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.
By way of background, 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 we have seen a raft of consultations and publications from the PRA and FCA in the build-up to March 2016, when the new changes come into force. In Enforcement Watch 16 we noted that the finalised rules were due to be published in Spring/Summer 2015 (see "Further steps towards the new senior management regime"). The FCA and PRA final rules have now been published and the main points of departure from what we have seen previously are discussed below. Separately, the FCA and PRA have also now jointly published rules dealing with how the new regime will apply to UK branches of overseas banks and Solvency II firms. Whilst not the main focus of this article, there are some particularly interesting points in relation to overseas banks which are noted below.
Whilst the detail of the new regime is taking shape, even at this late stage, there remain some key areas under consultation and these are also summarised below. In addition, readers of this article should also look at our summary of the Bank of England's "Fair and Effective Markets Review", with its proposals for extending the scope of the senior management regime to areas of the fixed income and commodities markets in due course (see "The Fair and Effective Markets Review Report").
Points of interest in the finalised rules
We have previously summarised the new senior management regime for readers (see Enforcement Watch 16 'Further steps towards the new senior management regime'). The finalised rules now published do not depart from this framework. However, there are some important changes and clarifications and we have set out below those of particular interest:
- As with the PRA, the FCA's approach to firms' allocation of prescribed responsibilities now differs depending on whether the firm has total gross assets of more than £250m or less (a "small firm"). Small firms (and all credit unions) need only allocate 8 prescribed PRA responsibilities and 1 additional FCA prescribed responsibility (financial crime).
- Whilst both the PRA and the FCA will allow for a prescribed responsibility to be shared by more than one person, this is not to be the norm, the rationale must be explained through Responsibilities Maps and liability will be joint, meaning in practice that Statements of Responsibility will be identical for all those sharing a role.
- The FCA has clarified that the Senior Management Regime has no territorial limitation, meaning that a Senior Manager is responsible for the activities of an entire firm including those conducted in an overseas branch (including where transactions take place in part or in full overseas).
- Following a consultation, the FCA has now provided specific guidance on the roles and responsibilities of NEDs in firms subject to the SMR (save for Solvency II firms that will benefit from distinct guidance to be published later in the year).
- In relation to Conduct Rule breaches, the reporting requirements have been altered. Actual or suspected breaches of the Conduct Rules by senior managers must be reported within 7 days. However, in relation to all other staff, such actual or suspected breaches need only be reported annually. The stated aim is to reduce the administrative burden on firms – although the FCA has been clear that the Principle 11 requirement on firms remains, that is to tell the FCA that which it would reasonably expect notice.
- On more logistical matters, despite pressure from respondents for greater flexibility, the FCA and PRA Statements of Responsibility are still expected to be "self-contained documents" of no more than 300 words. The FCA and PRA will also now require that Forms A and E (for Senior Managers joining a firm or being grandfathered into a Senior Management Function) summarise any handover material available (although it remains the case that handover certificates are not mandatory). More generally, in relation to forms, in September 2015, the FCA and PRA published the new Forms A. One interesting change to the long Form A is the removal of the requirement to disclose historic criminal proceedings – although historic cautions and convictions must still be disclosed. At the same time as publishing the new Forms A, the FCA and PRA opened a short consultation in relation to certain other forms to be deployed under the new regime. The consultation is scheduled to close on 19 October.
Points of interest for UK Branches of Foreign Firms and Solvency II Firms
- Following some uncertainty, the FCA has clarified that for EEA firms, the Senior Managers' Regime will only apply to the extent that there are activities (and not just regulated activities) taking place in relation to a branch in the UK. In relation to the certification regime, as before, this will apply to those performing a significant harm function who are dealing with (i.e. having contact with) UK clients and for EEA firms only if the employee is UK based. However, further guidance has been issued in relation to the meaning of UK client.
- There was uncertainty as to the extent to which UK branches would need to have additional significant management functions, particular to them. The position is now resolved and different for non-EEA and EEA branches of foreign Banks. For non-EEA branches, there will no longer be the proposed Overseas Branch Management Function. Instead, such branches may allocate an Executive Director Function (SMF3) or an Other Local Responsibility Function (SMF22). This is akin to the SMF18 function for UK firms, designed to capture individuals with significant responsibilities outside of the set list of SMF's. However, in relation to EEA branches, the FCA has opted to retain the EEA Branch Senior Manager function for those with significant responsibility for a significant business unit.
- One area that had been causing concern for respondents related to senior manager responsibility for transactions booked in UK branches, with components in other jurisdictions. The FCA has now clarified that where a transaction is booked in a UK branch, the relevant senior manager does not have responsibility for the entire transaction but only the booking aspect.
- Following respondents' expressions of concern about the practicality of enforcement, the FCA has clarified that the criminal offence resulting from a decision causing a firm to fail will not apply to senior managers of incoming branches.
What is still to be resolved?
- As we have reported previously, respondent firms have expressed concern about making determinations as to the fitness and propriety of Certified employees without the reassurance (provided by the current Approved Persons regime) of the FCA or PRA making the final decision. Up to now, those concerns seem to have fallen on deaf ears. However, many respondents to the Bank of England's Fair and Effective Markets Review (covered elsewhere in this issue ("The Fair and Effective Markets Review Report") provided feedback in relation to the content of regulatory references which the FCA and PRA have now undertaken to consider before finalising any new rules and guidance in this area. This includes in relation to the difficulties that may be faced by UK branches of foreign institutions seeking references from overseas employers. This may result in the provision of a mandatory template for regulatory references.
- There are a number of important other areas where guidance is still pending:
- Finalised guidance on the operation of the presumption of responsibility is expected in Autumn 2015.
- Amendments to the Enforcement Guide and Decision Procedures and Penalties Manual is expected in Autumn 2015.
- Possible additional guidance, before the commencement of the regime in March 2016, on reporting breaches of conduct rules.
- A final position on a prescribed responsibility for whistleblowing expected later in 2015.
- The FCA has opened a consultation as to whether the Certification regime should be applied to wholesale market activities. The genesis of this was a realisation that the Certification regime would apply to some engaged in wholesale activities, but not others, despite the possibility that the latter category could cause harm to the firm or its customers. The FCA propose two new categories of Certified individuals. These will broadly be those dealing with "clients" (meaning in this case retail, professional or eligible counterparty) and those engaged in algorithmic trading. Responses to the consultation were due on 7 September 2015. However, because of the likely need to amend primary legislation, changes are not expected to be immediately implemented.
You can read the consultation paper here.
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