The Parliamentary Commission on Banking Standards has dramatically raised the stakes for Britain’s top bank executives, according to KPMG, through its proposal in its final report published today for a new ‘Senior Persons Regime’ – with the threat of criminal sanctions to back it up.
The abandonment of the existing Approved Persons regime would represent a huge shake-up for the banks. It would mean a greater spotlight on a narrower, more senior group of executives – as well as new ‘licensing’ requirements for whole swathes of staff who would have to comply with a new set of Banking Standards Rules. The banks would be expected to police these themselves, subject to scrutiny from the FCA.
Bill Michael, Head of Financial Services at KPMG, said: “The Commission wants executives to be accountable for ‘reckless’ behaviour. One of the more painful and frustrating lessons learned from the crisis is that the balance of risk and individual reward was wildly out of kilter. The ‘fit and proper’ test has proved ineffective in making senior individuals accountable for reckless behaviour. This report goes a long way to encourage and enforce a more responsible and sustainable form of banking. By backing up their recommendations with the possibility of criminalisation, these are proposals with serious teeth. If implemented as recommended, this would put banks in the UK under one of the toughest regulatory and conduct regimes in the world.”
KPMG agrees with the report that there are lessons for all parties, including auditors, from the financial crisis. KPMG has been an active player in the debate about ways of making the audit more market-responsive and forward-looking.
Dialogue and communication between auditors, regulators and banks is fundamental. This has already improved significantly. KPMG was actively involved in the development of the Code created by the FSA and Bank of England.
The Commission has called for an amendment to the UK Corporate Governance Code to include an explicit responsibility on directors for the safety and soundness of the firm and the duties they owe to customers and society. In recommending that a Senior Independent Director takes responsibility for assessing the performance of the Chairman and ensuring that the relationship between the Chairman and the CEO does not become “too close”, the report could mark a significant ratcheting up of accountability at the very top of Britain’s banks – effectively placing a new ‘watchdog’ on the Board.
In making its recommendations the Commission appears to discount measures already taken by the regulators and the banks themselves to address concerns that they are too big and too complex to manage. The Commission also believes that the banks have had a “mis-placed sense of security” through their risk models and three lines of defence (operational management, risk and compliance, internal audit) and criticises what it sees as frequent instances of “misconceived and poorly-targeted regulation”. As expected, they take a hard line on remuneration too – recommending extremely close scrutiny of pay which would see the PRA having the ability to over-ride remuneration decisions taken by individual banks. The Commission has also cast doubt on current leverage requirements of 3%, suggesting that this should be increased.
Bill Michael said: “This report could prove a landmark in the history of banking in Britain. It would usher in an extremely tough regime. Many of the proposals go beyond what is required in Europe or internationally – for example on remuneration and leverage. Consideration will need to be given as to how far down that road the UK is prepared to go: whether we are prepared to sacrifice a degree of competitiveness for better banking governance.”
Media enquiries to:
Mark Hamilton, KPMG Corporate Communications 020 7694 2687
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