December 14, 2022 | Amanda Khatri
Estimated reading time: 7 minutes
The individual accountability regulatory movement across the globe
The financial services industry hasn’t had an easy ride. From global crashes, the Russian war against Ukraine, inflation, and the aftermath of Covid-19 – the events of 2022 have been challenging.
The backbone of the industry is held up by clear, reliable, and effective regulatory frameworks. To uphold the true nature of these regulations, lawmakers penalise firms that don’t abide by the rules. This demonstrates that one – regulators are serious about the laws they implement and two – enforcement actions pave the way for a righteous industry as they combat financial crime.
These past few years, it hasn’t just been companies getting into trouble with the regulators but also individual compliance officers. There has been a rise in the number of enforcement actions against individuals acting wrongly on behalf of a company.
The financial crisis of 2008 has left a bad taste in everyone’s mouths and regulators are leading the way for a financial industry that is transparent with higher standards of conduct through increased accountability. One person’s actions impact the majority and bad actors who are not fit to do their jobs are flushed out.
We recently conducted a poll on LinkedIn around the regulators’ increased focus on Chief Compliance Officer (CCO) and Senior Manager accountability. We asked if the narrowing focus on individual liability for compliance officers was keeping CCOs up at night. These were the results:
- 30% were worried about managing accountability regulations
- 32% were worried about being fined for others’ errors
- 29% were worried about increased individual liability
- 10% were not worried because their firm is compliant
Given these results and engagement, we thought it would be the ideal time to provide an update on individual accountability regulations and enforcements across the globe.
Regulation is up in the air for the UK. Since Brexit, there have been talks of a Big Bang 2.0 and a refreshed Financial Services Markets Bill (FSMB), however, nothing has been cemented.
On 9 December, the BBC published a story about deregulation and a shake-up to the UK’s banking rules to ignite growth. It discussed a package of more than 30 reforms that will “cut red tape” and “turbocharge growth.”
As part of this deregulation, Jeremy Hunt plans to overhaul the Senior Managers and Certification Regime (SMCR) which was first introduced after the financial crisis to hold senior managers accountable for violations and ensure they are fit to take on their roles.
This is being dubbed the “Edinburgh Reforms,” and has been advocated as something that will be far from the risky practices that led to the 2008 crash.
Under current regulation, if the SMCR was breached, there is a risk of personal and institutional liability such as fines or sentences assessed by the FCA. This includes market abuse, money laundering, financial crime etc.
Although enforcement actions are low, the risk of non-compliance is enough to scare firms into behaving correctly and implementing SMCR in their policies.
On 30th November 2022, the FCA fined an investment advisory and wealth management firm, Julius Baer International Limited, £18,022,500 and published decision notices for three individuals.
The fine was for the following:
- Failing to conduct its business with integrity
- Failing to take reasonable care to organise and control its affairs
- Failing to be open and cooperative with the FCA
The FCA charged three senior executives, Gustavo Raitzin, the former Regional Head for BJB, Thomas Seiler, the former BJB Sub-Regional Head for Russia and Eastern Europe, and Louise Whitestone, the former Relationship Manager on JBI’s Russian and Eastern European Desk.
Mark Steward, FCA Executive Director of Enforcement and Market Oversight said, “there were obvious signs that the relationships here were corrupt, which senior individuals saw and ignored. These weaknesses create the circumstances in which financial crime of the most serious kind can flourish. The FCA’s decisions on the individuals whom the FCA alleges were involved in these failures will now be reviewed in the Upper Tribunal.”
This case demonstrates that UK regulators are focusing their attention on increased accountability and holding senior managers responsible for the part they had to play in this incident. However, as we await Jeremy Hunt’s verdict on financial regulation, we also anticipate changes to SMCR.
Personal accountability regimes are evident in the US through the various enforcements this year alone.
The US Department of Justice’s Deputy Attorney General (DoJ), Lisa Monaco has previously advocated that regulators must prosecute “the individuals who commit and profit from corporate malfeasance.”
