21 July 2020 - Post by:
For many years, regulators across the globe have been extolling the importance of senior management accountability and an appropriate culture for financial institutions. In the Asia-Pacific region, the Securities Futures Commission (SFC) led the vanguard with the introduction of its Manager In Charge regime in 2017. This was followed by regulators in Australia and Singapore proposing their own regulatory regimes by which to impose accountability on senior management. Has Covid-19 and the need for governments to support sector economies put an end to this regulatory priority? Recent developments in the region suggest not.
Proposed regulatory regimes – Australia and Singapore
In 2018, Australia introduced the Banking Executive Accountability Regime (BEAR). The BEAR established clear standards of conduct by imposing a strengthened responsibility and accountability framework for directors and senior executives in authorised deposit-taking institutions (ADIs). Extensive criticism of the banking sector by the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in February 2019 (the Royal Commission) led the Australian government to propose that the regime be extended to all financial institutions regulated by the Australian Securities and Investments Commission (ASIC). The proposal has yet to be enacted. In May 2020, the Australian Government announced a six-month deferral of the implementation of the extended regime in light of Covid-19. For example, the measures due to be introduced into the Parliament by June 2020 will now be introduced by December 2020 as indicated by Government. Similarly, the measures originally scheduled for introduction by December 2020 will now be introduced by June 2021. This is intended to allow the financial services industry to focus on recovery and supporting customers during the pandemic.
Elsewhere in APAC, the Monetary Authority of Singapore (MAS) held consultations on Individual Accountability and Conduct Practices of Financial Institutions in 2018/2019. These were concluded in July 2019 when the MAS stated that it would, as a next step, publish guidelines on the topic. However, in April 2020, the MAS announced that it would defer the roll out of the guidelines to enable financial institutions to focus on the recovery from the pandemic and the resultant economic situation. There has clearly been a delay in expanding regulatory regimes regarding senior management accountability across APAC. Nevertheless, as demonstrated by recent regulatory development and enforcement action it would be wrong to perceive the delay as evidence that regulators in the region no longer consider it a priority.
Recent regulatory development and enforcement action – Mainland China, Hong Kong and Australia
In May 2020, as part of ongoing financial markets reform, the Financial Stability and Development Commission (FSDC) in the State Council of Mainland China proposed 11 measures, most notably asking the PRC financial regulators to issue Opinions on Strengthening Administrative Sanctions on Illegal Conduct in the Financial Industry. The five relevant financial regulators in Mainland China are the National Development and Reform Commission (NDRC), the Ministry of Finance (MoF), the People’s Bank of China (PBOC), the China Banking and Insurance Regulatory Commission (CBIRC), the China Securities Regulatory Commission (CSRC) and the State Administration of Foreign Exchange (SAFE).
Based on the press interview with the financial regulators, such opinions will provide grounds for a significant increase of monetary penalties and increase the focus on individual accountability. This signals that the financial regulators are prepared to take a tougher stance on enforcement action relating to individuals. The FSDC announced that the system of “dual penalty” should focus on individuals as well as corporates to ensure that there is a real deterrent to violation by financial firms. The above financial regulators have been asked to implement this policy goal as soon as possible. In practice, shifts in this direction can already be seen in recent enforcement actions of some regulators. For example, the number of penalties imposed on individuals, most notably the legal representative of an insurance firm (usually also the chairman of the board) by CBIRC in the first quarter of this year in insurance related cases has increased significantly.
At the same time, the administrative settlement regime is likely to be more broadly utilised to ensure efficiency of resource allocation and high monetary settlement amounts as typically seen in a US style settlement where this deemed appropriate.
In June 2020, the SFC banned a responsible officer (RO) from re-entering the financial industry for 12 months as a result of not taking steps to rectify the licensed corporation’s internal control deficiencies, to escalate a breach to other members of the senior management, or to ensure the licensed corporation’s staff adhered to its internal compliance manual. The SFC considered that the RO’s conduct fell short of the standard required. Meanwhile, senior management of a financial institution in Australia are being investigated under BEAR, following the institution’s alleged contraventions of anti-money laundering and counter-financing of terrorism obligations.
Meanwhile, the Hong Kong Monetary Authority (HKMA) in May 2020 published a Consultation Paper on the Implementation of the Mandatory Reference Checking (MRC) Scheme to Address the “Rolling Bad Apples” Phenomenon. The MRC scheme, if implemented, seeks to prevent the hiring of individuals with poor conduct records between banks without disclosure and adequate assessment of the conduct concerned. Specifically, it is proposed that a recruiting bank would obtain conduct-related references from the job applicant’s current and former employers with a view to the prospective employer receiving information of any matters that might call into question the fitness and propriety of the prospective employee. The first phase of the MRC scheme seeks to cover conduct-specific information concerning directors and bank employees in senior management positions for a period of ten years. The second phase would extend to bank employees heading key supporting functions, and those who have client facing or sales responsibilities such that any misconduct by them could have a direct impact on end customers.
The MRC proposal itself follows the SFC’s introduction of a requirement in February 2019 for intermediaries to disclose whether an outgoing licensed representative was subject to any internal investigations in the six months prior to termination of employment.
It is clear that while some reforms of accountability regimes have been delayed, proper culture and senior management accountability remain very much a priority of regulators across APAC.