Individual accountability remains high on the agenda of regulators globally.
In a nutshell:
2021 sees the long awaited implementation of Guidelines on Individual Accountability and Conduct (the IAC Guidelines) in Singapore, as well as further consultation on the proposed expansion to the Australian individual accountability regime, with the Financial Accountability Regime (FAR) potentially coming into effect in early 2022.
2021 also marks the five year anniversary of the introduction, for banks and PRA investment firms, of the UK’s Senior Managers and Certification Regime (SMCR), and six years since the United States Department of Justice (DOJ) released the Yates Memorandum re-articulating that individual accountability is at the heart of DOJ’s enforcement strategy.
As a result of these regimes, senior managers are now more clearly individually accountable for their area of responsibility.
But what is the impact of this focus on individuals on investigations? Will it result in more enforcement cases against individuals?
We are certainly seeing an increase in internal investigations involving individuals in many jurisdictions. Some of the reasons for this increase would suggest that this is a trend that will continue.
In particular, whistleblowing is giving rise to more investigations.
In Australia, 2019 reforms have significantly expanded the matters which can be the subject of a protected disclosure, such that most forms of misconduct are now covered. The legislation has also widened who can be a whistleblower, and the remedies available to a whistleblower who suffers detriment. In France, the AMF implemented arrangements to receive and process alerts of potential regulatory violations. The whistleblower benefits from strict confidentiality and can also remain anonymous.
Thanks to these whistleblowers, who without protection measures would not have come forward, we will be able to identify more offences, intervene earlier and minimize the repercussions on victims.”
And change continues - under the new IAC Guidelines, financial institutions in Singapore will be expected to have in place an appropriate framework to enforce a formalised whistleblowing programme.
But does this perceived increase in internal investigations translate into an increase in investigations by regulators?
In Hong Kong, the SFC sees the manager-in-charge (MIC) regime as a preventative tool, and considers it to be “one of the most effective ways to dissuade misconduct, incentivise good behaviour and improve corporate governance”. However, and although the SFC had initially stated that it did not see the MIC regime as an enforcement tool, it has moved away from this position and is actively using it as a 'roadmap' to identify senior individuals responsible for misconduct. Investigations are being conducted against MICs but have, however, yet to result in any regulatory sanctions. Meanwhile, in the United States, high profile prosecutions have imposed significant penalties on corporations based, at least in part, on their delay in either providing information sufficient to identify all individuals with knowledge of the relevant misconduct, or otherwise disciplining responsible employees.
It is well known that, after more than 4 years of operation, there is only one concluded UK case under the SMCR (the decision against the Chief Executive of Barclays in May 2018). The number of investigations into individuals by the UK FCA appears to be fairly static (377 open investigations in December 20191, and 360 in February 20192), nonetheless there was a 50% increase in the Senior Managers within those figures (10 in February 2019, 15 in December 2019). By the end of 2019, the UK PRA had twice as many open investigations into individuals than firms (8 firms; and 16 individuals).
In Australia, ASIC is clear in its Corporate Plan 2020-2024 that, in its enforcement activity, it will “continue to ensure that individual accountability is given appropriate attention in [its] investigations” and misconduct by individuals remains a stated priority.
In Singapore, MAS’ latest Enforcement Report states that one of MAS’ enforcement priorities for 2020/2021 is to enhance focus on senior management accountability for breaches by their financial institutions or subordinates.
In 2019, the SFC in Hong Kong introduced an internal investigation disclosure obligation requiring securities and futures firms to identify whether departing licensed representatives, responsible officers and executive officers were the subject of an internal investigation in the 6 months prior to their departure. While not yet apparent that it has given rise to more investigations into individuals by the regulator, it certainly has the potential to do so.
In a similar vein, it seems likely that increased focus on breach reporting in Australia and Singapore could furnish the regulator with additional areas for investigations into individuals:
- In Australia, reforms, which have been delayed but are likely to come into effect in the course of 2021, would (among other things) require the reporting of internal investigations into potential significant breaches. Having a regulator aware of the fact of an internal investigation, and awaiting its results, will also mean that the investigation processes will need to be robust and able to withstand regulatory scrutiny and inquiry.
- Under the new IAC Guidelines, more self-reporting obligations will apply in Singapore from 10 September 2021.
New areas of regulatory focus may also give rise to an increase in regulatory investigations.
non-financial misconduct is misconduct, plain and simple”- Christopher Woolard, FCA
In the UK, the FCA is increasingly likely to pursue non-financial misconduct (which includes behaviours such as sexual misconduct, sexual harassment, other forms of harassment, bullying, discrimination, favouritism, exclusion and intimidation) through enforcement and, in November 2020, the FCA prohibited three individuals from working in the financial services industry on the basis that they are not fit and proper. The three individuals had each been convicted of serious non-financial indictable offences while working in the regulated financial services industry. In France, the ACPR’s 2020 report on governance in the banking sector also stresses that members of the board of directors of banks must meet criteria of good renown, honesty, and integrity.
If you would like more information on global trends and tips in relation to investigations involving individuals, please visit our dedicated hub.
Authors: Jenny Stainsby, Benedicte Perowne, Hannah Cassidy, Natalie Curtis, Valerie Tao, John O'Donnell, Michael Jones, Andrew Eastwood, Antoine Juaristi
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© Herbert Smith Freehills 2021