The New York City Bar published a Framework for Chief Compliance Officer Liability in the Financial Sector which is applicable to the SEC’s evaluation of whether to penalise CCOs for conduct.
Every week there seems to be a new SEC enforcement against a firm, and every so often, its senior managers too – no matter what the industry.
Recent enforcements against senior executives
- On 13 October 2022, the SEC charged New Jersey-based National Realty Investment Advisors LLC (NRIA) and four of its former executives for running a Ponzi-like scheme.
- On 24 October 2022, the SEC charged Cronos Group Inc, a Nasdaq-listed cannabis company based in Toronto and its former senior executive for accounting fraud. The CCO, William Hilson, was charged with fraud and aiding and abetting the company’s violations.
- On 10 November 2022, the SEC charged Ramkumar Rayapureddy, the Chief Information Officer at Viatris Inc, a pharmaceutical company for an insider trading scheme.
“As the officer of a public company, Rayapureddy had a duty to safeguard material nonpublic information concerning significant Mylan events, but, as our complaint alleges, he violated this duty by tipping his friend in exchange for cash kickbacks,” said Nicholas P. Grippo, Regional Director of the SEC’s Philadelphia Regional Office. “The SEC remains committed to finding, investigating, and charging public company executives who engage in insider trading.”
In the incident above, a senior member of the team acted wrongly for his own gains and corporate greed. The continuous enforcement actions portray the SEC’s dedication to fighting corporate crime and penalising senior managers for those who have acted wrongly.
What is SEAR?
Ireland has followed in the footsteps of SMCR by introducing The Senior Executive Accountability Regime (SEAR) which places increased importance on individual accountability in financial services.
In July 2018, the Central Bank of Ireland announced that it is looking to introduce an Individual Accountability Framework (IAF). The draft legislation was then published on 28 July 2022, once it is enacted, the IAF will be implemented in late 2023.
SEAR changes the way regulated entities and senior managers behave, laying out where responsibility clearly lies. It aims to combat financial crime and avoid future financial crises through senior managers taking reasonable steps that will prevent their firms from non-compliance.
As per SEAR, individuals could be directly accountable for breaches of duty as well as subject to potential enforcement action.
What is BEAR?
On 19 October 2017, the Federal Australian government announced the Banking Executive Accountability Regime (BEAR), much like SEAR and the SMCR. BEAR establishes key accountability regulations for authorised deposit-taking institutions (ADIs) and their senior executives and directors.
BEAR aims to improve the transparency and accountability of the financial services sector through new accountability regulations in the Banking Act of 1959. It makes senior managers responsible for the activities of a financial institution and requires certain bonuses to be deferred. A number of measures are similar to the UK’s SMCR, and the Australian Prudential Regulation Authority (APRA) will be overseeing the administration of BEAR.
It also provides the APRA with more power to investigate potential compliance breaches and penalise senior managers accountable for the breach.
Full details on BEAR can be found here.
Evidently, the financial services industry is being modernised and transformed across the globe as regulators seek out wrongdoers at financial institutions.
Regulators are demonstrating that they mean business by making an example of specific senior managers who have broken the rules. This sends a clear message to all financial services firms and will ensure compliance from the top down.
It’s much harder to prosecute individuals, however, there has been progress, especially in the US. Regulators don’t want to scare people away from applying to be a compliance officers but rather to ensure that they are fit for the role they are undertaking.
The US, UK, Australia, and Ireland have all established regulatory obligations for compliance officers and Hong Kong and Singapore have also joined the fleet. We predict that it won’t be long before more nations join to combat financial crime by holding those who act wrongly on behalf of a company accountable for their actions.
Compliance is a hefty task. If your firm needs assistance in managing the sheer volume and velocity of regulatory change, including accountability obligations, we’re here to help.
Use CUBE’s RegTech to ensure an accurate reflection of your regulatory scope, ensuring access to all available content pertaining to applicable jurisdictions and regulatory bodies.
Keep ahead of emerging individual accountability regulations by speaking to CUBE.