Strengthening accountability in banking – key points from the FCA and PRA's final rules

On 7 July 2015, the PRA and the FCA published their final rules and guidance on the Senior Managers and Certification Regime which come into force on 7 March 2016.

Who is affected?

UK banks, building societies, credit unions and PRA-designated investment firms as well as UK branches of overseas banks.

The final rules may also be of interest to hedge funds, asset managers and inter-dealer brokers following recommendations of the Fair and Effective Markets Review (FEMR), established by the Chancellor in June 2014, to extend the regime to a wider range of regulated firms.

What are the new proposals for Senior Managers?

The new proposals are:

• Firms will need to ensure that individuals holding particular “senior manager” roles are allocated to a Senior Management Function (SMF) and are pre-approved by the regulators. There are 17 role-specific SMFs (listed in Annex 3 of the FCA’s consultation, here). Only some SMFs will be relevant to all firms, for example, the Chief Executive and Executive Director functions. Firms must also identify individuals (including contractors/consultants etc.) responsible for activities, functions or areas that are not covered by the specified SMFs and ensure that these individuals are pre-approved for SMF18 (Other Overall Responsibility function).
• Individuals who hold SMFs must be given “Prescribed Responsibilities”. These vary depending on the size of the firm, however, some will apply to all firms. Responsibility for the firm’s performance of its obligations under the Senior Managers Regime (SMR), the Certification Regime, the Management Responsibilities Map, allocation of all Prescribed Responsibilities and responsibility for policies and procedures for countering financial crime must be allocated to senior managers by all firms.
• Firms must record the allocation of responsibilities on individual Statements of Responsibilities and provide a summary in the firm’s Responsibilities Map. The FCA suggests that each responsibility is limited to 300 words, however, this is not a mandatory limit.
• Where individuals hold the same responsibility in relation to different aspects of the business, this needs to be clearly set out in Statements of Responsibility and the Responsibilities Map. If it is unclear who is responsible for a certain aspect of the business, SMF managers with the relevant responsibility would be considered jointly responsible.
• The FCA has confirmed that the SMR has no territorial limit. Individuals that may be employed by a parent or group company but exercise a significant influence over activities in the UK (e.g. group finance director) will need to be approved as a Group Entity Senior Manager, regardless of where they are located.
• There is a “presumption of responsibility” that applies to senior managers when a relevant/authorised firm contravenes a relevant requirement or conduct rule. A senior manager will be guilty of misconduct unless they can satisfy the regulator that they took reasonable steps to avoid the contravention.    

Certification regime

Firms will now be responsible for assessing the fitness and propriety of staff carrying out “significant harm functions”, both at the point of recruitment and on an ongoing basis. “Significant harm functions” include senior managers, CASS managers, propriety traders and material risk takers. A list of significant harm functions is on page 70 of the FCA’s consultation paper, here.

Firms seeking to appoint someone to either a senior management or a certification function will have to request a reference from all previous employers covering the past five years employment. Where they are requested from another relevant firm, references would need to disclose any facts that led a previous employer to conclude that the candidate breached a conduct rule and a description of the basis and outcome of disciplinary action taken in relation to any such breach. The FCA plans to make further rules and guidance on regulatory references following the recommendations of FEMR, in particular, guidance on the content and changes to the format of the disclosures required through regulatory references and a mandatory template for the provision of references.

Conduct rules

The FCA has confirmed that its new conduct rules will apply to all bank employees, save for a list of “excepted employees”. Excepted employees are those whose role would be fundamentally the same as it would if they worked in a non-financial services firm, for example, receptionists, post room staff etc. The conduct rules are not radically different from the existing rules that apply to approved persons. Certain conduct rules will only apply to senior managers, for example, the obligation to “whistleblow” in relation to any information of which the regulator would reasonably expect notice.

Firms must notify the FCA/PRA of any actual or suspected breaches of the conduct rules within 7 days for senior managers and annually (in October) for the wider population. The scope of this obligation is wide and uncertain. It has been argued that allegations against an employee which are unrelated to their regulated activities could trigger an obligation to notify the regulator. This could arise where a regulated employee is the subject of a grievance by another employee, alleging, for example, significant bullying or harassment. The FCA have suggested that firms should act proportionately in these cases and should consider whether it is “reasonable” to “assume that the information would be of material significance” to the regulator. Nonetheless, it is likely that firms will take cautious approach, at least in the initial period following the introduction of the rules, which may lead to the FCA been deluged with notifications.

Next steps

The FCA has confirmed that firms will need to:

• Submit a notification confirming how the individuals who currently have a controlled function will transfer to an equivalent SMF under the new regime by 8 February 2016. The notification should include Statements of Responsibility and a Responsibilities Map. If firms have senior posts that need to be filled before 7 March 2016, firms must continue to apply for controlled functions.
• Issue a certificate of fitness and propriety to all individuals that fall within the Certification Regime by 7 March 2017. The FCA has given firms the time to accommodate annual appraisal cycles.
• Ensure that training on the new conduct rules is given to all individuals who are affected by 7 March 2017.

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