The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct. A guide to the current proposals. August

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1 The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct A guide to the current proposals August

2 2 The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct A guide to the current proposals 2014 Allen & Overy LLP 2014

3 3 Contents Overview of the proposals 4 Background 8 Which firms will be covered by the Senior Managers and Certification Regime? 9 The new Senior Managers Regime 10 The new Certification Regime 25 Fitness and propriety 29 New Code of Conduct 33 Transition to the new regime 39 Glossary 42 New FCA and PRA Senior Management Functions 44 List of proposed FCA Key Functions and PRA Prescribed Responsibilities 47 Allocation of senior management responsibilities 50 FCA and PRA draft rules regarding the contents of Management Responsibilities Maps 52 List of FCA ancillary functions 53 Key contacts 54

4 4 The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct A guide to the current proposals 2014 Overview of the proposals The Financial Conduct Authority (the FCA) and the Prudential Regulation Authority (the PRA) have published a joint consultation paper 1 (the Consultation Paper) which sets out their proposals to overhaul the current approved persons regime by introducing the new Senior Managers and Certification Regime as well as a new Code of Conduct. As anticipated, the new Senior Managers and Certification Regime will result in significant changes to the way in which individuals working in financial institutions are regulated. Firms will also have significantly increased responsibilities in relation to individuals who fall within the new Senior Managers and Certification Regime and a much wider group of individuals will be subject to the new Code of Conduct and exposed to the risk of potential FCA or PRA enforcement action. As a result, firms may be required to change or adapt their existing internal processes in order to comply with the new Senior Managers and Certification Regime, as well as the new Code of Conduct. The new Senior Managers and Certification Regime will also have practical repercussions on every aspect of firms relationships with the FCA and the PRA, ranging from authorisations (for Senior Managers) to enforcement (for all employees subject to the new Code of Conduct) and, in particular, day-to-day supervision. Even though the proposals set out by the FCA and the PRA are still in the consultation stage, it is likely that the current proposals will not change significantly before they are implemented in As a result, there is much that firms can be doing now in terms of considering how they will need to adapt existing internal processes or implement new ones in order to comply with the new Senior Managers and Certification Regime when it comes into force in In this publication, we consider the detailed proposals set out by the FCA and the PRA for the new Senior Managers and Certification Regime and the new Code of Conduct in the Consultation Paper, along with the implications these proposals may have in practice from both a regulatory and an employment law perspective. The FCA and the PRA have also published a consultation paper on proposed changes to the Remuneration Code. These proposals are aimed at strengthening the alignment of risk and reward in response to recommendations made by the Parliamentary Commission on Banking Standards. Which firms are covered by the proposals? Individuals working in UK banks, building societies, credit unions and PRA-designated firms will be covered by the new Senior Managers and Certification Regime (referred to collectively as Relevant Firms). Before the new Senior Managers and Certification Regime is implemented, HM Treasury is intending to make an order which will require all banks that operate in the UK (including UK branches of overseas firms) to comply with the new Senior Managers and Certification Regime. For more information about the scope of the Senior Managers and Certification Regime, please see page Consultation Paper FCA CP14/13, PRA CP14/14: Strengthening accountability in banking: a new regulatory framework for individuals (July 2014) ( Allen & Overy LLP 2014

