Will New Legislation Make Financial Services Industry More Accountable?

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Under legislation introduced in Parliament on 15 October 2015, executives at UK insurance companies, mortgage brokerages and payday loan firms will be covered by the same “duty of responsibility” as those in banks. Dubbed the Bank of England and Financial Services Bill, the new legislation will extend the Senior Managers and Certification Regime across the entire financial services industry, imposing clear responsibilities upon all of them to keep them from breaking the rules.

In an emailed statement, the Treasury noted that a key part of the government’s long-term plan is to restore trust in Britain’s financial services sector so that it works better for businesses and individual consumers alike. “Ensuring that these firms are properly run is vital for the health of our economy,” the statement said.

The bill reflects Bank of England Governor Mark Carney’s mission to clean up an industry that has been tarnished by scandals and implicated in the recent financial crisis. Tracy McDermott, acting chief executive officer of the Financial Conduct Authority (FCA), wrote in an emailed statement, “Extending the Senior Managers and Certification Regime is an important step in embedding a culture of personal responsibility through the financial services industry.”

A reprieve for bankers

On the surface this new legislation sounds like good news, perhaps especially for consumers who were burnt during the financial meltdown and who may view the entire setup as being rigged greatly in favour of the financial institutions that are “too big to fail”. It remains to be seen how this will all play out, however, as the new regime isn’t due to come into effect till March 2016, and the banks themselves are currently in the midst of working out who is responsible for which areas.

What does seem clear now is that the proposed new legislation represents a reprieve for UK banks, in that that the Treasury has abandoned the “reversal of burden of proof” (or “guilty until proven innocent”) rule that would have automatically held senior managers accountable for failings on their watch, with the threat of a fine or a ban. That rule would have required executives to prove that they had taken all reasonable steps to prevent breaches, rather than the regulator proving its case, as is the norm under UK law. So concerned were the banks about this proposal that they reportedly had numerous high-level meetings with the Bank of England about it.

Under the revised proposal, senior managers across the financial sector will have a statutory duty of responsibility to take all appropriate steps to prevent a regulatory breach from occurring. But it will be up to the watchdog to prove that the requisite steps were not followed.

Even so, the new Senior Managers and Certification Regime is stronger than the Approved Persons Regime that has been in operation since before the financial crisis, according to Andrew Bailey, the BOE’s deputy governor and CEO of the Prudential Regulation Authority. “We strongly support this strengthening,” he said in a separate emailed statement.

Tightening the reins on an already troubled industry

Though it may indeed often seem that everything is rigged in favour of the big financial players, regulators are looking out for consumers. For instance the fact that the new certification regime will encompass the troubled payday loan industry is a promising sign and a step in the direction of imposing greater accountability on these lenders. This is on top of FCA regulations that went into effect earlier this year to tighten the reins on the payday loan industry and give consumers greater protection.

And recently the Broadcast Committee of Advertising Practice (Bcap) – the code-setting body for all TV and radio advertising – launched a consultation to assess whether campaigns by payday loan companies such as Wonga should be given scheduling restrictions that bar them from airing during shows watched by large numbers of children. Although the existing advertising code already requires the adverts to be socially responsible, and prohibits them from encouraging people under eighteen to take out a loan or harass others into doing so for them, watchdogs are still concerned about children’s exposure to the ads.

Matthew Reed, chief executive of the Children’s Society, said, “Commercials with singing satsumas, Christmas presents and catchy jingles make borrowing money seem easy and fun to children, which increases the pressure on parents to take out high-interest loans. Children should learn about borrowing and debt from their school and family, not from irresponsible payday loan advertising.”

Granted, payday loans are a viable recourse for some people who need modest amounts of money quickly and are unable to get a loan through more conventional avenues. Even so the decision to take out one of these short term, high interest loans should be compared carefully in order to avoid digging oneself deeper into a financial hole. In any case placing additional restrictions on the advertisements will probably have negligible effect on the industry or on broadcasters’ revenue, and may provide added protection to some of the most vulnerable TV audiences.

In the end we really can’t rely upon legislation or official guidelines or bans to protect us from our own unwise decisions, and it is still on us to take responsibility for our personal finances. But sometimes we need protection from unfair business practices, and it’s good to know that the watchdogs are looking out for us, at least some of the time.

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