banks and individual qualified members. However, it would also need to establish independence from the outset, through its forms of governance, its disciplinary procedures and through the personnel at senior levels. The body must never allow itself to become a cosy sinecure for retired bank chairmen and City grandees. Just as importantly, it must eschew from the outset and by dint of its constitution any role in advocacy for the interests of banks individually or collectively.

The Senior Persons Regime

THREE NEW PILLARS

612. We concluded earlier that the slow and incremental approach to reform of the Approved Persons Regime envisaged by the FSA and the FCA, adding new functions in a piecemeal manner and as its inadequate operational systems permit, does not represent the right way forward. We have also concluded that a professional body for banking, welcome though its development would be, cannot fill the space currently occupied by the Approved Persons Regime and the associated enforcement arrangements. In the remaining sections of this chapter we set out the three main pillars of a new system to replace the Approved Persons Regime:

· A Senior Persons Regime to replace the Significant Influence Function element of the Approved Persons Regime. This should provide far greater precision about individual responsibilities than the system that it replaces, and would serve as the foundation for some of the changes to enforcement powers and approach that we recommend in Chapter 10;

· A Licensing Regime to replace the Approved Persons Regime as the basis for upholding individuals' standards of behaviour, centred on the application of a revised set of Banking Standards Rules to a broader group than those currently covered by the Statement of Principles for Approved Persons; and

· Reform of the register to support the first two pillars and ensure that relevant information on individuals can be captured and used effectively.

A NEW REGIME

613. There is evidence to suggest that the Government and the regulators are already considering how to respond to acknowledged weaknesses of the Approved Persons Regime. In its consultation on sanctions for directors of failed banks, the Treasury stated that in order to address the lack of clarity about responsibilities and expected performance standards, it might be appropriate to introduce:

Clearer regulatory requirements regarding individual responsibilities and the standards required of people performing certain key roles; or

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Andrew Bailey noted:

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614. Tracey McDermott acknowledged how the Approved Persons Regime provides an inadequate basis for enforcement against senior individuals, and told us the FCA are considering how to address this problem:

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The FCA explained further the aims of this SIF audit:

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615. Some witnesses put forward arguments for the importance of collective as opposed to individual responsibility, based on the view that this mitigates the risk of powerful individuals running their own fiefdoms without proper checks and balances. The Salz Review pointed out how this risk had materialised at Barclays in the run-up to the financial crisis, describing "a decentralised system of accountability with a powerful leader for each of the 'clusters'".[1091] The Review noted how this led to less debate and challenge within the business:

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Stuart Gulliver said "I think that having joint and several responsibility—not 'no one's responsible'—is the way to manage the risk", while Douglas Flint said this means that "you can't sit in the room and say, 'My gosh, so-and-so has got a difficult challenge, it's his challenge not mine'".[1093]However, moving too far towards a situation where everyone is responsible risks resulting in nobody being responsible.

616. The Commission recommends that the Approved Persons Regime be replaced by a Senior Persons Regime. The new Senior Persons Regime must ensure that the key responsibilities within banks are assigned to specific individuals who are aware of those responsibilities and have formally accepted them. The purposes of this change are: first, to encourage greater clarity of responsibilities and improved corporate governance within banks; second, to establish beyond doubt individual responsibility in order to provide a sound basis for the regulators to impose remedial requirements or take enforcement action where serious problems occur. This would not preclude decision-making by board or committee, which will remain appropriate in many circumstances. Nor should it prevent the delegation of tasks in relation to responsibilities. However, it would reflect the reality that responsibility that is too thinly diffused can be too readily disowned: a buck that does not stop with an individual stops nowhere.

