Governance and Individual Accountability Hiding behind the Accountability veil
Conduct regulation was recently introduced into South Africa. It manifests itself most patently in the establishment of the conduct regulator, being the Financial Sector Conduct Authority (“FSCA”) and in the introduction of “a consolidated, comprehensive and consistent regulatory framework for the conduct of financial institutions”, in the form of the Conduct of Financial Institutions (“COFI”) Act (currently still a draft Bill).
The primary objective of the FSCA is the regulation and supervision of the “conduct of business” of all financial institutions. Conduct introduces a distinct shift in the manner and approach to the regulation and supervision of the financial services industry, by the FSCA. Key amongst these, is the potential introduction of an accountability regime, in one form or another.
The National Treasury’s Explanatory Policy Paper accompanying the COFI Bill requires,
“…improvements in financial institutions’ culture, including ensuring appropriate governance frameworks and that decision makers are directly and personally held accountable for weak governance and abusive practices by the institution, [for] ensuring that financial institutions better serve South Africans.”
The 2018 Financial Markets Review recommended that “regulators consider the implementation of an accountability regime that is equivalent and proportional for all market participants…”
We know that governance and accountability is a key focus of the FSCA, and that it is taking it very seriously. The comments made thus far provide a strong indication of the direction that the FSCA may move in, and the extent to which it may go, in order to drive accountability within financial institutions.
Accountability has always been a feature of corporate governance, but this presents a clear regulatory enforcement mechanism to be able to hold senior management to account.
Essentially in terms of the concept of “individual accountability”, senior managers in a financial institution are held personally liable for regulatory breaches and conduct failures.
Enabling the regulator to link inappropriate customer outcomes to those individuals responsible for the decisions that resulted in those inappropriate outcomes will, in turn, ensure that important responsibilities within a financial institution are appropriately assigned to specific senior managers.
The focus on accountability is not just a South African concept; the concept of holding individuals within financial institutions personally accountable for abusive practices is becoming a regulatory focus area around the world. The UK, Australia, Hong Kong, Singapore and the US have all implemented forms of individual accountability and more countries are likely to follow suit over the coming years.
Why introduce “individual accountability”?
If we consider the UK example, there was significant criticism that the then-existing regulatory framework was unable to hold individuals accountable for their personal responsibility and, as a consequence, there was concern that senior managers continued to shelter behind an accountability veil.
The inference is that senior managers were not seen to be adequately taking account for their responsibilities and that internal mechanisms within business, to hold senior managers to account, were lacking.
There is a strong interplay between culture and accountability. Accountability is one of the key indicators of a strong corporate culture. The threat of regulatory sanctions will hopefully engender an enhanced sense of accountability, which should, in turn, strengthen corporate culture ultimately driving down misconduct in the business.
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