Independent Audits
The era of additional oversight for banks have come a step closer today. The US regulators are taking an approach of saying that big banks who have systems and controls problems can't just be trusted to sort it out with the hire of new compliance heads but must be subject to ongoing audit process by the regulator that they will have to pay for. The UK regulators wish to follow suit and introduce this measure, especially where there is a large institution with a history of failings. Indeed, HSBC is in the process of trying to finalise a deal with the FSA and there is some speculation that this will include the appointment of an independent monitor to oversee HSBC's compliance function, which, if correct, would be a significant change in the UK regulatory landscape.
Bonuses
In regard to bonuses, the rumour is that the deal will provide that the HSBC's top executives are to defer a portion of any bonuses that they are awarded for the next 5 years. This is another example of the US regulators trying to sheet home responsibility to individuals and those financial measures are, with the exception of custodial sentences or removal of authorisation, the most chilling sanction available. Again, the UK regulators are following this approach. Andrew Bailey, head of the Financial Services Authority's prudential business unit, wrote to bank chief executives in late October ahead of this year's bonus round warning them that the watchdog would be looking for evidence they had "clawed back" deferred bonuses from people involved in scandals.
'Clawback' rules, which give banks the power to cut or cancel the portion of an individual's bonus that has been awarded but not yet paid out, have been in place in the UK and Europe since 2009. 2013 looks, however, to be the year in which this rules really start to bite because the FSA informed the remuneration committees of Britain’s biggest banks that they need to demonstrate 'a change in culture' when they unveil their bonus pots for 2012 in the new year.
Deferred Prosecution Agreements
The HSBC deal is being done through the US mechanism of a deferred prosecution agreement (DPA). A DPA can be made between a prosecutor and an organisation to defer prosecution for alleged economic wrongdoing as long as stringent conditions are met. Interestingly there are moves to introduce such a mechanism into the UK. The UK proposal would involve judges at an early stage which would be an improvement on the US process, although it is unfortunate that the measure will only be available for corporations and not individuals.
This HSBC DPA deal, falling short of an indictment, demonstrates that DPAs are a very useful white collar crime mechanism and would be a welcome introduction to the UK scene. The hawkish view in the US is that it was a 'cop out' to use the DPA to avoid indicting the bank but a more balanced view is that indictment would have been too harsh a measure because the DPA seems likely to give rise to significant improvements on the systems and controls of the bank (which have, in any event, already been improved). The problem with an indictment, or a guilty plea over such charges, was that it could have ended the bank's business in the US.
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