Directors Held Individually Accountable for Financial Services Firms
In a significant move, senior managers in financial services firms are now held individually accountable for their actions under the Senior Managers Regime (SMR). The Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) can take action against senior managers if they fail to prevent contraventions of relevant requirements.
Burden of Proof
The burden of proof lies with the regulator, which must establish that a contravention has occurred and that the senior manager did not take reasonable steps to avoid it. The FCA and PRA have issued guidance on how senior managers should behave to comply with their duties.
Private Rights of Action
Section 138D of the Financial Services and Markets Act (FSMA) provides a statutory right for private individuals who suffer loss as a result of contravention by an authorized firm of an FCA or PRA rule. Customers may also bring claims against investment firms in contract or tort where there has been a breach of a regulatory rule or requirement.
Standard of Care for Customers
Financial services firms are subject to high-level requirements to treat customers fairly and act in their best interests. A high standard of care applies when dealing with retail customers, who are afforded the most protection under the Financial Services Compensation Scheme (FSCS) and the Financial Ombudsman Service.
- The standard of care may differ based on the sophistication of the customer or counterparty.
- Investors are categorized into:
- Retail clients
- Professional clients
- Eligible counterparties
- Different regulatory protections apply to each category, with those falling within the retail category afforded a higher level of protection.
Rule-Making
Rules that affect the financial services industry in the UK are adopted through a combination of:
- UK legislation
- FCA and PRA rules and guidance
- Consultations are typically undertaken for significant changes.
Cross-Border Regulation
The UK has agreed a trade and cooperation agreement with the European Union, which covers general objectives and frameworks for the relationship between the two jurisdictions. Under this agreement, UK firms no longer need to comply with EU regulations, but must instead follow UK rules and guidance.
Conclusion
In summary, directors of financial services firms are held individually accountable under the Senior Managers Regime, while private individuals have statutory rights to bring claims against authorized firms that breach regulatory rules. The standard of care for customers varies based on their sophistication, and rule-making is a collaborative process between regulators and industry stakeholders. Cross-border regulation has changed with the UK’s departure from the EU, but the UK remains committed to maintaining high standards of financial regulation and supervision.