DEFINING SCOPE AND RESPONSIBILITIES

617. The Senior Persons Regime should apply to all banks and bank holding companies operating in the UK. The Commission would expect that the Senior Persons Regime would cover a narrower range of individuals than those currently in Significant Influence Functions. Many of the people in these functions are not really senior decision-takers. Taking them out of scope, though still subject to the Licensing Regime that we propose below, would allow the Senior Persons Regime to focus much more clearly on the people who really run banks and who should stand or fall by their role in decision-making. Beyond board and executive committee members, who should always be within scope, primary responsibility for identifying which individuals fall within the regime and how their responsibilities are defined should rest in the first instance with the banks themselves. We would expect such responsibilities to cover both prudential and conduct issues, such as product design. It should not be for the regulator to prescribe how banks structure their management, because it is important that banks retain the flexibility to do this in the most appropriate way for their business.

618. The Commission recommends that regulators set out in guidelines how responsibilities are to be identified and assigned, and should have the power to take action against firms when it is satisfied that they are not following these guidelines. We would expect these to include the points below:

· All key activities that the business undertakes or key risks to which it is potentially exposed should be assigned to a Senior Person;

· The assignment of formal responsibilities should be aligned with the realities of power and influence within a bank and should reflect the operation of collective decision-making mechanisms;

· Individuals should be fit and proper to carry out responsibilities assigned to them, and be able to demonstrate the necessary skills and experience;

· Responsibilities may be shared only where they are generic to the office, such as a non-executive member of the board; otherwise, they should be specific to an individual;

· A Senior Person cannot report directly to anyone within a UK-based organisation who is not themselves a Senior Person; and

· A bank's board should have a duty to regularly certify to the regulator that their firm is fulfilling its obligations under the Senior Persons Regime.

In Chapter 7 we make recommendations on some additional principles and some specific responsibilities which would need to be assigned.

619. Tracey McDermott told us that regulators already seek to identify a responsible individual when they impose remedial requirements on a firm:

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620. Regulators will need to show judgement and realism in exercising their enhanced powers. The Commission recommends that the regulators also be given a power to designate time-limited or remedial responsibilities that must be assigned to an individual within or thereby brought within the Senior Persons Regime.

ENTRY, REVIEW AND CONDITIONS

621. In recent years, the practice of interviewing those who are seeking to hold Significant Influence Functions has developed. Sir Mervyn King has already announced an intention to narrow the extent of such interviews, saying "we will reduce the number of people subject to the intensive regulatory interview process before appointment by limiting such interviews to the most senior people".[1095]

622. One weakness of the Approved Persons Regime is that ongoing review of fitness and properness for responsibilities has been hobbled by the weaknesses of the enforcement system and by the 'all or nothing' feel of refusal in the context of a regime which does little to distinguish between very different responsibilities. The FCA has suggested that a power to reassess individuals would be particularly useful in situations where the role performed by the person has changed sufficiently from the original position approved (such as where the bank has increased significantly in size and complexity or the scope of the role changing materially which may require different skills or skills at a different level).[1096]

623. In the context of the current SIF approval process, the FSA argued that, in high-risk firms and for certain types of approval, the regulators should be able to limit approval to a certain time period.[1097] Sir Hector Sants made a similar and more specific proposal:

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624. The FSA opposed mandatory reassessment of SIFs, but suggested that:

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625. It would be a mistake to prescribe a one-size-fits-all approach to the assessment of fitness and properness to assume a position as a Senior Person. What matters more is that the checks are geared to the responsibilities proposed for the individual and reflect supervisory judgement by senior regulators with involvement in the supervision of the bank concerned, rather than a box-ticking exercise by an isolated unit. The stated intention of regulators to focus more rigorous pre-approval checks on a smaller number of key individuals is to be welcomed.

626. The Commission considers that it would be unduly onerous for both the regulators and the regulated to make Senior Person status subject to periodic review. However, the Commission recommends that the regulators be given clear discretionary powers to review the assignment of responsibilities to a particular individual and require the redistribution of certain responsibilities or the addition of certain conditions. We would expect these powers to be exercised where, for example, a bank undergoes rapid expansion or where the regulators have reason to question a bank's approach to the allocation of responsibilities. We also recommend that the regulators be able to make approval of an individual Senior Person subject to conditions, for example where it is felt that they need to acquire a certain skill to carry out the job well. It is essential that the regime evolve and adapt over time. It would be a disaster if it were to relapse back into a one-off exercise that applied, in practice, only on entry, as with the Approved Persons Regime.

