29 April 2016
New laws that overhaul the "reverse burden of proof" for senior bankers accused of wrongdoing have stood up to their final challenge in the House of Commons, despite strong resistance from Opposition members. Under the current legislation, which is yet to be implemented, there would be a presumption that a senior manager is guilty of misconduct if there has been a breach of a regulatory requirement in an area for which they are responsible, unless they can prove they have taken reasonable steps to avoid the breach.
However, the legislation removing this onus and replacing it with a statutory duty of responsibility (a change which was first announced in October 2015) has now survived the Third Reading in the House of Commons. Clause 24 Bank of England and Financial Services Bill (the "Bill") stipulates that no senior manager will be guilty of misconduct unless the regulators can prove that the senior manager did not take reasonable steps to avoid the breach occurring. The test for what constitutes "reasonable steps" is an objective one: it is the steps that a reasonable person in that position could have been expected to take.
Referred to in the Commons debates as the "reversal of the reversal of burden of proof", the new laws received criticism because they have been regarded by some as a loosening of regulations that have not yet even come into force. The laws imposing the "reverse burden of proof" had originally been passed as a means of clamping down on senior managers escaping liability following the 2007-2008 crisis. Critics of the new proposals have therefore said that the decision demonstrates that the Government has failed to learn the lessons of the financial crisis. At the very least, they say, the Government should put the senior managers "reverse burden of proof" laws into force for at least a few years to see whether it works. However, advocates claim that the senior managers and certification regime, with a statutory duty of responsibility, will be an effective tool for holding senior managers to account, and the "reverse burden of proof" is not needed to deliver the required culture change.
Whilst the removal of the "reverse burden of proof" was welcomed by senior bankers, in practice, the change may make little difference to the ability of the FCA to take enforcement action against individuals. Whilst it will be for the FCA to prove that a senior manager did not take reasonable steps to avoid a breach occurring, one of the first questions FCA investigators are likely to ask senior managers during interview is "What steps did you take to discharge your statutory duty of responsibility?" An unsatisfactory answer is likely to be taken as evidence that sufficient steps were not taken.
Another key part of the Bill, the extension of the senior managers regime to all regulated firms, was supported by all parties and has been passed. The Bill will now return to the House of Lords for consideration of amendments, after which the Bill will be sent to receive Royal Assent.
To read more on this topic, please see: https://www.mayerbrown.com/The-UKs-new-regulatory-