Banking StandardsLetter from Andrew Bailey, Deputy Governor and Chief Executive Officer of the Prudential Regulation Authority, Bank of England
First of all, can I apologise for the length of time that has elapsed since your request to me at the Banking Commission hearing on 6 March for a letter setting out my views on how the approved persons regime could be enhanced in respect of senior approved persons in financial institutions. We have, however, given a lot of thought to the issue during the intervening period.
There are two objectives that I think we should have in mind: first, to be able to take enforcement action under FSMA against senior approved persons in authorised institutions where that is appropriate; and second where enforcement action is not considered appropriate, to be able nonetheless to place a formal “not fit and proper” determination under FSMA on an individual whether or not they remain in the role of an approved person at the time when the determination is made.
I think it is important that senior figures therefore retain overall responsibility and accountability even where they have delegated responsibility for dealing with a particular matter to someone further down the management chain. This will ensure that the problem encountered by enforcement actions during the crisis, namely that in a literal sense the trail of evidence does not go to the top (ie the senior people do not themselves make the bad loans etc), would not in future get in the way of reasonable cases being brought against senior people.
Of course, such actions should be subject to the same legal protections for the individuals involved as exist today. In other words, there is a strong case for broadening the scope of such actions in terms of the responsibilities of senior people, but keeping the due process that FSMA currently affords.
In order to achieve these outcomes, I think it is worth examining how FSMA can be amended to ensure:
that enforcement action against individuals can be in respect of the reasonable responsibilities of their job, which they cannot delegate; and
that the regulators can more easily make not fit and proper determinations against individuals based on their past record even when they are no longer in the role.
In its previous submissions to the Commission, the FSA made a number of helpful suggestions for changes to the approved persons regime, including:
reversing the burden of proof in cases where a significant failing has been identified. This would require an approved person who had responsibility for a particular area to show that they had taken all reasonable steps to avoid the failing concerned. The FSA believed this would make clear to approved persons that delegation of authority does not equate to delegation of responsibility or allow the person concerned to avoid accountability if something goes wrong;
a rebuttable presumption that approved persons who were in charge of a failed bank and seek approval for a new post are presumed not to be fit and proper unless they can convince us otherwise. Again, the FSA believed that this could lead to a change in how senior executives view their responsibilities. However, the FSA made clear that any legislative provision would need to be carefully drafted to ensure that the standard of review the regulators can apply to applications from other approved persons is not undermined;
the extension of the limitation period for taking action against approved persons (or having the limitation period start from the date on which investigators are first appointed);
the power to prohibit individuals on an interim basis pending an investigation, where their continued holding of a particular post gives rise to a serious threat to the regulator’s objectives (the FSA recognised that this would be a significant power that would need to be subject to appropriate safeguards); and
a power to allow time-limited approval in certain cases, for example to impose clear expectations that an incoming executive should resolve particular issues within a firm within a particular period of time. The FSA believed that this would allow for a targeted approach that could be deployed in the course of supervision.
Taking these five suggestions in turn: the first (reversing the burden of proof) could be a means to achieve the point I made above on the responsibility of senior figures; the second (rebuttable presumption) concerns me because it may hinder our ability to ask good people to go into firms in difficulty, something that we do quite often—I would therefore not favour this approach; the third (extension of the limitation period) is sensible based on recent experience; the fourth (interim prohibition) would need to be carefully drafted to ensure the rights of the individuals are adequately protected, and I think could be quite difficult to put in to effect for the same reasons. In sum, the first and third of these suggestions strike me as the most appropriate ones to pursue. And the fifth (time-limited approval) strikes me as potentially placing a significant administrative burden (and therefore increased costs) on firms and the regulator for something that on many occasions can be achieved through the regulator using its powers of persuasion.
It has also been suggested that FSMA should provide for a form of strict liability; namely that senior executives who were in charge of a failing bank at the point of failure should be deemed to be automatically unfit to hold positions as approved persons in the future. While this may have some advantages in terms of rectifying some of the difficulties the regulators face, particularly in proving misconduct, it carries with it some significant drawbacks which Tracey McDermott laid out in her 13 February submission, including:
it gives rise to real questions of fairness to those subject to it—a director may not have been responsible for the decisions which led to the firm failing, but they may nevertheless end up being held accountable;
it will often be difficult to determine when a firm is said to have failed. Our experience suggests that the seeds of firm failure are often sown by decisions which are made long before the firm is placed into the resolution process, or public funds are used to support it; and
the effect of strict liability should not be underestimated. There is a real risk that so-called “white knights” would be less willing to come to the rescue of a failing firm if there were the possibility of regulatory action being taken against them should the firm fail on their watch.
Finally, it is clear that the PRA’s own rules also have an impact on our ability to take action against approved persons who fall short of expectations. With that in mind, we intend to review our current rules applying to approved persons with a view to determining whether there are any changes that we could make to enhance the accountability of approved persons for the decisions they take.
22 April 2013