627. Arrangements for the allocation of individual responsibilities within banks will need to take account of changes in personnel. The Commission recommends that it be a requirement of those in the Senior Persons Regime that, before relinquishing any responsibilities that are to be passed to a successor, they prepare a handover certificate outlining how they have exercised their responsibilities and identifying the issues relating to their responsibilities of which the next person holding them should be aware. Such handover certificates should be held by banks as a matter of record, and should be available to the regulators both to assess the effectiveness of the Senior Persons Regime within a particular bank and to assist with the attribution of responsibility in the event of subsequent enforcement action. Such a certificate could also serve as an important source of information in recouping remuneration in accordance with our proposals in Chapter 8.

The Licensing Regime

BROADENING THE REGIME

628. Our proposal for a Senior Persons regime addresses the weaknesses in personal responsibility at the most senior levels of banks. However, this represents only a partial solution to the much more pervasive failures of individual standards and culture in banking. Our proposals for a Licensing Regime seek to address these failures by tackling three wider issues: the patchy and inadequate coverage of the Approved Persons Regime, the need for banks themselves to be held responsible for promoting and upholding standards for their employees, and the need for a robust mechanism for sharing information about problematic individual behaviour.

629. The scandals relating to mis-selling and LIBOR illustrated the weaknesses of the Approved Persons Regime and the associated enforcement regime. Activities carrying important conduct risks were in the hands of people who were not required to follow the FSA's Statements of Principle for Approved Persons, and who the regulator was therefore constrained in its ability to sanction despite evidence of clear failures in banking standards.

630. The US regulatory authorities told us that their system utilised the concept of "institution-affiliated parties", which allows them to bring enforcement action against any employee of a bank from top to bottom.[1100] The FCA called for

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631. The proposals for the Senior Persons Regime involve a targeted and specific approach for those in the positions at the highest levels and bearing the greatest responsibilities. Such a system would be unduly intrusive and burdensome if applied more generally. We asked Martin Wheatley whether coverage of the Approved Persons regime could be expanded without requiring a burdensome application and approval process. He replied:

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632. Regulators' ability to take enforcement action only against individuals who are covered by the Approved Persons Regime results in inadequate coverage, notwithstanding the fact that, in practice, such enforcement action has seldom been taken. Additionally, requiring that only this relatively small sub-set of bankers needs to uphold the Statements of Principle for Approved Persons undermines a wider sense of responsibility and aspiration to high standards throughout the banking sector. We have already considered and rejected proposals to rely solely on a professional standards body and a code of conduct to address these problems. Instead, the Commission recommends the establishment of a Licensing Regime alongside the Senior Persons Regime. Under this a broader set of bank staff would be contractually obliged to adhere to a set of Banking Standards Rules, which the regulators could enforce against and which would replace the existing statements of principle.

633. The Commission recommends that the Licensing Regime cover anyone working in banking, including those already within the Senior Persons Regime, whose actions or behaviour could seriously harm the bank, its reputation or its customers. It would not need to cover staff working in auxiliary or purely administrative roles, or those in junior positions whose autonomy and responsibility is very limited. Such a scope is likely to include all staff currently covered by the Approved Persons Regime, including those in customer dealing functions.

634. Because the Licensing Regime will be broader in its application than the Approved Persons Regime it is important that it operate with a minimum of bureaucratic process. Entry should not require pre-approval by the regulators, but should require employers to verify the fitness and propriety of staff, including checking the register for any record of past disciplinary action. The existing Statements of Principle for Approved Persons and the accompanying code of conduct are not intrinsically wrong, but they do not constitute a sufficiently robust foundation for improving banking standards. The Commission recommends that regulators develop, after consultation with banks, staff, unions and those bodies already working on codes of conduct, a new set of Banking Standards Rules. These should draw on the existing principles and apply to a wide group of individuals, forming the foundation of their understanding for how they are expected to behave: the rules should be written in a way which is readily meaningful for those who must adhere to them, unlike the current statements and code which are complex and heavy with legalistic cross-references to other regulations. The rules should be generally applicable to all individuals within the Licensing Regime, rather than sub-divided depending on category of employee. The rules should explicitly encapsulate expectations about behaviour which are currently absent from the statements of principle for individuals, such as treating customers fairly and managing conflicts of interest and a requirement to draw to the attention of senior management and regulators conduct which falls below the standards set out.

