‘Don't punish us’ plead UK's fledgling banks as new rules bite

LONDON — Tougher rules aimed at holding top UK bankers to account when things go wrong are driving up pay, which smaller "challenger" banks say is making it harder to recruit senior staff.

Executives at several such banks told Reuters the Senior Managers Regime (SMR), which came into force this month, is hurting those with no history of wrongdoing more than bigger rivals, who were the ones the rules were aimed at.

Public outrage over the financial crisis and subsequent scandals prompted the SMR, allowing regulators to pin the blame for excessive risk-taking and reckless expansion on individuals.

This marks a step change for British banking, where political scrutiny and tough new regulations had already made it hard to find people to take on some of the most senior jobs.

"While the SMR could potentially improve accountability and transparency, it raises that barrier further," Rishi Khosla, chief executive of OakNorth Bank, said.

The challengers say a one-size fits all approach to regulation is stifling their efforts to grab market share from big fish such as HSBC, Lloyds Banking Group, Barclays and Royal Bank of Scotland (RBS).

This now appears to be at odds with the aim of Britain's Fnance Minister George Osborne and other politicians of boosting retail banking competition by encouraging new players.

HSBC, Lloyds, Barclays declined to comment, while RBS and the Financial Conduct Authority (FCA), which designed the regulation, did not immediately respond to requests for comment.

While rising pay impacts all banks, the problem is particularly acute for the minnows trying to recruit non-executive directors (NEDs) who see increased risk from joining new banks with no track record and are demanding more pay.

"[They] are having to pay more to attract NEDs to their boards due to the competition with the larger banks for the limited pool of NEDs with relevant experience and willingness to join a bank's board," said Paul Lynam, chief executive of challenger Secure Trust Bank.

Barclays and HSBC, which reported billions of pounds in profits last year, paid NEDs an average of £211,857 and £229,933 respectively, while Shawbrook Group  posted underlying pretax profit of £80 million and paid them a base fee of £65,000.

Personal risks

The challenger banks are also harder hit by the fixed costs of complying with the new regime, the executives said.

Shawbrook needed six months to prepare the papers to comply with the SMR, its Chief Executive Steve Pateman told Reuters.

"The cost to the organisation was huge, both relative to our size and relative to the damage or harm that we could do to the economy if we got it wrong," he said.

The rules are also impacting middle managers, with some now preferring to keep a low profile in order to avoid being singled out in the event of another banking scandal.

Some are concerned about gaining promotion at smaller banks with a shorter path to the top, according to PWC risk and regulatory partner Sarah Isted. This leads some to seek roles in bigger banks, enabling them to advance without taking on a more regulated status.

At the same time the SMR has clarified responsibilities, Chris Box, human resources partner at PWC said, adding that people wanting to join an institution perceived to have a cleaner culture are more likely to work for a challenger.

It is not just the SMR which fledgling lenders say is stunting their growth. They already face sharp rises in tax after Osborne introduced a profit surcharge because of the risk they pose to the economy, a policy approved by Britain's top competition watchdog last month.

Osborne hinted at more proportionate regulation of smaller lenders in his budget last week, including possible changes to capital requirements, but said nothing on executive supervision.

"It seems slightly arbitrary to punish the challengers when, in most instances, their existence postdates the credit crunch and they're far too small to pose any broader systemic risk," Jamie Clark, a fund manager for Liontrust, said.

According to legal and compliance experts, the  new rules that hold bosses responsible for wrongdoing at British banks is deterring some bankers from taking on senior management roles and even prompting big hitters to play down their own importance.

Public anger that so few senior bankers were punished after taxpayers bailed out the industry in the financial crisis, or for scandals such as the London Inter-Bank Offered Rate (LIBOR) and currency market rigging, has led to the rules which make it easier to hold them to account.

The SMR replaces a system that UK lawmakers criticised for giving illusory control over individuals with little prospect of enforcement action.

A step change in banking rules, it will allow regulators to pin blame on named people rather than just firms, which lawyers said has triggered anxiety among top bankers.

"I have had some clients with staff resistant to being a senior manager, worried they are going to be kept awake at night about what their team is doing, and if something goes wrong, will they be the scapegoat," said Sarah Henchoz, an employment partner at Allen & Overy (A&O) law firm.

Unlike the old system, bankers deemed to wield significant managerial influence will have to sign up to a legal duty of responsibility for their units, and show they took reasonable steps to prevent or stop rule breaking that comes to light.

They include chief executive officers, heads of big business units, and non-executive directors who chair key committees and will amount to about 10,000 staff across 900 banking companies, or an average of about 12 per firm, rising to 40-50 for the biggest lenders.

Ron Gould, a former UK regulator who is now European chairman of compliance Science, which helps financial companies comply with rules, said some senior bankers were looking at whether they could convince regulators that they did not have significant managerial influence over their teams.

"One thing I have seen that does make me smile is the wonderful term used by some firms that want to 'juniorise' positions," Gould added. "It may be more wishful thinking than anything else."

One person familiar with how the SMR is being introduced said regulators were aware of this and were pushing back against banks that fail what the person described as the "sniff test", or too many senior managers saying that they did not have full responsibility over teams but simply reported to other more senior managers.

But such attempts at creating a chain of senior managers to blur direct accountability were not widespread, the source said.

The FCA and the Bank of England's Prudential Regulation Authority, which will both enforce the regime, declined to comment.

Asked if bankers were balking at the new rules, Simon Hills, an executive director at the British Bankers' Association, said the SMR was regarded in the industry as a key element to restoring trust in banking.

"I talk to senior managers at banks who say it's been a useful exercise, enabling banks to check and confirm they have got the right people in the right roles and clarify job descriptions where necessary," he added.

E-mail trail

The United States and other European countries have not gone as far as the SMR by holding senior managers personally responsible by law.

Requirements in the rules for senior managers to demonstrate they took steps to prevent or stop rule breaking will also prompt bosses to document all delegation of tasks and to archive e-mails to help keep them in the clear if misconduct is uncovered, lawyers said.

"You need to be clear that you have a document trail on how you delegated responsibility, how you supervised key parts of the business, that you know in five years' time exactly what you did," said Henchoz.

Adrian Crawford, employment partner at Kingsley Napley, which advises individuals in the financial sector, said more senior managers might have been held responsible for the LIBOR-rigging scandal if the SMR had existed in past years.

"We have heard anecdotally that some banks now have a lawyer present at every meeting... and that as a result decision making is becoming increasingly bureaucratic," he said.

"This is good for the protection of the individuals but not so good for the competitiveness of the City," he added.

Few lawyers expect regulators to make any major enforcement moves in the early days, but said they would eventually want to bare their teeth.

"It only applies to conduct on or after March 7, so we are unlikely to see enforcement action under the SMR for at least 18 months or so," said Elly Proudlock, counsel at WilmerHale's UK investigations and criminal litigation team.

Compliance adviser Gould said that while some bankers were genuinely frightened, others were blase, viewing this as simply another set of rules from regulators.

"You are going to get a crystallisation of feelings only in the aftermath of some action by the FCA," he added.