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Executive Matters

A duty of responsibility: The impact of the senior managers and certification regime and its extension
Executive Matters

Executive MattersIssue 1 | April 2017

Date
13 April 2017

Matt Hancock Legal Director

Katharine Bond Managing Associate

In March 2016, stringent new rules governing the approval of individuals working at banks, building societies, credit unions and large investment banks and insurers came into force.


A duty of responsibility: The impact of the Senior Managers and Certification Regime and its extension

In March 2016, stringent new rules governing the approval of individuals working at banks, building societies, credit unions and large investment banks and insurers came into force. Known as the Senior Managers and Certification Regime (SMCR), and governed by the Financial Conduct Authority and the Prudential Regulation Authority, the new regime set out a new charter for the accountability of senior executives.

SMCR is currently due to be extended to all authorised firms in 2018 with the FCA saying that they will consult on the changes during Q2 of 2017. Just as it did for large banks and insurers, SMCR will bring considerable changes for all levels of the financial services community.  

WHAT'S CHANGED?

In broad terms, the core features of the current SMCR are:

  • The allocation of mandatory senior management functions (SMFs) to senior executives – who must be pre-approved by the regulators – and the allocation of specific prescribed responsibilities to them.
  • Senior Managers are personally responsible for the prescribed responsibilities allocated to them and must sign Statement of Responsibilities.
  • A requirement to map – and keep updated – the management responsibilities across the firm.
  • The Approved Persons Regime no longer applies. Firms take on sole responsibility for annually certifying the "fitness and propriety" of a far wider group of staff than are currently captured by the Approved Persons Regime. 
  • New conduct rules apply to staff at all levels of the firm.
  • New rules to strengthen whistleblowing systems and controls including an SMF role of "Whistleblowing Champion".
  • New regulatory referencing rules and reporting obligations.

SENIOR MANAGER RESPONSIBILITY

A primary function of the new regime is to make it easier for the regulators to bring enforcement action against senior individuals when things go wrong and to remedy the perceived "accountability firewall" that  prevented regulators from pursuing senior managers in relation to the fallout from the financial crisis and the large-scale investigations into LIBOR and FX.  Where there has been a proven regulatory breach by the firm in an SMF holder's area, a new 'duty of responsibility' requires them to show that they took "reasonable steps" to avoid the breach. If they cannot show this, they may face severe personal consequences regardless of whether they had knowledge of the matters which led to the breach at the time. Somewhat unhelpfully, and although the regulators have consulted on the point, there is likely to be very limited guidance as to what "reasonable steps" may mean in any given case. To date, there have been no cases under the new regime which have examined this point and we will have to wait and see how the regulators approach this.

INCREASED SCRUTINY FOR 'CERTIFIED' STAFF

Those who hold senior positions, but are not SMF holders, also face greater and more regular, scrutiny under the new certification regime. With the obligation on firms to initially certify the fitness and propriety of staff, and then to review this on an annual basis, appraisal processes and performance review are likely to be a far more rigorous and can no longer simply focus on financial performance. In addition, new regulatory reference rules, which require certain mandatory disclosures, are likely to increase the likelihood of formal investigation (including disciplinary proceedings) where any issues arise and to prevent the incidence of so-called "rolling bad apples" slipping under the regulatory radar.

WHAT CAN SENIOR STAFF DO TO PROTECT THEMSELVES?

It is vital that senior staff have the information and support to properly discharge their responsibilities. Before signing up to a Statement of Responsibilities, SMF holders need to ensure that they fully understand the areas for which they have been allocated responsibility, including how responsibilities in their area are delegated across the business. They should have direct input in the creation and any review of their Statement of Responsibilities and understand where that sits in the context of the firm's wider responsibilities map. Competing interests as between different areas of the firm may lead to conflicts both between the firm and an SMF holder and between SMF holders themselves. For that reason, is important for firms to offer their senior staff access to independent legal advice.

THE EXTENSION

The regulatory requirements in relation to extension of SMCR to all authorised firms have yet to be consulted on. Given the range of firms that will be caught by the extension, it is unlikely that there will be a one size fits all approach. For example, it is not clear whether the certification regime will be applied to firms of all sizes. When the proposals are published, and given the current proposed time frame for implementation, firms (and senior staff) will quickly need to understand how the landscape is changing and what that may mean for them. Firms will likely need to review and update existing procedures or design and implement new ones. Employment contracts and employee policies will also likely require amendment. Staff training in respect of the detail of the new regime, in particular the new conduct rules, will also be important.