The aftermath of the 2008 Global Financial Crisis exposed financial services regulators. In the United Kingdom (UK), the closure of the Northern Rock Bank (2007) and the manipulation of the London Interbank Offered Rate (LIBOR) in 2008 signaled much needed reform in the financial services sector. The unprotected customers' efforts to join long queues to trace their savings were futile.
Uganda, had a decade earlier faced its own set back in the financial services, when eight banks failed, forcing the Bank of Uganda (The Central Bank) to intervene and close some while others were resold.
This was due to management issues, in most cases attributable to oversight by the majority shareholders that used their influence over the boards of directors to facilitate insider lending that led to liquidity shortfalls and eventually, the collapse of these banks.
These events elicit a general concern for regulation of senior management in the financial services.
The nature of business conducted by financial institutions entails trust. Customers deposit their money, reasonably expecting that when they need it, it should be readily available. Given such a fiduciary relationship, financial institutions 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 financial institutions, 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 requires the relevant firms to submit a Statement of Responsibilities for each senior official performing a senior management function and a Responsibility Map for the firm. 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, care, diligence, reason and cooperativeness among 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. The Companies Act 2012 lays out the general fiduciary obligations and duty 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 Central Bank of any appointment of senior management, these appointments are only effected when approval has been signified after applying fit and proper person test.
The board of directors is also required set and enforce clear lines of responsibility and accountability throughout the organization.
There are a number sanctions that can be imposed by the Central Bank of Uganda where 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 the performance of certain roles has been delegated.
In comparison to the SMCR, which creates individual accountability where a senior manager does not take reasonable steps to avert a failure. Further, the SMCR even imposes criminal 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 Central Bank of Uganda may 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, despite its inherent ambiguities in as far as it provides for proof of ‘reasonable steps' as a measuring rod for liability and the imposition of criminal liability.
Nevertheless, the SMCR is a step in the right direction and it 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.