The Financial Conduct Authority published its Policy Statement setting out guidance on how it intends to enforce the new individual accountability rules under the Senior Managers Regime, the Certification Regime and the new Conduct Rules. The FCA's guidance, which will apply from March 7, 2016 when the new rules come into force, amends the Enforcement Guide and the Decision Procedure and Penalties Manual. The Policy Statement includes the FCA's feedback to responses to its proposed guidance, including a confirmation that the FCA does not intend to add any additional guidance on the types of conduct it would consider as falling far below what would reasonably be expected of a senior manager when assessing whether to bring criminal proceedings against an individual alleging that his decision caused a firm to fail or to refer the matter to another prosecuting authority. The FCA considers that the FCA Handbook already contains enough guidance on the standards expected of senior managers. The FCA guidance does not include guidance on the presumption of responsibility for senior managers because the FCA intends to wait for the outcome of the Parliamentary debate on whether to approve the Government's proposal to replace the presumption of responsibility with a duty of responsibility.

View the guidance.

View our client note on the Government's proposals.

Federal Reserve Bank of New York Executive Vice President Alberto G. Musalem delivered remarks regarding the New York Fed’s initiatives to endorse a positive banking culture. Mr. Musalem explained that the New York Fed’s interest in reforming culture is a product of events since the financial crisis, including recent incidents of misconduct such as the manipulation of LIBOR. In his speech, Mr. Musalem offered three messages to the banking industry: (i) cultural problems are the banking industry’s responsibility to solve; (ii) a bank’s implicit norms – especially those reinforced through incentives – must align with the public purpose of banking; and (iii) the aim of reforming bank culture should be to restore trust. Mr. Musalem delivered his remarks at an event hosted by the Goethe University of Frankfurt’s Institute for Law and Finance titled “Towards a New Age of Responsibility in Banking and Finance: Getting the Culture and the Ethics Right.”
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The Financial Stability Board published a progress report on measures to reduce misconduct in the finance industry. The report, amongst other things, sets out the next steps that the FSB will take to address such misconduct. The FSB's aims include: (i) establishing a working group so that outlooks and good practices can be exchanged with a view to create possible necessary guidelines; (ii) examining the use of compensation tools for addressing misconduct, with a view to making recommendations on better practices if needed; and (iii) organizing a workshop so that national experiences can be shared on the role of enforcement powers of bank regulators in addressing misconduct by individuals.
 
View the report.

US FDIC Vice Chairman Thomas M. Hoenig spoke at the Annual International Banking Conference regarding “Post-crisis risks and bank equity capital”. Vice Chairman Hoenig’s remarks focused on the comparison of capitalizing banks with debt or equity capital. Specifically, he pointed out the key risks of using debt capital, as required by the recent TLAC proposal by the Federal Reserve. He noted that costly debt may put earnings pressure on firms and may even accelerate failure in the case of financial distress. Moreover, debt rules essentially require regulators to “predict what activities and investments might cause future crises”. Vice Chairman Hoenig suggested that equity rules would allow well capitalized institutions to withstand shocks and crises in the financial system and would not require any “extraordinary insight” from financial regulators. He argued that the overall economic benefits will be higher than the related costs, and points to the current outperformance of well-capitalized US institutions as compared to less well-capitalized European institutions as an example. According to Vice Chairman Hoenig, “…our goal to prevent failure should be every bit as important as resolving failed firms” and increased equity capital would be a stronger deterrent as compared to debt. 

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Federal Reserve Board Governor, Daniel K. Tarullo, spoke at the 18th Annual International Banking Conference on “Shared Responsibility for the Regulation of International Banks”. He spoke about the benefits of international banking, including diversification and improved efficiencies, and the associated risks including contagion risk. Governor Tarullo also made recommendations encouraging further cross-border coordination including: (i) greater information sharing between countries; (ii) encouraging financial regulators to fully understand the risks and standards in other jurisdictions when considering substituted compliance; and (iii) regular contact between top country officials. In his conclusion, Governor Tarullo encouraged a “strong set of international prudential standards” and “good institutional relationships” in order to establish an improved environment for internationally active banks. 

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William C. Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, made opening remarks at the Reforming Culture and Behavior in the Financial Services Industry: Workshop on Progress and Challenges. In his remarks, he reiterated certain points from his previous speeches, noting that there still remain “deep-seated cultural and ethical failures” in the financial services industry that need to be handled from the inside out. He continued to encourage the industry to focus not just on banning specific examples of misconduct, but rather to try to find the underlying causes. “I think our focus should be less on the search for bad apples and more on how to improve the apple barrels.”