5 5 New Senior Managers Regime The Financial Services (Banking Reform) Act 2013 (the Banking Reform Act) replaced the existing concept of Significant Influence Function (SIF) holders in the Financial Services and Markets Act 2000 (FSMA) with that of a Senior Management Function which covers: A function that will require the person performing it to be responsible for managing one or more aspects of the relevant firm s affairs, so far as relating to regulated activities, and those aspects involve, or might involve, a risk of serious consequences for the authorised person, or for business or other interests in the UK. Both the FCA and the PRA have specified which functions constitute Senior Management Functions (SMFs) for Relevant Firms as well as group and parent entities (see pages 10 and 13). The aim of the FCA and the PRA in specifying SMFs is to focus accountability on a narrower number of senior individuals in Relevant Firms than the current approved persons regime. Relevant Firms will be required to allocate a range of responsibilities to individuals who hold SMFs (known as Senior Managers ). These individuals will be subject to regulatory approval by the FCA or the PRA. This regulatory approval may be granted subject to conditions and/or time limits both at the initial approval stage and subsequently by varying a Senior Manager s approval. Relevant Firms will also be required to vet Senior Managers fitness and propriety, both before they apply for regulatory approval and on a regular basis thereafter. In addition, the new Senior Managers Regime will also include the following new elements: Statements of Responsibilities: Applications for Senior Managers to be approved by the FCA and/or the PRA will be required to contain or be accompanied by a Statement of Responsibilities setting out the aspects of the affairs of a firm for which the person applying to be a Senior Manager will be responsible. These Statements of Responsibilities must be resubmitted whenever there is a significant change in a Senior Manager s responsibilities. Management Responsibilities Maps: The FCA and the PRA will require all Relevant Firms to draft and maintain comprehensive Management Responsibilities Maps. These documents will need to set out a significant amount of detailed information about a firm s governance arrangements (including its reporting lines and lines of responsibility) as well as the people who are part of these arrangements and their responsibilities. Handover requirements: Relevant Firms will be obliged to provide newly-appointed Senior Managers with all information and material that a person in their new position could reasonably expect to have to perform his or her responsibilities effectively and in accordance with regulatory requirements. The FCA and the PRA have stated that this information should include details about any unresolved or possible breaches of regulatory requirements and information about any unresolved concerns expressed by the FCA, the PRA or another regulatory body. Presumption of Responsibility: If a Relevant Firm is found to have contravened a relevant regulatory requirement, the Senior Manager responsible for the area where the contravention has occurred may be held accountable if they are unable to satisfy the FCA and/or the PRA that they have taken reasonable steps to prevent or stop the contravention. Potential criminal liability: A new criminal offence is to be introduced relating to a reckless decision that causes a financial institution to fail. This offence only applies to Senior Managers working in banks, building societies and PRA-designated investment firms. For more information about the Senior Managers Regime, please see page 10.

6 6 The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct A guide to the current proposals 2014 New Certification Regime Under FSMA (as amended by the Banking Reform Act), Relevant Firms will be required to certify certain employees as being fit and proper to perform certain functions. This arrangement is referred to by the FCA and the PRA as the Certification Regime. In the Consultation Paper, the FCA and the PRA have specified sets of significant harm functions in accordance with their respective statutory objectives. In general terms, the FCA and the PRA have taken the view that a function is a significant harm function if the person performing it will be involved in aspects of the Relevant Firm s regulated activities that might involve a risk of significant harm to the firm or any of its customers. The significant harm functions specified by the FCA and the PRA are referred to by the regulators as Certification Functions. Under the new Certification Regime, individuals performing Certification Functions (known as Certified Persons) will not be subject to regulatory approval. New Code of Conduct The FCA and the PRA are proposing to introduce a new Code of Conduct, which will replace the existing principles and guidance set out in the FCA s Statements of Principles and Code of Practice for Approved Persons (APER) for employees who work for Relevant Firms. The introduction of the new Code of Conduct is likely to have the most significant and wide-ranging impact on Relevant Firms and their employees. The new Code of Conduct will apply to all employees of Relevant Firms who fall within the Senior Managers and Certification Regime. In addition, the FCA is also proposing to apply the new Code of Conduct to all other employees of Relevant Firms, with the exception of those who perform ancillary functions which would be fundamentally the same if they worked in non-financial services firms (eg catering and security staff). This means that the vast majority of individuals working within Relevant Firms (including Legal and Compliance personnel) will be subject to and required to comply with the new Code of Conduct. Rather, a Relevant Firm must take reasonable care to ensure that no employee performs any Certification Function without having been certified as fit and proper to do so. Relevant Firms will be required to renew an employee s certification to perform a Certification Function on an annual basis. In order to provide this annual certification, Relevant Firms will need to assess an employee s fitness and propriety to perform a Certification Function every year. In the Consultation Paper, the FCA and the PRA have set out how they consider that Relevant Firms should assess the fitness and propriety of individuals who fall within the Certification Regime, including what evidence Relevant Firms should gather when making their assessment. For more information about the Certification Regime, please see page 25. If an individual breaches one or more of the Conduct Rules, the FCA and/or the PRA may take enforcement action against them. The introduction and broad application of the new Code of Conduct will be a significant change for Relevant Firms. Not only will Relevant Firms have to provide regular and comprehensive training to their employees on the new Code of Conduct, but a much larger number of employees may be exposed to the risk of possible FCA enforcement action if they are found to have breached the Conduct Rules. Relevant Firms will also be required to formally notify the FCA (who will pass information onto the PRA) if an employee is suspected of or has breached the Code of Conduct, as well as if any disciplinary action has been taken against an employee as a result of conduct which amounts to a breach of the Conduct Rules. For more information about the new Code of Conduct and the practical implications its implementation may have, please see page 33. Allen & Overy LLP 2014

