Have we really heard the last of the Presumption of Responsibility?

Sarah Hitchins

Monday saw the first debate by the House of Lords of the draft bill that proposes to abolish the controversial Presumption of Responsibility from the UK Senior Managers Regime. On the whole, the House of Lords mounted quite fierce opposition to this proposal. Their reaction has prompted some speculation as to whether we really have heard the last of the Presumption of Responsibility.

 

A quick re-cap

As we reported earlier this month, the draft Bank of England and Financial Services Bill proposes to abolish the Presumption of Responsibility (the reversal of the burden of proof for Senior Managers). In its place, the draft bill proposes to create a ‘duty of responsibility’ for Senior Managers. This essentially codifies the current position regarding the burden of proof on the FCA in enforcement cases against individuals.

 

shutterstock_140628874A ‘spineless surrender’? Fierce opposition from the House of Lords

The House of Lords debated the draft bill for close to three hours on Monday evening. A substantial chunk of their debate was devoted to the proposed abolition of the Presumption of Responsibility.

Lord Eatwell started the debate off by describing the draft bill as ‘depressing reading’. He accused the Government of a ‘spineless surrender to industry lobbying on the issue of the’ Presumption of Responsibility, which he saw as a ‘major retreat’.
Some highlights from the debate are as follows:

  • Rationale for the proposed ‘u-turn’: One of the Lords’ main concerns was how the Presumption of Responsibility went from being ‘at the very heart of government policy two years ago’ to now being abandoned before it has even come into force. As we have previously noted, the way in which the FCA has subsequently played down the Presumption of Responsibility as ‘one, small element of the reforms’ is at odds with the emphasis that the FCA has previously placed on this aspect of the new regime and its practical implications.
  • Less detailed examination of the relationship between risk and responsibility: It was noted that one of the reasons given by HM Treasury for abolishing the Presumption of Responsibility was the ‘unintended’ consequence that firms would have to ‘incur greater costs than originally envisaged in preparing the documentation required by the regulators setting out the allocation of responsibilities in firms’. The Lords queried whether this was the ‘right’ outcome, commenting that it may ‘result in less comprehensive documentation and hence less awareness of responsibilities and less detailed examination of the relationship between responsibility and risk’. I think this may be a slight over-reaction. The proposed abolition of the Presumption of Responsibility in no way affects firms’ obligations relating to Senior Managers’ Statements of Responsibilities and Management Responsibilities Maps. These are the key tools that the regulators will use to pinpoint exactly who is responsible for what in a firm.
  • Ignoring the Parliamentary Commission on Banking Standards: Significant attention was paid to the fact that abolishing the Presumption of Responsibility goes against one of the key recommendations made by the Parliamentary Commission on Banking Standards. Lord Sharkey called the draft bill ‘unsatisfactory’ on that basis, and alleged that it ‘undoes much of Parliament’s work… [and] overturns a key recommendation of the Parliamentary Commission on Banking Standards’. He concluded that ‘[w]e have recently seen many moves in favour of the banks… We should not let this Bill add to all that’.

 

It ‘had to go’: A couple of lone dissenters

In and among the fierce opposition to the proposed abolition of the Presumption of Responsibility, there were a couple of lone dissenters in the form of Lords Northbrook and Flight.

Lord Flight commented that the Presumption of Responsibility ‘had to go’ or else (as Andrew Bailey has suggested) ‘the courts would throw it out in due course anyway, as being contrary to the very fundamentals of British law’. Lord Northbrook gave similar reasons for his support for dropping the Presumption of Responsibility. These concerns echo some of the possible legal reasons we suggested in our blog post from the other week as to why the Presumption of Responsibility may have been dropped.

 

Maybe not such a done deal?

When the news of the proposed scrapping of the Presumption of Responsibility first hit, it may have been easy to think that it was a done deal. Both the FCA and the PRA came out with statements acknowledging the change, almost as if it was a fait accompli.

The House of Lords – it appears – has other ideas. Their fierce debate over this proposal indicates that the legislative process for the draft bill may not run quite as smoothly as HM Treasury had perhaps hoped.

 

What comes next?

The draft bill is now due to move to the committee stage, where it will undergo further debate. As a result, this is unlikely to be the last word we hear on the proposed abolition of the Presumption of Responsibility. Watch this space.

 

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