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HM Treasury published the Financial Services and Markets Act 2000 (Relevant Authorised Persons) Order 2015 which amends the Financial Services and Markets Act 2000. A RAP is a UK institution that, amongst other things is: (i) a credit institution with permissions under FSMA to carry on the regulated activity of accepting deposits; or (b) an investment firm that deals in investments as principal; and (c) is not an insurer. The Order provides for non-UK institutions to be "relevant authorised persons" if they fall into one of two categories and if they are not insurers. The two categories are: (i) a non-UK firm that is a credit institution with a branch in the UK and that is authorised to take deposits; or (ii) a non-UK firm that is an investment firm with a branch in the UK, authorised to deal in investments as principal in the UK and is regulated by the Prudential Regulation Authority for that activity. The Order enters into force on November 9, 2015.
 
View the Order and Explanatory Note.

HM Treasury published the Financial Services and Markets Act 2000 (Misconduct and Appropriate Regulator) Order 2015 which amends the Financial Services and Markets Act 2000. The Order, amongst other things, grants the Financial Conduct Authority with disciplinary powers over individuals working in financial services firms, and when there has been a breach of the Alternative Investment Fund Managers Regulations 2013 by a firm. The Order enters into force on March 7, 2016 (excluding Article 2 and 3(4) of the Order which enter into force on March 7, 2017).
 
View the Order and Explanatory Note.

Janet Yellen, Chair of the Federal Reserve Board, testified before the House Committee on Financial Services on supervision and regulation of financial services. Her testimony consisted largely of a review of the regulatory framework and steps US regulators have taken since the financial crisis to strengthen the regulation and supervision of the largest banking institutions, including instituting capital, liquidity, stress testing and annual resolution planning requirements. Chair Yellen further spoke to the work of the Federal Reserve’s Large Institution Supervision Coordinating Committee, which is responsible for the supervision of the eight largest US G-SIBs. Though noting that the “financial condition of the firms… has strengthened considerably since the crisis…” both from financial stability and corporate governance perspectives, she stated that US G-SIBs continue to have “substantial compliance and risk-management issues”, which the Federal Reserve Board, through the LISCC, is dealing with “directly and comprehensively”. 

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The Prudential Regulation Authority and Financial Conduct Authority jointly published a consultation paper on proposals for regulatory references that are employment references passed between firms when an individual moves roles. The proposals form part of the wider reforms aiming to strengthen accountability in the banking and insurance sectors and are relevant to candidates applying for new roles, including senior management functions under the Senior Managers Regime, significant harm functions under the Certification Regime and other roles within insurance firms and credit unions. The proposals include: (i) a requirement for firms to request regulatory references covering a period of six years from former employers; (ii) specific disclosures for inclusion in regulatory references, such as whether the firm has ever concluded that a candidate was at any point in the last six years deemed not fit and proper to perform a function, the details and basis of any disciplinary action taken and details of any other roles performed by a candidate within a firm whilst working as an employee of that firm; and (iii) a requirement for firms not to enter into any arrangements that would prevent them from disclosing relevant information. Final rules are expected to be in place for the start of the accountability regime on March 7, 2016. Comments on the consultation are due by December 7, 2015. 

View the consultation paper.

The European Securities and Markets Authority published a final report and final draft Regulatory and Implementing Technical Standards on the Market Abuse Regulation which replaces the Market Abuse Directive and applies from July 3, 2016. The report sets out the changes to the draft technical standards from those proposed in ESMA's initial consultation. The final draft technical standards cover: (i) detailed requirements for reporting of suspicious orders or transactions; (ii) the establishment, maintenance and termination of accepted market practices for certain behaviour not to be considered market manipulation; (iii) the arrangements, procedures and record keeping requirements that persons conducting market soundings must comply with for a market sounding not to be considered insider dealing, including the systems and notification templates and technical means for appropriate communication; (iv) the conditions that buy-back programmes and stabilisation of securities must meet not to be considered insider dealing or market abuse, including conditions for trading, restrictions on time and volume, price conditions and disclosure and reporting obligations; (v) notification requirements for trading venues of financial instruments for which a request for admission to trading is made, admitted to trading or traded for the first time; (vi) technical means and rules for public disclosure of insider information and rules on disclosure delays; (vii) arrangements for the objective presentation of investment recommendations or other information recommending or suggesting an investment strategy and for disclosure of particular interests or indications of conflict of interest; (viii) the precise format of insider lists; and (ix) the format and template for notification of managers transactions. ESMA will submit the final report and final draft RTS and ITS to the European Commission for endorsement. 

View the final report and technical standards.

The European Systemic Risk Board published a report on misconduct risk in the banking sector. The report analyses misconduct risk in the banking sector from a macroprudential angle and makes the following recommendations: (i) prudential and conduct regulators should continue to impose requirements on banks that limit the opportunities for misconduct; (ii) coordination and transparency between regulators at an international level should be improved, including preparation of a set of principles for authorities to follow where action against a bank in one jurisdiction may have systemic implications in another jurisdiction; (iii) extension of the legal entity identifier scheme to a wider range of counterparties so that banks can determine which entities are subject to financial sanctions; (iv) the European Supervisory Review and Evaluation Process taking into account the systemic impact of potential misconduct; and (v) inclusion of potential misconduct risks in future EU-wide stress tests. 

View the report.