7 7 Next steps Responses to the Consultation Paper must be submitted by the end of October The FCA and the PRA intend to publish their finalised rules and guidance relating to the Senior Managers and Certification Regime later in 2014, with a view to implementing the new regime in Due to this tight timeframe, we do not anticipate that significant changes will be made to the proposals set out in the FCA and PRA consultation paper before they are implemented

8 8 The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct A guide to the current proposals 2014 Background Parliamentary Commission on Banking Standards In 2013, the Parliamentary Commission on Banking Standards (the PCBS) recommended a series of measures to try and improve trust and culture in the financial services industry in the UK. These recommendations included the introduction of a new framework for approving and holding individuals who work in financial institutions in the UK to account which included: Replacing the SIF element of the current approved persons regime with a Senior Persons Regime (subsequently renamed the Senior Managers Regime), covering a narrower range of individuals. A licensing regime (now known as the Certification Regime) which applies to employees within certain financial institutions who are not covered by the Senior Managers Regime but whose actions or behaviour could significantly harm the bank, its reputation or its customers. Implementing a new set of enforceable Conduct Rules to replace APER, which will apply to a much wider range of employees than those who are currently subject to regulatory approval. The Banking Reform Act, which received Royal Assent on 18 December 2013, adopted these key recommendations in the changes it made to FSMA. In addition to introducing the new regimes referred to above, the Banking Reform Act also gave the FCA and the PRA enhanced powers when approving Senior Managers and taking enforcement action against them. These include: the ability to impose conditions and time limits on regulatory approvals for Senior Managers, a presumption that Senior Managers are responsible for contraventions that occur within their area of responsibility and a new criminal offence relating to decisions that cause a financial institution to fail. FCA and PRA Consultation Paper On 30 July 2014, the FCA and the PRA published the Consultation Paper. The Consultation Paper sets out the proposed approaches of the FCA and the PRA to implementing the new Senior Managers and Certification Regime, including: How the new Senior Persons and Certification Regime will be implemented, including which firms and employees within those firms will be covered. How firms will be expected to assess the fitness and propriety both of applicants for, and holders of, Senior Manager positions under the Senior Managers Regime, as well as individuals falling within the Certification Regime. The application and nature of the new Code of Conduct which will apply to Senior Managers, those falling within the Certification Regime and all other employees of firms except staff carrying out purely ancillary functions (eg catering and security staff). How the new Senior Managers and Certification Regime will impact the way in which firms interact with the FCA and the PRA in practice, including their authorisations, supervision and enforcement teams. Allen & Overy LLP 2014

