New regime holds top real estate bankers to account

New rules could mean criminal sanctions for reckless decisions, reports Daniel Cunningham

Last month’s damning report by the Bank of England and Financial Conduct Authority (FCA) on the near implosion of HBOS laid the blame squarely at the door of senior executives and criticised the decision not to pursue prosecutions of at least 10 of the bank’s top-ranking staff.

Financial regulators have thus far proven either reluctant or unable to prosecute individuals as part of their efforts to reform the UK banking industry. The £500,000 fine and professional ban meted out to former HBOS executive Peter Cummings in 2012 stands out as the exception to the rule.

That looks set to change. On 7 March 2016, a new regime proposed by the Bank of England’s Prudential Regulation Authority (PRA) and the FCA comes into force and will put lenders under unprecedented scrutiny. The Senior Managers Regime (SMR) will hold bankers to more stringent levels of accountability and place an onus on them to ensure that staff follow the rules.

Commercial real estate lenders will feel the impact. Along with bank CEOs and board members, ‘heads of key business areas’ will be subject to the SMR, potentially putting those at the top of real estate finance divisions under the microscope.


“If you are the head of a business unit or a division of a bank, you will have significantly more accountability under the new regime,” says Elizabeth Todd, a financial services regulatory specialist at law firm Pinsent Masons.

From next March, UK banks and foreign banks’ UK branches, building societies, credit unions and investment banks will be subject to the SMR. A new certification regime will apply to an organisation’s ‘significant risk takers’ and conduct rules will apply across organisations, except for such staff as receptionists, cleaners and caterers.

Insurers will become subject to a separate set of rules – the Senior Insurance Managers Regime (SIMR) – driven largely by the EU Solvency II directive and somewhat lighter in tone than its banking counterpart.

Further forward, the regime will apply across the City. In October, the government announced that the rules will be rolled out across the financial services sector in 2018.

Significant impact

Todd says: “The regime will have a significant impact. If you have done anything wrong in a bank and it comes to light, the regulators will have reach over you for a number of years even after leaving the bank. The government is taking this very seriously; it is determined to see behavioural and organisational change.”

The SMR is designed to ensure that those who perform functions with the potential to cause considerable harm to a bank or its customers are monitored. Staff in senior functions must be pre-approved by the regulators and held accountable to prescribed responsibilities. Under the certification regime and conduct rules, bosses will also be required to ensure that their staff comply.

Penalties will range from fines to criminal sanctions, with a maximum seven years’ imprisonment for those found culpable of the most reckless decision making. The harshest penalties are reserved for bankers, with insurers under SIMR not subject to criminal prosecution.

Perhaps not surprisingly, real estate bankers were not keen to speak on the record about SMR. In private, one admitted that the looming regime is very much on his and his peers’ minds.

Another expressed the view that creeping legislation can only result in bankers becoming increasingly reticent to do business for the fear that any future problems with their deals would make them personally liable.

“There’s going to come a point where bankers start to say to themselves ‘this isn’t what I signed up for’,” the banker says.

Some in the real estate lending profession will see the SMR as yet more banker-bashing, while others will see it as a necessary step towards ensuring that the toxic real estate debt pile amassed in the run up to 2008’s crash is not repeated. Whatever your opinion, 7 March 2016 is fast approaching. Be prepared.