BoE governor calls for shift from misconduct mega-fines to cultural change

Speaking at the Institute of International Finance’s Washington Policy Summit (11-page / 210KB PDF) last week, Carney told his audience that the financial authorities cannot “legislate for every circumstance, watch every transaction, or anticipate every market innovation”.

Carney said the mega-fines paid out by banks globally had reached more than $320 billion, and that money could otherwise have supported lending to households and businesses worth up to $5 trillion.

He said instead of focusing on institutional misconduct, the UK Financial Conduct Authority (FCA) was now trying to make sure senior individuals were accountable for regulatory breaches.

The incoming senior managers' regime (SMR) for management of banks, building societies and investment firms will come into force next year as an extension of the senior managers' and certification regime (SMCR), which was introduced in 2016.

In turn, the SMCR was recommended by the independent Parliamentary Commission on Banking Standards in July 2013 as part of banking sector reform after the financial crisis. The SMCR brought in a statutory duty of responsibility for managers to prevent regulatory breaches

Earlier this year FCA head of conduct David Blunt said the expansion of the SMCR beyond deposit-takers to all regulated financial firms would be “clear, simple and proportionate”.

Financial services law expert Steven Cochrane at Pinsent Masons, the law firm behind Out-Law.com, said then that firms were concerned about proportionality and that a 'one-size fits all' approach to implementation “would be ineffective and potentially dangerous”.

This month Pinsent Masons financial regulation experts Jonathan Cavill and Michael Ruck added that because managers do not have to prove that they have taken every reasonable step to prevent breaches, the SMR “is almost inevitably not going to be the panacea” regulators wanted.

Cavill and Ruck said the FCA would still have the power to bring prosecutions and regulatory action against corporates suspected of financial crime and firms were increasingly looking at internal governance systems to ensure they were up to speed with regulation. 

In his Washington DC speech Carney said adoption of the SMR principles was spreading with some international firms voluntarily adopting elements of the regulation.

However he added the global financial industry was “at a fork in the road”.

“On one path, trust and cooperation diminishes, fragmentation hardens, capital flows are disrupted, and trade and innovation are curtailed. If authorities do not have sufficient confidence that their efforts to promote financial stability are being reciprocated elsewhere, then concerns about the risks of openness could intensify,” Carney said.

He argued in favour of the “high road” to a system in which transparent implementation and supervisory cooperation led to robust standards and greater trust.

Carney praised the progress made by the G20 nations in addressing the systemic issues in the banking sector, assessed and reported by the Financial Stability Board (FSB) and the International Monetary Federation (IMF).

He recommended three priorities for the future: a dynamic approach to reform; resistance of any steps which would damage the global financial system; and collaboration between nations.

The UK's exit from the EU would be the “litmus test” of international cooperation, Carney concluded, noting: “The UK and the rest of the EU have exactly the same rules and the most highly developed frameworks of supervisory cooperation. Their capital and banking markets are already highly integrated. They have the potential to create the template for trade in financial services.”