9 9 Which firms will be covered by the Senior Managers and Certification Regime? UK institutions The FCA and the PRA are proposing that their new Senior Managers and Certification Regime will apply only to individuals working in UK banks, building societies, credit unions and PRA-designated investment firms (referred to as Relevant Firms throughout the Consultation Paper). UK branches of overseas firms At present, the proposals set out by the FCA and the PRA in the Consultation Paper do not generally apply to the UK branches of firms that are headquartered overseas. However, under FSMA, HM Treasury has the power to make an order to extend the Senior Managers and Certification Regime to cover non-uk institutions that are operating in the UK. In his annual Mansion House speech on 12 June 2014, the Chancellor of the Exchequer stated that he intends to extend the scope of the Senior Managers and Certification Regime to include all banks that operate in this country, including the branches of foreign banks. Once the HM Treasury order giving effect to this is confirmed (likely to be later this year), the FCA and the PRA will publish a further consultation paper which will set out their proposed approaches to extending the Senior Managers and Certification Regime to cover UK branches of overseas firms. In the meantime, the FCA and the PRA set out in the Consultation Paper what their proposed approaches may be to extending the Senior Managers and Certification UK institutions are defined in FSMA as institutions that are incorporated in, or formed under the law of any part of, the UK. 2 Regime to UK branches of overseas firms (subject to the terms of any order made by HM Treasury): The PRA has stated that it is likely to require at least one individual per incoming non-eea branch to be approved as an Overseas Branch Senior Executive Manager. The PRA is proposing that this Senior Management Function will have responsibility (either alone or jointly with others) for the conduct of all activities of the UK branch of an overseas firm which is subject to the UK regulatory system. The PRA is not proposing that its Certification Regime will apply to incoming EEA branches, as the question of the fitness and propriety of staff in those branches, insofar as it relates to prudential matters, is reserved to the firm s Home State Supervisor. The FCA has noted that it will have more powers over EEA firms than the PRA, as conduct matters are not reserved to the Home State Supervisor. Other entities operating in the UK The Consultation Paper does not make it clear whether the new Senior Managers and Certification Regime will apply to other financial institutions that are operating in the UK which are not UK incorporated companies or UK branches. We anticipate that the FCA and the PRA will clarify this point when they issue their consultation paper later in 2014 as to how the new Senior Managers and Certification Regime will apply to UK branches of overseas firms. 2. Section 71A FSMA.

10 10 The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct A guide to the current proposals 2014 The new Senior Managers Regime The approaches of the FCA and the PRA to the new Senior Managers Regime differ in some respects. In particular, the FCA and the PRA are intending to cover different individuals within their Senior Persons Regimes in accordance with their respective statutory objectives. However, the FCA and the PRA are also proposing to take a common approach to certain aspects of the Senior Managers Regime, including, for example, Statements of Responsibilities, Management Responsibilities Maps, handover arrangements and conditional or time-limited approvals and variations of approvals for Senior Managers. The proposed approaches of the FCA and the PRA to the new Senior Managers Regime are explored in more detail below. The PRA s proposed approach to the Senior Managers Regime Who will be in scope? The Banking Reform Act allows the PRA to specify a function as requiring approval under the Senior Managers Regime if it is satisfied that it falls within the statutory definition of a Senior Management Function (set out in Glossary below). Consistent with this requirement and its general objectives, the PRA has identified the functions that it considers meet the statutory definition of a Senior Management Function and which could directly affect a Relevant Firm s safety and soundness: PRA Senior Management Functions for Relevant Firms (except small credit unions) Executive Non-Executive Chief Executive Function* Chairman* Chief Finance Function* Chair of the Risk Committee Chief Risk Function Chair of the Audit Committee Head of Internal Audit Chair of the Remuneration Committee Head of Key Business Area Senior Independent Director Group Entity Senior Manager PRA Senior Management Function for small credit unions (those with assets less than or equal to 25m) Credit Union Senior Manager * All Relevant Firms (except credit unions) must allocate people to these PRA Senior Management Functions A combined list of FCA and PRA Senior Management Functions is set out on page 44. Under the PRA s proposed rules, all Relevant Firms (except small credit unions) will be required to have one or more persons performing a Chief Executive, Chief Finance and Chairman Senior Management Function. In addition, if a Relevant Firm chooses to include in its governance structure a committee or control function which it is not required to have by law or regulation, the PRA has stated that steps must be taken to ensure that the chair of that committee or the head of that control function is approved for the relevant Senior Management Function. Allen & Overy LLP 2014

