Regular readers of Enforcement Watch will know that we have been tracking the proposals for reforming the responsibilities of individuals in banks and investment firms.
In short, in June 2013 the Parliamentary Commission on Banking Standards recommended a new regime for individual accountability (see Enforcement Watch 11 "Parliamentary Commission makes far reaching recommendations"). Since then, much ink has been spilt in consultations and draft policy statements, and we are now much closer to knowing how the regime will actually operate when it takes effect – which has to be by no later than March 2016. We still await the finalised rules, however, which are due to be published in Spring/Summer 2015.
This article draws attention to important changes and clarifications since we last covered the subject at the end of 2014 (see Enforcement Watch 14 "Impact of FCA/PRA joint consultation on strengthening accountability through new framework for individuals").
The scope of the regime
The regime originally applied to UK banks, building societies, credit unions and PRA-designated investment firms (for convenience we refer in this article to "relevant Firms"). However, using a power under FSMA, and following a separate consultation, the regime will now also apply to UK branches of foreign Banks1.
The new senior management regime
The broad framework remains as before. That is, there will be three tiers of responsibility:
- Senior Management Function holders (SMFs):
- the Senior Management Responsibilities to be allocated to SMFs2.
- pre-approved by the FCA/PRA on the "fit and proper" criteria
- presumed responsible for any failure of their relevant Firm in an area over which they have responsibility.
- Certified employees;
- Broadly speaking, non SMFs who were previously Approved Persons, but also to include some others too.
- fitness and propriety determined by the relevant Firm.
- Other relevant employees of the relevant Firm
- subject to the new Code of Conduct.
In February 2015, the FCA and PRA clarified that they no longer intend for "standard NEDs" (meaning those not chairing certain board sub- committees) to be SMFs. This development will be a relief to those who were concerned that the regime would impact upon the willingness of NEDs to serve on boards.
Both the FCA and PRA have supplemented and refined their respective lists of Senior Management Responsibilities to be assigned to SMFs:
- The FCA has added responsibilities for compliance with the CASS handbook (client assets), remuneration policies and financial crime. These themes are self-explanatory and consistent with historic areas of focus for the FSA/FCA.
- The PRA has added the responsibilities of remuneration policies and ring-fencing activities for certain firms. The PRA has also adopted a more nuanced approach to the allocation of responsibilities in response to concerns that smaller relevant Firms might find the requirements burdensome. Accordingly, there will now be fewer responsibilities to be allocated for relevant Firms with assets of less than £250m. Unlike the FCA, the PRA has also clarified that Senior Management Responsibilities may be held jointly – but importantly not split.
The two PRA Senior Management Responsibilities relating to culture at relevant Firms came in for criticism during the consultation as being unclear and overly onerous for one SMF (see on this also Enforcement Watch 14 "Impact of FCA/PRA joint consultation on strengthening accountability through new framework for individuals"). The PRA has elected to retain these responsibilities but has amended their descriptions to make it clear that the relevant SMFs are not single-handedly expected to change culture, but are instead responsible for overseeing that the board and management instigate such a change.
The presumption of responsibility of senior managers
The presumption of responsibility has caused some real concern and respondents wanted some more details around it to understand when they might be liable. The PRA and FCA have now each proposed quite detailed guidance. (Which can be viewed here PRA Guidance / FCA Guidance.) This includes:
- From the FCA, that for the presumption of responsibility to operate, the senior manager will usually be involved in a contested hearing alongside the Firm, before the RDC or the Tribunal, in relation to the relevant conduct.
- A number of identified factors that an SMF might use to demonstrate that he/she has taken steps which might reasonably be expected of a person in that position in order to try to avoid the breach committed by the relevant Firm.
We see this guidance as being a key part of the landscape of enforcement cases under the new regime.
Transitional Provisions and Grandfathering
Where an individual holds a "significant influence function" under the Approved Persons regime at a relevant Firm, then that individual will be able to take up a corresponding SMF (i.e. can be "grandfathered") without the need for fresh approvals, provided that a Statement of Responsibility is prepared for them. They will not be subject to a fresh assessment of their "fitness and propriety".
Those individuals who are Approved Persons at relevant Firms will lose their approvals in return for a certification from the relevant Firm that they are fit and proper. Where the individual's role has not changed, then the Firm will not be required to obtain references before a certificate is issued – but the certificate will have to be issued when the new regime comes into force.
There are separate provisions for applications pending ("in flight applications") when the new regime takes effect.
Statements of Responsibility and Responsibilities Maps
The PRA and FCA have now clarified that they expect Statements of Responsibility for Senior Managers to be clear and short, and that any additional, language seeking to qualify the senior management responsibilities being allocated should be clear and should serve a definite regulatory purpose. In other words, these are not expected to be bespoke, long and complex documents.
The requirement to maintain and submit Responsibilities Maps remains, but the regulators have clarified that for smaller/simpler relevant Firms, these need not be complex documents.
Handover certificates for new SMFs
These certificates were the cause of some concern to respondents. Both regulators have now clarified that the certificates are not a mandatory requirement, but simply one way in which relevant Firms may seek to discharge their obligation to ensure that SMFs have adequate information to discharge their duties.
Relevant Firms' assessment of fitness and propriety under the certification regime
The FCA and PRA reported that many respondents were concerned that they will lose the reassurance provided by the regulators' determining fitness and propriety. These concerns have largely been ignored, but the FCA and PRA say that they will consider further guidance that will assist Firms in the practical discharge of their duties in this regard.
Driven by past failures and a political imperative, the SMR is a real sea change. We see it as likely to impact a variety of enforcement related aspects in the future. As for what needs to be done now, as there is now much more flesh on the bones, relevant Firms are able to map out more accurately how they are going to deal with the new regime, and they are doing so. The lead time to the commencement of the new regime is not now very long in light of what needs to be put in place.
It should not be forgotten that, ultimately, it is senior individuals who will end up carrying the can more than ever for failures. So, whilst we see relevant Firms looking to get their houses in order, prospective SMFs must also ensure that they are properly focussed. They must properly assess what they are being lined up for, whether this is appropriate, what impact it has on their employment position and what precisely they need to do in order properly to insulate themselves against liability under the new regime.
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