MAKING BANKS RESPONSIBLE

635. The evidence has led the Commission to conclude that in banking the gap is unduly wide between the role of banks in maintaining and upholding certain standards as employers of individuals, and the role of the regulator. Banking is an industry with a high turnover of staff, partly facilitated by the scale of remuneration pots available for redundancy and by the emphasis on time-specific bonuses, which weaken the loyalty of staff to a particular employer. This has weakened the incentives of banks to play their part in regulation of the industry, relying instead on the regulator.

636. Banks have always been corporately responsible for the behaviour of their staff, but it has been clear that they have not taken this duty sufficiently seriously. The Association of Financial Markets in Europe (AFME) wrote:

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Several of the large banks stressed that they were already placing far greater emphasis on the professional standards and conduct of employees in their internal training, management and appraisal systems. However, as Martin Wheatley pointed out:

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637. In established professions such as accountancy and law, firms themselves take on a major role in enforcing individual standards. While firms have primary responsibility for taking action against individuals who fail to uphold standards, where there are more serious breaches that merit a fine or prohibition from the industry such cases can be referred to the statutory regulator. The regulator is generally also able to pursue individual enforcement action regardless of whether a referral has taken place, if circumstances require. The Institute of Chartered Accountants in England and Wales explained the benefits of such an approach:

Self-regulation is often misunderstood and its importance under-estimated. We include among self-regulatory measures desirable features of any social group like integrity, self-discipline, adherence to norms of behaviour and peer-based enforcement of these norms. These features apply at both a personal and organisational level.

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The Legal Services Board stated:

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638. One lesson from the approach in those professions is that the responsibility on firms to uphold standards is integrated with the statutory regime. A regulator can set out clear expectations of what standards firms must uphold, then monitor implementation and take action if firms are found to be failing in their duties. For example, the Financial Reporting Council conducts regular reviews of major accounting firms, covering areas including "tone at the top", "independence and ethics", "performance evaluation and other human resource matters" and "audit quality monitoring". The resulting reports "seek to identify areas where improvements are [...] needed" and "place greater emphasis on weaknesses identified requiring action by the firms than areas of strength".[1107]

639. Barclays proposed that a newly-created Banking Standards Review Council should:

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For reasons set out earlier in this chapter, we have concluded that a regulatory role such as this is not appropriate for a professional body in the short or medium term. However, we have concluded that Barclays have helpfully identified an important element in a new system.

640. Banks should not be able to offload their duties and responsibilities for monitoring and enforcing individual behaviour on to the regulator or on to professional bodies. The tools at their disposal have the potential to be much more usable, effective and proportionate for the majority of cases than external enforcement, which should remain the backstop for more serious breaches.

641. The new licensing duty should not be unduly onerous. Some banks may already, in practice, have in place much of the control framework required to implement the Licensing Regime. Banks should already know the employees whose actions or behaviour could seriously harm the bank, its reputation or its customers. Banks should also already monitor their work closely and fully explain to individuals their contractual responsibilities. Many banks have already acknowledged that they need to do more in this area, but the incentives for them to translate this into action are not apparent.

642. The new Licensing Regime should therefore not only ensure that all relevant staff are covered by a common set of rules which are enforceable by the regulators, but should also formalise banks' responsibilities for ensuring that staff understand and demonstrate the high standards set out in the regime. This should make clear banks' primary responsibility for taking disciplinary action under an employee's contract of employment when standards are breached. Banks' implementation of the Licensing Regime should be subject to monitoring by regulators and enforcement action where firms are found to be failing in their duties.