11 11 Head of Key Business Area Senior Management Function In the Consultation Paper the PRA provided some guidance as to who it intends will be captured by the Head of Key Business Area Senior Management Function. The PRA has stated that it intends this Senior Management Function to cover individuals who are managing a business area or division which is so large in relative terms to the size of the firm that it could jeopardise the safety and soundness of that firm. The PRA s draft rules propose that an individual will require approval as a Head of Key Business Area if they manage an area with gross total assets of GBP10 billion or more which accounts for either 20% or more of the firm s or, where the firm is part of a group, more than 20% of the group s gross revenue (see page 44 for further details). Multiple approvals The PRA has stated that individuals who are intending to perform more than one Senior Management Function will require separate approvals for each Senior Management Function. However, the PRA has also confirmed that multiple PRA and FCA Senior Management Function approvals for one person may be combined in a single application. Shared Senior Management Functions The PRA expects Relevant Firms to put forward for each Senior Management Function the single most senior individual who is responsible for managing or overseeing that aspect of the firm s affairs. However, the PRA recognises that in some cases (for example, where people job share) that a Relevant Firm may have more than one individual approved to perform the same Senior Management Function. Where this is the case, the PRA has made it clear that each of the individuals approved for a Senior Management Function will be accountable for all of the responsibilities conferred on them by that Senior Management Function, and that each of them may be required to demonstrate that they have taken reasonable steps to prevent a breach from occurring or continuing in the management area covered by their Senior Management Function. Senior managers based in parent or group entities Under the current approved persons regime, an individual who is employed in the parent or other group entity of a relevant firm but who is deemed via an arrangement with the Relevant Firm to exercise significant influence over its affairs is subject to regulatory approval. The PRA has proposed that this approach will continue under the new Senior Managers Regime. Individuals who are not directly employed by a Relevant Firm but who have significant influence on the management or conduct of one or more aspects of the affairs of a firm in relation to its regulated activities must be specifically approved for the Group Entity Senior Manager Senior Management Function. The PRA will assess whether certain parent or group entity employees meet this test on a case-by-case basis in light of all relevant circumstances. The PRA has also anticipated that there may be situations where an individual based outside a Relevant Firm is performing a Senior Management Function directly on behalf of the Relevant Firm. For example, the PRA has stated that the chair of a group remuneration committee which takes decisions on behalf of all group entities would require regulatory approval from the PRA as Chair of the Remuneration Committee of each of those group entities to the extent that they fall within the scope of the Senior Managers Regime (not just the parent or group entity).

12 12 The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct A guide to the current proposals 2014 Prescribed Responsibilities The PRA s proposed rules define every PRA Senior Management Function by reference to its key responsibilities. A list of these definitions can be found on page 36. In addition to this, the PRA is also proposing to make rules prescribing a set of responsibilities (PRA Prescribed Responsibilities) which all Relevant Firms (except credit unions, which will have their own requirements) will be required to allocate amongst their Senior Managers. A list of the proposed PRA Prescribed Responsibilities can be found on page 49. The PRA s proposed approach to PRA Prescribed Responsibilities is intended to clarify who is responsible for managing or overseeing key aspects of firms affairs, while still allowing firms to allocate responsibilities amongst senior individuals as they see fit. The PRA has stated that it expects Relevant Firms to allocate most PRA Prescribed Responsibilities to the Senior Management Function holder with which the responsibility is most closely associated. For example, the PRA recognises that the PRA Prescribed Responsibility for safeguarding the independence of the Head of Internal Audit function may, in theory, be allocated to any non-executive Senior Manager. However, in practice, the PRA has stated that it will typically expect this PRA Prescribed Responsibility to be allocated to the Chair of the Audit Committee or to the Chairman. To the extent that Relevant Firms decide to allocate additional responsibilities to Senior Managers, the PRA has made it clear that these must not qualify or modify the responsibilities conferred by the definition of a Senior Management Function or a PRA Prescribed Responsibility. Additional responsibilities will also need to be recorded in a Senior Manager s Statement of Responsibilities and in the Relevant Firm s Responsibilities Map (see below). Allen & Overy LLP 2014

