Overview

• The European Commission is seeking views on the “benefits and drawbacks” of an individual “accountability regime” under the Capital Requirements Directive (CRD).
• The proposals are at a formative stage, and it is uncertain whether they will ultimately be taken forward. Nonetheless, we recommend that Board members and senior managers pay close attention to how they unfold through the consultation process.
• Although the Commission has positioned these proposals as more of an extension of the existing fitness and propriety requirements, there are some potential parallels with the UK’s Senior Managers and Certification Regime (SM&CR).

Background

Regulators are turning increasingly to formal accountability regimes for individual board members and senior managers. In line with this trend, the European Commission (the Commission) has, in its recent consultation on the implementation of Basel III reforms, raised the possibility an “accountability regime” under the CRD. Citing the Financial Stability Board’s 2018 toolkit on mitigating misconduct risk, which observes that “accountability can be reinforced by clearly identifying key responsibilities and assigning them to individuals” the Commission says it is “important to reflect” on whether the CRD could include a requirement for firms to define clearly the roles and responsibilities of each member of the management body and key function holders.

The Commission’s consultation precedes a legislative proposal expected in mid-2020. As such, the proposed changes are at the very early stages of the legislative process, and it is not certain they will be included in the Commission’s final legislative proposal.  Nevertheless, the consultation signals the Commission’s apparent willingness to enhance standards of accountability within financial services to help tackle misconduct, poor culture and excessive risk-taking.

Key Proposals

Although high-level, the consultation gives some clues as to the Commission’s thinking on the potential scope and features of an accountability regime.  It can immediately be seen that there appear to be several prima facie parallels with the SM&CR in the UK:

Statements of responsibility

The Commission is seeking views on the “benefits and drawbacks” of an accountability regime whereby the management body1 would be required to produce statements of responsibility for each of its members identifying the activities for which they are responsible, beyond their membership of certain committees (e.g. the risk committee).

Statements of responsibility are a common feature of accountability regimes globally2. They record formally the allocation and apportionment of responsibilities amongst board members and senior managers making it easier to ensure that an individual can be identified and held accountable for any failings in their areas of responsibility.

Key function holders

Importantly, the Commission has not restricted the scope of the potential regime to the management body and is also seeking views on “benefits and drawbacks” of designing a similar regime for key function holders.

The consultation does not set out who might be considered a key function holder. However, European Securities and Markets Authority/European Banking Authority guidelines on the assessment of suitability define key function holders as “persons who have significant influence over the direction of the institution, but who are neither members of the management body and are not the CEO”. They may include the heads of internal control functions and the CFO (where they are not members of the management body); and heads of significant business lines, EEA/EFTA branches, third country subsidiaries and other internal functions.

Responsibilities map

Whilst the Commission’s consultation does not explicitly mention any requirement to produce a “responsibilities map”, it does reference “details of the firm’s governance and structures”. Furthermore, the FSB’s toolkit, from which the consultation draws its ideas, states that “a statement of the activities for which each senior manager is responsible could be used to devise a “responsibilities map” showing how key responsibilities are allocated across a firm”.

Much like statements of responsibility, responsibilities maps are intended to ensure that responsibilities have been allocated appropriately and with sufficient clarity and that no key activities and functions are excluded.

Conclusion: change may well be coming, but it would be premature to conclude that a pan-European SM&CR regime is in prospect.

The Commission’s decision to consult in this area reflects an increasing global regulatory appetite to hold senior individuals to account (see Appendix A for more detail). That said, we think it is too early to assume that the Commission is intent on replicating an accountability regime such as the UK’s SM&CR across the whole of Europe. Notably, the consultation observes that defining the roles and responsibilities of members of the management body and key function holders “could also help to make fit and proper assessments by firms and competent authorities more informed and targeted”, indicating that the Commission may see its proposals for accountability more as an enhancement to the fitness and propriety regime than as a stand along regime on the model of the UK’s SM&CR.

Nevertheless, the proposals are clearly consistent with a wider regulatory direction of travel and so boards may wish to give preliminary consideration to the longer term implications of this trend for their governance and management arrangements.

Appendix A: Why are regulators pursuing accountability regimes?

Following the global financial crisis and subsequent string of misconduct episodes, a common complaint is that too few senior executives have been held personally accountable for management failings. Conscious that senior individuals can avoid accountability “by claiming ignorance or hiding behind collective decision-making”3 regulators have sought, increasingly, to clarify the allocation of responsibilities amongst firms’ senior decision makers.

Figure 1 sets out global regulatory efforts to enhance accountability:

¹According to Article 3, point 7, of CRD IV “management body” means “an institution's body or bodies, which are appointed in accordance with national law, which are empowered to set the institution's strategy, objectives and overall direction, and which oversee and monitor management decision-making, and include the persons who effectively direct the business of the institution”.

²For example, statements of responsibility (or similar) are required under the UK’s SM&CR, the Australian Banking Executive Accountability Regime and the incoming Irish Senior Executive Accountability Regime.

³Parliamentary Commission on Banking Standards, 2013