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Senior Managers and Certification Regime in Financial Services

The new Senior Managers and Certification Regime (SMR), established as a result of the Parliamentary Commission on Banking Standards report in 2013, is a move towards greater personal accountability in the financial sector, and in particular UK banks,  UK branches of EEA and non-EEA foreign banks, insurers and FICC market participants. The regime, which is now in force, aims to allocate clear responsibilities to named individuals, and has a far wider application than previous rules. The rules will facilitate enforcement action against individuals working in banks and financial institutions. It is therefore essential for senior managers to understand the extent of the regime, the responsibilities they have been allocated, the penalties they may face and new referencing requirements.

Who is affected?

Senior managers, including those one level below board level (in large institutions only). This includes the Chairman, a senior independent director, executive directors, and certain non-executive directors if they have a specific delegated responsibility, such as being chair of a committee. For example, of the risk committee, audit committee or nomination committee.

It may also include General Counsel or the Head of Legal.

A separate regime has been introduced for insurance managers.

What responsibilities will I have under the regime?

Some responsibilities are inherent to certain roles, other ‘prescribed responsibilities’ are to be allocated by the firm to Senior Managers all within a Statement of Responsibility (SOR), which must be agreed with the Senior Manager and which is likely to be a fertile ground for negotiation. The SOR will need to be re-negotiated if there are significant changes to the role.

Independent legal advice should be taken by any Senior Manager prior to agreeing the SOR not only in relation to the allocation of appropriate responsibilities but also the allocation of resources, scope of indemnities and insurance cover available for the role amongst other areas.

If a firm allocates a responsibility to more than one individual, each person will be wholly responsible. Firms are being required to submit a ‘responsibilities map’ for the institution by February 2016. The SOR will be the accountability document delineating a Senior Manager’s role and the scope of their personal liability.

Individuals with senior management functions must be pre-approved by the firm, which must conduct its own fitness and propriety check and then approved by the regulator.

What are the Conduct Rules?

Conduct Rules will replace the Statement of Principles for Approved Persons. Firms will be under a duty to notify the FCA/PRA if it suspects the Conduct Rules have been breached within 7 days.

The Conduct Rules will be applied to roles deemed to pose a risk of ‘significant harm’ to the firm or any of its customers (in relation to a regulated activity).

There will be an annual in-house certification of the Senior Managers fitness and propriety.

Those categorised as Certified Persons will be much wider than those who are currently Approved Persons. The current FCA rules opt to exclude certain categories of workers such as receptionists and post room staff rather than list individuals who will be Certified Persons.

The new Conduct Rules requires that :

  • you must pay due regard to the interests of customers and treat them fairly
  • you must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively
  • when exercising your responsibilities, you must pay due regard to the interests of current and potential future policyholders in ensuring the provision of an appropriate degree of protection for their insured benefits
What is the duty of responsibility?

The new regime will place a duty of responsibility on all Senior Managers to take reasonable steps to prevent regulatory breaches in the areas of the firm for which they are responsible.

This means that if there is a failure by a firm in an area for which a Senior Manager is responsible within their Statement of Responsibility, the Senior Manager will have to establish to the regulator that they took reasonable steps to prevent, stop or remedy the regulatory breach.  What the FCA or PRA will consider to be a reasonable step will depend on the relevant circumstances but could include: (i) pre-emptive action to avoid a breach; (ii) investigating or reviewing responsibilities; or (iii) implementing, policing and reviewing appropriate policies. Further guidance will be required as to what constitutes ‘reasonable steps’.

The individual may face tough questions from a regulator to assess whether they have taken reasonable steps.

This means that Senior Managers will have a greater likelihood of being: sanctioned; named and shamed publicly by the regulator; at risk of financial penalties and legal costs; having their approval withdrawn; or in the case of more serious breaches, being banned from, or have restrictions placed on them holding a regulated position.

Senior Managers in UK banks could also face a new criminal offence of reckless mismanagement if they are aware of a risk that a decision will cause a bank to fail, their conduct falls short of what is reasonably expected and the bank does indeed fail.

When will these changes come into force?

The new Conduct Rules came into force for Certified Persons and Senior Managers on 7 March 2016.

The certification of Senior Managers does not have to be completed until 7 March 2017. This is also the date when Conduct Rules will apply to other employees.

Whistleblowing champions will have been appointed from 7 March 2016 to oversee the implementation and effectiveness of policies and procedures aimed at compliance with the new rules by 7 September 2016.

A new regulatory referencing regime will need to be in place under final rules to be published later in 2016. Firms will be required to seek regulatory references going back 5 years prior to appointment.