13 13 The FCA s proposed approach to the Senior Managers Regime Who will be in scope? The changes made to FSMA by the Banking Reform Act allow the FCA to specify Senior Management Functions which require regulatory approval. The FCA has stated that it does not intend to specify the same Senior Management Functions identified by the PRA as also being FCA Senior Management Functions. However, the FCA does intend to specify a series of further Senior Management Functions in addition to those proposed by the PRA. These proposed FCA Senior Management Functions are as follows: FCA Senior Management Functions for Relevant Firms Executive Non-Executive Executive Director Non-Executive Director Significant Responsibility Senior Manager Chair of the Nominations Committee Money Laundering Reporting Compliance Oversight A combined list of FCA and PRA Senior Management Functions is set out on page 44. Significant Responsibility Senior Manager Senior Management Function The FCA intends that the Significant Responsibility Senior Manager Function will cover individuals who have overall responsibility for a key function or identified risk, and who are performing a function which is not otherwise specified as a Senior Management Function requiring approval by the FCA or the PRA. The FCA has stated that the test to be applied by Relevant Firms when determining whether a person should be approved for the Significant Responsibility Senior Manager Function is: (a) if the board has delegated to that person overall responsibility for a particular function, and (b) they are primarily responsible for reporting to the board in respect of that function. The FCA has emphasised that a person s job title may not determine the outcome of this test. For example, an individual may have the title Head of Product Development but may not be the most senior person responsible for the design and manufacture of products and therefore does not need to perform a Significant Responsibility Senior Management Function. Further details about this Senior Management Function can be found on page 39. The FCA does not propose to impose a limit on the number or status of individuals holding Significant Responsibility Senior Manager Functions. However, the FCA has stated that it expects these to be the individuals with overall responsibility for one or more of certain key functions (FCA Key Functions) that have been prescribed by the FCA. A full list of the proposed FCA Key Functions is available on page 40 and includes responsibility for areas such as controls relating to financial crime, safekeeping and administration of client assets, investment research, middle office and customer complaints. The FCA has stated that Relevant Firms will not necessarily be expected to appoint a single individual as a Senior Management Function holder for each of the FCA Key Functions it has prescribed. Although there will be no restriction against individuals below the top two layers of management being appointed as Senior Management Function holders, the FCA has stated that appointments below this level are expected to be the exception rather than the rule. The FCA intends to issue rules and guidance regarding how it expects Relevant Firms to allocate responsibilities amongst its Senior Managers. A copy of the draft rules and guidance published by the FCA is set out on page 50.

14 14 The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct A guide to the current proposals 2014 Multiple approvals In accordance with the PRA s proposed approach, individuals who are seeking to perform more than one Senior Management Function designated by the FCA will require separate approvals for each. The exception to this is the Significant Responsibility Senior Manager Function, which is only required where the person performing an FCA Key Function is not already approved as a Senior Management Function holder by either the FCA or the PRA. If an individual is applying to perform both FCA and PRA Senior Management Functions, these may be combined into a single application. Allen & Overy LLP 2014

15 15 Statements of Responsibilities What are Statements of Responsibilities? A Relevant Firm s application for an individual to perform an FCA or a PRA Senior Management Function will be required to accompany that application with a Statement of Responsibilities. A Statement of Responsibilities is a statement of the affairs of a Relevant Firm for which it is intended that a person who performs a Senior Management Function is (or will be) responsible. The FCA and the PRA have explained that a Statement of Responsibilities should: include any FCA Key Functions and/or PRA Prescribed Responsibilities that have been allocated to and which are to form part of the responsibilities of the individual applying to become a Senior Manager; and not contain any responsibilities that are inconsistent with the scope of the Senior Management Function being applied for and any FCA Key Functions or PRA Prescribed Responsibilities allocated to the individual applicant. Other than these requirements, the FCA and the PRA have provided no further guidance at this stage as to what Statements of Responsibilities should contain. However, it is clear that Statements of Responsibilities will go further than traditional job descriptions that firms have tended to submit to the FCA and the PRA as part of SIF applications in that they will need to be aligned to the specific regulatory responsibilities and/or functions that the prospective Senior Manager candidate will assume. Statements of Responsibilities will be crucial documents for internal stakeholders, including: Senior Managers as Statements of Responsibilities will constitute a marker of personal responsibility and will also highlight how the allocation of responsibilities fits with the FCA Key Functions and/or PRA Prescribed Responsibilities. The management of Relevant Firms who will be invested in the Statements of Responsibilities because, when viewed collectively in the Management Responsibility Maps (see below), there must be no gaps in accountability. Certified Persons who will be part of the organisational structure articulated by Statements of Responsibilities, which will set out the chain of command and allocation of accountabilities within Relevant Firms.