643. It should be the job of the bank as employer to inform and instruct each licensed person of his or her responsibilities and to keep accurate records. Individuals within the Licensing Regime who are not Senior Persons can nevertheless have important responsibilities which could have a significant impact on the bank or its customers. The Commission recommends that the regulators have the discretionary power to require those leaving such posts to prepare handover certificates in line with our earlier recommendation in relation to Senior Persons. Banks may want to provide training and support to employees to help them understand how the banking standards rules translate to an individual's specific role, and reflect the rules in their own appraisal processes. Professional standards bodies may be able to play a valuable role in this area. However, the creation and implementation of such a process should not be held by the regulator to be a substitute for compliance with the substance of the standards rules. Most bankers may behave honourably "when no-one is watching", but some will do so only if there is a genuine prospect that someone might in fact come looking. Banks need to maintain and where necessary implement systems that include checks and random audits, rather than simply addressing standards issues with process-driven training or when those issues hit the front pages and threaten the brand. In support of these responsibilities of the firm, we would expect a Senior Person to be directly responsible for the performance by a bank of its licensing responsibilities.

644. This proposal builds on the ideas put forward by senior bankers for banks to improve individual standards through self-regulation. However, the Licensing Regime benefits from robust regulatory underpinning. This is essential, in view of the shortcomings of self-regulatory arrangements in financial services in the past.

645. The Commission is well aware that neither the Senior Persons Regime nor the Licensing Regime can resolve the multi-faceted problems of banking standards. But they can make a contribution. They give banks an opportunity to demonstrate that they are putting their houses in order, in a way which could reduce the costly bureaucracy inherent in the ever more complex reforms of the Approved Persons Regime currently being considered. They also give regulators more effective tools to hold individuals to account and, through them, unambiguous responsibility for ensuring that banks adhere to higher standards.

Reforming the register

646. There is currently a register of individuals in the financial services industry who are subject to the Approved Persons Regime. The register is a public document, but provides limited information about individuals. Its weaknesses reflect those of the regime itself and the associated enforcement arrangements. We envisage the establishment of a new register underpinning the maintenance and provision of information about individuals within the Senior Persons Regime and the Licensing Regime, while operating differently in respect of the two Regimes.

647. Whereas in other professions a public register has an important role in demonstrating which individuals have successfully completed the demanding entry requirements, the absence of mandatory qualifications in banking makes this function of a register less relevant. A public register of regulated individuals can also be important in giving customers confidence about the status of the person they are dealing with, although this is less relevant in banking—where customer relationships are typically with a firm—than with financial services sectors such as independent financial advisors. Instead, the main purpose of a register in relation to individuals working in banking is to provide a record of their employment and disciplinary history, to inform would-be employers and the regulator and to permit sanctions such as suspensions or bans to be enforced effectively.

648. The register would need to reflect any regulatory enforcement action against individuals within the Senior Persons Regime as well as those covered only by the Licensing Regime. Sir David Walker also noted the importance of a register being able to capture details about disciplinary action taken by firms themselves:

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However, placing information about banks' own disciplinary actions on a public register to be used by prospective employers could risk abuse. Very robust safeguards against individuals and appeal processes would likely be necessary to make such a system fair and legally sound.

649. Simon Thompson, Chief Executive of the Chartered Banker Institute, noted the importance of there being a single register to hold all of this information rather than splitting it:

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650. Maintaining an accurate and up-to-date register can impose a significant burden on both firms and regulators. The FSA recommended that if the scope of the regime were to be widened to facilitate enforcement "for this wider group we could dispense with the requirements for pre-approval and registration [...] such an arrangement would not be intrusive or costly as the existing regime".[1111]

651. It will be important for the register underpinning the current Approved Persons Regime to be reformed to take account of the Commission's recommendations. A single register should cover both the Senior Persons Regime and the Licensing Regime, although for individuals covered only by the Licensing Regime it is likely to be more proportionate only to include their details where there has been enforcement action against them. Banks should be required to inform regulators if they take disciplinary action against an employee for reasons related to a breach of the banking standards rules. In such cases regulators should assess whether any further sanction is merited. Regulators should be able to retain such information for their own purposes even where they decide not to proceed with enforcement action. The regulators should explore whether information about disciplinary dismissals could also be communicated to prospective employers, although the Commission recognises the potential legal difficulties with such an approach.

