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Will the FSCA adopt an Individual Accountability Regime

21 June 2019 Finn Elliot, Associate Director at Financial Services Regulatory

Conduct regulation has recently been introduced into South Africa. It manifests itself most patently in the establishment of the conduct regulator, being the Financial Sector Conduct Authority (“FSCA”) and in the introduction of “a consolidated, comprehensive and consistent regulatory framework for the conduct of financial institutions”, in the form of the Conduct of Financial Institutions (“COFI”) Act (currently still a draft Bill).

The primary objective of the FSCA is the regulation and supervision of the “conduct of business” of all financial institutions. Conduct introduces a distinct shift in the manner and approach to the regulation and supervision of the financial services industry, by the FSCA. Key amongst these, we reasonably consider, is the potential introduction of an accountability regime, in one form or another.

Individual Accountability.

The National Treasury’s Explanatory Policy Paper accompanying the COFI Bill requires,

“…improvements in financial institutions’ culture, including ensuring appropriate governance frameworks and that decision makers are directly and personally held accountable for weak governance and abusive practices by the institution, will be a vital pillar in ensuring that financial institutions better serve South Africans”.

The 2018 Financial Markets Review recommended that “regulators consider the implementation of an accountability regime that is equivalent and proportional for all market participants…”

We know that governance and accountability is a key focus of the FSCA, and that it is going to be taking it very seriously. The comments made thus far provide a strong indication of the direction that the FSCA may move in, and the extent to which it may go, in order to drive accountability within financial institutions.

Accountability has always been a feature of corporate governance, but this presents a clear regulatory enforcement mechanism to be able to hold senior management to account. Essentially in terms of the concept of “individual accountability”, senior managers in a financial institution are held personally liable for regulatory breaches and conduct failures. Enabling the regulator to link inappropriate customer outcomes to those individuals responsible for the decisions that resulted in those inappropriate outcomes will, in turn, ensure that important responsibilities within a financial institution are appropriately assigned to specific senior managers.

The focus on accountability is not just a South African thing; the concept of holding individuals within financial institutions personally accountable for abusive practices is becoming a regulatory focus area around the world. The UK, Australia, Hong Kong, Singapore and the US have all implemented forms of individual accountability and more countries are likely to follow suit over the coming years.

Why introduce “individual accountability”?

If we consider the UK example, there was significant criticism that the then existing regulatory framework was unable to hold individuals accountable for their personal responsibility and, as a consequence, there was concern that senior managers continued to shelter behind an accountability veil.

The inference is that senior managers were not seen to be adequately taking account for their responsibilities and that internal mechanisms within business to hold senior managers to account were lacking.

There is a strong interplay between culture and accountability. Accountability is one of the key indicators of a strong corporate culture. The threat of regulatory sanctions will hopefully engender an enhanced sense of accountability, which should in turn strengthen corporate culture ultimately driving down misconduct in the business.

The South African context

We don’t have certainty on whether “individual accountability” will be introduced into South Africa; in what form it may be introduced or when it may be introduced. However, it would be amiss to ignore the regulatory tone and direction that the FSCA is taking in this regard. Senior management will receive increased scrutiny and attention from the FSCA for their roles and accountability within financial institutions.

At its core the accountability regime requires that all financial institutions ensure that the “universe” of conduct responsibilities is properly identified and individual accountability is assigned to senior managers for each responsibility.

What should you think about?

• A key question is whether your business would respond to the introduction of individual accountability purely as a regulatory burden or because developing consequence management mechanisms to hold senior managers to account for their responsibilities for the fair treatment of customers is the correct approach?
• Do you consider it necessary to introduce or enhance your accountability mechanisms and consequence for senior management failures in Conduct?
• Are responsibilities properly delegated and accountabilities properly defined to senior management across your business? Are there clear lines of responsibility through the business?
• Have you developed a comprehensive responsibilities universe reflecting how all senior management are responsible and accountable and how this responsibility is shared across the business?

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