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Nov 19, 2015

Regulators pushing more personal liability for senior officers, Thomson Reuters says

Firms need to invest in systems that will increase senior managers’ ability to see and better manage risks in various business activities

A pervasive belief that regulators have not held senior executives accountable for conduct and events that led to the financial crisis is fueling an increased emphasis on personal liability in the financial services industry. As a result, compliance officers at several financial institutions have faced fines, banishment, suspension, or firing for their alleged roles in violating regulatory rules.   

A recent report, by Thomson Reuters, ‘Rising personal liability--perception and reality: how best to manage personal regulatory risk,’ confirms this trend. The report, co-authored by Stacey English, head of regulatory intelligence for Thomson Reuters, is based on a survey of more than 2,000 risk and compliance practitioners at Thomson Reuters client summits in New York, London, and Sydney, as well as other global regions and included those representing banks, brokers, insurers and asset managers. While all senior corporate officers are expected to be held more accountable from now on, compliance officers believe that regulators are targeting them in particular.

Among the key findings of the report are that:           

  • Sixty-seven percent of those at the New York summit and 59 percent at the London summit say that compliance officers carry the most personal liability for failing to catch high-risk behavior.  The chief executive is cited second, by 22 percent of summit participants in New York and 30 percent in London.
  • Ninety-three percent of respondents in New York say they expect compliance officers’ personal liability to increase in the next year, with 64 percent anticipating a ‘significant increase.’
  • Citing lack of oversight from senior managers, nearly half (49 percent) of all survey respondents report that senior managers in their companies ‘do not really know what is going on in their business.’ 
  • Sixty-four percent of respondents report there is a worldwide trend in regulatory regimes focusing more on individual accountability.
  • Despite increased regulatory focus on personal liability, only 53 percent of all respondents expect the new focus to change behavior positively. ‘Anecdotally, practical experience of the sheer complexity of many business activities is behind the skepticism,’ says Susannah Hammond, senior regulatory intelligence expert at Thomson Reuters and co-author of the report. ‘Senior managers do not have a consistent line of sight to the risks being run. Behaviorally, firms need to understand the need to invest in robust systems' that will enable senior managers to have a better understanding of all business activities and, in effect, enable them to manage these activities more actively.
  • Two-thirds of those polled report that the greater focus on accountability will adversely affect their ability to recruit and retain skilled compliance staff to a significant extent. Recent regulatory actions will likely deter people from seeking these positions. Increased compliance officer liability will fuel demand for highly skilled compliance officers and escalate salaries for these individuals.

'Increased personal liability associated with a role leads to higher salaries and difficulties in retaining talented compliance staff if they feel unsupported by the board,’ says Hammond. ‘Recruitment costs tend to be a percentage of starting salary, so where this is the case there will be an increase in the cost. The other cost driver in recruitment is the amount of time it takes to fill compliance roles at firms with poor risk and compliance frameworks.’ 

Regulators in the UK are moving more decisively toward more stringent requirements and expectations for senior managers than in other jurisdictions, according to the report. Beginning in March 2016, the new Senior Managers and Certified Persons Regime will require banks and the largest asset managers to allocate prescribed responsibilities to individuals and document their accountability in formal 'responsibility maps'. The UK’s efforts to show the serious consequences that individuals will increasingly face, such as handing down a 14-year prison sentence to a trader convicted of fraud, come in the wake of the Libor rate-fixing scandal, the report says. 

The report recommends that compliance officers take detailed notes and maintain records of all communications with regulators. They should also make sure they understand the business and not assume that senior managers do, especially as business strategies and personnel are continually changing. Compliance officers need to maintain detailed, up-to-date job descriptions company-wide that reflect the roles and responsibilities of all personnel, especially with respect to regulatory criteria, expectations, and accountability. 

Firms have an opportunity to shape and influence the severity of proposed new regulations by engaging with policymakers, Hammond says. She cites the decision by UK regulators to rescind a requirement that would have placed the burden of proof in accountability lawsuits on defendants rather than plaintiffs, which was to have been implemented as part of the Senior Managers Regime starting in March.