Corporate Governance -Individual Accountability in the Banking Sector:  Lessons for Uganda from the United Kingdom

The aftermath of the 2008 Financial Crisis exposed bank regulators. In the United Kingdom (UK), the closure of the Northern Rock Bank (2007) andthe manipulation of theLondon Interbank Offered Rate (LIBOR)signaled much needed reform in the financial services sector.Several customers lost their savings. Uganda, had a decade earlier faced its own set back in the financial services, when eight banks failed, forcing the Bank of Uganda to intervene and close some, while others were resold.This was due to management issues, in most cases attributableto oversight by the majority shareholders which facilitated insider lending thatled to liquidity shortfalls. These events elicit a general concern for regulation of senior management within banks.

The nature of business conducted by banks entails trust. Customers deposit their money, reasonably expecting that when they need it, it should be readily available. Given such a fiduciary relationship, banks ought to be run with the highest standard of accountability.Professor Emmanuel T. Mutebile, Governor of the Bank of Uganda, comments that the unique characteristics of banks, particularly how they are very heavily leveraged and that most of their liabilities are owed to a large number of atomised depositors, who have the most to lose from abusive or negligent management, necessitate a priority of corporate governance in banking primarily to protect the interests of depositors.

The Senior Management Certification Regime (SMCR) of the United Kingdom, enables an allocation of responsibilities to different senior officials. It also provides for standard conduct rules for senior officials in the financial services industry. The conduct rules require relevant officials to act with integrity, skill and diligenceamong others and grants the regulator enforcement powers through sanctions.

Unlike the United Kingdom, the Ugandan regulations on senior management within the Financial Services are not as detailed. Although theCompanies Act 2012 lays out the general fiduciary obligations of directors, these are complemented by the Financial Institutions (Corporate Governance) Regulations, 2005, the closest equivalent to the SMCR from the United Kingdom.

The Corporate Governance Regulations require financial institutions to notify the Bank Uganda of any appointment of senior management, these appointments are only effected when approval has been signified. The board of directors is also required set and enforce clear lines of responsibility and accountability. There are a number sanctions that can be imposed by the Bank of Ugandawhere a financial institution fails to meet the regulatory requirements. They include correctional measures by the Central Bank to carry out a special examination, issuing directives to improve management

These are undoubtedly good checks that enhance independence and objectivity, however, they do not stipulate or set out any form of individual accountability and neither do they adequately address accountability where certain roles have been delegated.

In comparison, the SMCR creates individual accountability where a senior manager does not take reasonable steps to avert a failure. Further, the SMCR imposescriminal liability for negligent acts.Although criminal liability may not be ideal, it undeniably has a deterrent effect, thereby raising the standard by which directors and senior managers may act. This might be an area the Bank of Ugandamay consider for further review especially regarding the history of financial services in Uganda. The measures under the Corporate Governance Regulations are targeted towards the board and the financial institution collectively.  It might be beneficial to have sanctions targeted towards the individuals, as this may help in circumstances where senior managers or directors act negligently.

As discussed, both regulatory regimes create a frame work that minimizes the likelihood risk exposure for financial institutions. However, the Corporate Governance Regulations in Uganda might benefit from a detailed review. This may be targeted towards creating a framework that enhances the regulators pre-emptive ability for apportion individual liability in case of any failure by the senior management and sanctions targeted towards individuals as opposed to the board and financial institution collectively. The SMCR achieves this to a greater extent and is definitely worth emulating for Uganda, with a budding financial services industry.

Joel Basoga is a commercial lawyer and recent graduate of the University of Oxford, UK. basogajoel@gmail.com

 

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