16 16 The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct A guide to the current proposals 2014 How will the FCA and the PRA use Statements of Responsibilities? Statements of Responsibilities will also be important documents for the FCA and the PRA as they will play a key role in the Senior Managers Regime. The FCA and the PRA stated in the Consultation Paper that they expect Statements of Responsibilities to become an important tool for supervising Senior Managers and assessing overall corporate governance of firms. In particular, it is expected that the FCA and the PRA will make particular use of Statements of Responsibilities in the following circumstances: During the initial assessment as to whether a candidate applying for Senior Manager approval should be approved. Statements of Responsibilities will be used to highlight the areas for which the candidate will be responsible for managing and to assess his or her ability to do so. In daily supervision activities, where the FCA and the PRA may use Statements of Responsibilities to: identify the relevant Senior Manager to whom specific regulatory queries should be directed; understand changes to the allocation of responsibilities to individuals in response to changes to a Relevant Firm s business model or as a result of changes in the external market environment; clarify which individuals are ultimately responsible for actions which supervisors expect a Relevant Firm to take; and in enforcement cases as evidence of individual responsibility for the area where the breach occurred. As a result, Relevant Firms should expect that Statements of Responsibilities prepared for Senior Managers will be closely scrutinised by the regulators. Practical implications It will be important that prospective Senior Managers are familiar with and fully understand the responsibilities set out in their Statements of Responsibilities. This is especially so given that breaches of Statements of Responsibilities are likely to expose Senior Managers to FCA and/or PRA enforcement action. The importance of Statements of Responsibilities to the various stakeholders will make them fertile ground for tough negotiation. Individual Senior Managers will be seeking to minimise their personal responsibilities while the management of a Relevant Firm as a whole will be trying to plug gaps and allocate more responsibility. In view of this potential conflict, the consequences of breaching Statements of Responsibilities and the fact that the final version must satisfy the FCA and the PRA, Statements of Responsibilities will need to be crafted and negotiated with care. It will be prudent for both the Relevant Firm and the Senior Manager candidate to take independent legal advice. The cost of, or a contribution to, the candidate s independent legal advice should be borne by the Relevant Firm as the Statement of Responsibility is a requirement of the post. The Senior Manager s service agreement or appointment letter, in the case of non-executives, will need to incorporate provisions dealing with the existence and variation of, and compliance with, Statements of Responsibilities. Provisions linking the disciplinary and remuneration implications of breach will also need to be included. Allen & Overy LLP 2014

17 17 Changes to Senior Managers responsibilities The FCA and the PRA have also stated that Relevant Firms will be required to submit revised Statements of Responsibilities for Senior Managers who have already received regulatory approval whenever there is a significant change to their responsibilities. Neither the FCA nor the PRA have issued guidance as to what may constitute a significant change in this context. However, assuming or giving up responsibility for a particular business area may be an example of a significant change to a Senior Manager s responsibilities. As mentioned above in relation to new Statements of Responsibilities, Senior Managers should also seek independent legal advice where revised Statements of Responsibilities are being resubmitted to the FCA and the PRA. As a result, Relevant Firms will need to have controls in place in order to ensure that changes to Senior Managers responsibilities are recorded and communicated to those with responsibility for determining whether amendments need to be made to Statements of Responsibilities and re-submitted to the FCA and/or the PRA. Senior Managers must also be aware of and understand fully any changes made to their Statements of Responsibilities.

