Academic journal article Journal of Corporation Law

Reversing the Burden: Preventing Malfeasance in the Financial Services Industry by Presuming Fault

Academic journal article Journal of Corporation Law

Reversing the Burden: Preventing Malfeasance in the Financial Services Industry by Presuming Fault

Article excerpt

I. INTRODUCTION II. BACKGROUND    A. The Approved Persons Regime    B. Criticisms of the Approved Persons Regime    C. Remedy: Extension of the Senior Managers and Certification       Regime    D. Comparisons to Compliance Management Systems III. ANALYSIS    A. Removing the Presumption of Responsibility: A Changing Ethos of       the SMCR?    B. SMCR as a Toothless Tiger: What is a "Reasonable Step"?    C. Removing the Need to Report Suspect Breaches: Undermining the       Conduct Rules and Proof that Reasonable Steps End at Delegation? IV. RECOMMENDATION    A. Recommendation for the UK Government: Reinstate the Presumption       of Responsibility.    B. Takeaways for Financial Service Providers Regulated in the       United States V. CONCLUSION 


During the early 2000's, the United Kingdom enacted the Approved Persons Regime (APR) in an effort to regulate the financial services market. (1) The APR was long criticized for its inability to effectively regulate the market, and its vulnerabilities were revealed in the wake of the 2007-2008 market crash. (2) Not only did these regulations not prevent the crash, but because of the manner in which the Regime operated, those who were responsible for the crash simply could not be identified. (3) This was largely due to the fact that the APR really only served as a regulatory barrier to individuals holding particular roles in the financial services market, but once the barrier was passed, the APR lacked any teeth. (4) Thus, once an individual was approved for their role, there was no way to regulate their conduct to prevent malfeasance. (5) Another key problem with the APR was that it was nearly impossible to tell which individuals in which firms were responsible for specific tasks, so when the time came to penalize those responsible, regulators had no idea who they were. (6)

The Senior Managers and Certification Regime (SMCR) has since been chosen to replace the APR and its many defects. This SMCR still operates as a regulatory barrier to individuals who wish to hold key roles within a firm, requiring the relevant regulatory agency to approve or deny the individual based on a number of criteria. (7) Most importantly, however, is that the SMCR goes further than just serving as a barrier to entry. The SMCR purports to impose a continuing duty for the highest levels of management to diligently supervise all of their subordinates in an effort to prevent any future malfeasance. (8) The SMCR also requires individual firms and those at the highest levels of management to specifically map out the delegation of duties within the firm, so that if malfeasance does occur, the regulatory agencies know exactly who to hold responsible. (9) These changes have essentially turned each private firm into a regulator of itself, and comparisons to the Compliance Management Systems ("CMS") required for financial firms in the United States are particularly salient. (10)

While the SMCR should be a vast improvement over the APR, several changes to the SMCR have taken shape since it was originally proposed. (11) Most notably, the original SMCR implemented a reverse-burden of proof, requiring individuals at the highest levels of management to actually prove that they took reasonable steps to prevent and mitigate any malfeasance that occurred under their watch. (12) This requirement has since been removed. (13) In addition, the original SMCR imposed a duty on those managers to report any actual or suspected breaches of specific rules of the SMCR within seven days, but now those managers have no specific duty to report actual or suspected breaches. (14)

This Note will explore how these two changes in tandem may affect the efficacy of the SMCR as a whole. Part II will delineate the history of the APR and the SMCR, first looking at the APR and how it specifically operated, second looking at the problems associated with it, and finally looking at how the SMCR is supposed to operate and how that may improve upon the APR. …

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