THE BENEFITS OF AN INTERNATIONAL APPROACH

652. Banking is a highly internationally mobile profession. Many of the individuals working in the sector in the UK are foreign nationals, and many of the banks operating in the UK are headquartered overseas. If individuals who were subject to sanctions in the UK as a result of poor banking standards could simply transfer overseas and continue their careers unhindered, the incentive effects of an enforcement regime would be significantly weakened. This problem is not unique to banking, as Sir Peter Rubin of the GMC pointed out:

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653. The US regulators who gave evidence indicated that there was no official mechanism for sharing information about individuals between the UK and the US, the two leading global financial centres, although the US regulators would look at any criminal convictions.[1113] They agreed that movement towards mutual recognition of sanctions would be a useful step.[1114] Some steps are already being taken to support the sharing of information about sanctions between European regulators.[1115]

654. Sanctions imposing restrictions on practising can only be effective if they cannot be circumvented by moving within the industry. Strengthening the register will address this domestically, but much more should also be done to move to mutual recognition of sanctions between jurisdictions. Of particular benefit would be an obligation on firms to take account of any misdemeanours recorded on the register in other jurisdictions before hiring staff. The need for such an obligation between the US and UK is particularly important. The development of such an obligation, and in particular comprehensive coverage, may take time. It might ultimately require legislative change both here and in the US to be effective. The Commission recommends that the Government and the UK regulators initiate early discussions with US counterparts on this issue. Subsequent discussions with the EU and other financial centres may also be appropriate.

Banking as a special case

655. The Approved Persons Regime and the accompanying register currently apply not only to banks, but to the entire financial services sector. As noted earlier the largest 19 banks and building societies in the UK account for only 26,575 people on the Approved Persons Regime register.[1116] This is a relatively small proportion of the estimated 156,000 individuals on the register, as Anthony Browne noted:

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656. The authorities must not be constrained, in implementing the proposed reforms relating to individuals, by the fact that the existing Approved Persons Regime and register apply to the whole financial services sector rather than just banks. Events have demonstrated why reforms are urgently needed to promote improved individual standards in banking. There may be a strong case for applying some of these reforms to other areas of the financial services sector and it is plausible to suppose that the deficiencies of the Approved Persons Regime are replicated beyond banking. However, not only does analysis of this issue lie outside the scope of the Commission's work, but there is a risk that an extension of reform would delay the timetable for reforms, both due to the wider interests involved and the operational flaws of the current Approved Persons Regime. We therefore recommend that the arrangements for a Senior Persons Regime, for a Licensing Regime and for a register, reflecting the operation of these regimes, be put in place in the first instance separately from the Approved Persons Regime, which should cease to apply to banking. It is for the regulators to advise on the merits of the new schemes' wider applicability.

657. In Chapter 10, we make proposals for how the Senior Persons and Licensing Regimes should form part of a more effective system of enforcement and sanctions against individuals.

974 Financial Services and Markets Act 2000, section 59 Back

975 Ibid., section 60 Back

976 Ibid., sections 61 and 62 Back

977 Ibid., sections 63 to 63D Back

978 Ibid., section 64 Back

979 Ibid., section 59(7B) Back

980 Ibid., section 59(7A) Back

981 Financial Conduct Authority, Controlled Functions, www.fca.org.uk Back

982 FSA, Consultation Paper 12/36, The regulation and supervision of benchmarks, December 2012 Back

983 PRA and FCA Handbook SUP 10A.4. www.fshandbook.info Back

984 Financial Conduct Authority, Controlled Functions, www.fca.org.uk Back

985 PRA and FCA Handbook, FIT, www.fshandbook.info Back