18 18 The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct A guide to the current proposals 2014 Management Responsibilities Maps What purpose will Management Responsibilities Maps serve? The FCA and the PRA will require all Relevant Firms to draft and maintain comprehensive Management Responsibilities Maps. The principal purpose of Management Responsibilities Maps is to ensure that, when looked at collectively, the allocation of responsibilities to a Relevant Firm s Senior Managers (as set out in their respective Statements of Responsibilities (see above)) does not leave any gaps in accountability. Clear and comprehensive Management Responsibilities Maps may also provide evidence that a Relevant Firm is satisfying its regulatory obligation to have robust governance arrangements, which include a clear organisational structure with well-defined, transparent and consistent lines of responsibility. What will Management Responsibilities Maps need to contain? The FCA and the PRA have published detailed draft rules regarding the contents of Management Responsibilities Maps. Based on these draft rules, it is clear that a Relevant Firm s Management Responsibilities Map will need to set out a significant amount of detailed information about its governance arrangements, including details of reporting lines and lines of responsibility, as well as details about the people who are part of these arrangements and their responsibilities. More information about the draft rules published by the FCA and the PRA about the contents of Management Responsibilities Maps is set out on page 52. The FCA and the PRA have stated that Management Responsibilities Maps should be consistent with any Statements of Responsibilities that a Relevant Firm has in place. In addition, Management Responsibilities Maps and Statements of Responsibilities should be prepared in a way that makes it simple to see how the responsibilities allocated in a particular statement of responsibilities fit into the overall system of management and governance of the Relevant Firm. Steps should be taken to ensure that Senior Managers understand and are familiar with a Relevant Firm s Management Responsibilities Map. This will help Senior Managers to understand where their responsibilities fit within a Relevant Firm s overall governance and management arrangements. Allen & Overy LLP 2014

19 19 Changes to Management Responsibilities Maps The FCA and the PRA have stated that Relevant Firms will be required to keep their Management Responsibilities Maps up-to-date. Annual board certification of compliance A Relevant Firm s board will also be required to provide an annual confirmation to the FCA and the PRA that it has complied with requirements set by the FCA and the PRA regarding the allocation of responsibilities between Senior Managers. The annual certification provided by a Relevant Firm s board should also specifically confirm that there are no gaps in the allocation of overall responsibilities amongst Senior Managers. To the extent that a Relevant Firm has not complied with any guidance issued by the FCA or the PRA, the board of that Relevant Firm will be required to give details of that non-compliance. This process will be more than a box-ticking exercise, as the board of a Relevant Firm will want assurance from the Senior Managers that no responsibility gaps have been identified within the previous 12 months. This will require detailed due diligence on an on-going basis, robust systems and processes to be implemented to capture issues that by definition are not the responsibility of any designated Senior Manager, and collaboration between all the Senior Managers within a Relevant Firm.

20 20 The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct A guide to the current proposals 2014 Handover arrangements The FCA and the PRA are proposing to impose requirements on Relevant Firms to take reasonable steps to ensure that newly appointed Senior Managers are made aware of all necessary materials, information and risks of regulatory concern in order to perform their responsibilities effectively. Although the new requirements relating to handover arrangements are primarily aimed at newly appointed Senior Managers, they will also apply in respect of Senior Managers whose responsibilities are being changed as well as anyone who has management or supervisory responsibilities for a Senior Manager. What information will need to be provided as part of the handover process? The FCA and the PRA have stated that newly appointed Senior Managers should be provided with all information and material that a person in their new position could reasonably expect to have to perform his or her responsibilities effectively and in accordance with regulatory requirements. This information should include details about any unresolved or possible breaches of regulatory requirements and of any unresolved concerns expressed by the FCA, the PRA or another regulatory body. The FCA and the PRA envisage that the information provided to newly appointed Senior Managers will be presented in a single document or pack. In particular, the FCA has commented that this document/pack should be a practical and helpful document and not just a record. The material should include an assessment of what issues should be prioritised and judgment opinion, not just facts and figures. Input required from predecessors Where a Senior Manager is taking over responsibilities from another individual, the FCA and the PRA have stated that Relevant Firms should take reasonable steps to ensure that the predecessor (ie the individual handing over responsibilities) contributes to the handover materials provided to the new Senior Manager. In particular, the FCA and the PRA expect that a predecessor should contribute all that it would be reasonable to expect [them] to know and consider relevant, including [their] opinions. One way of doing this that has been suggested by the FCA and the PRA is for a predecessor to prepare a handover certificate. In practice, handover certificates are likely to be negotiated between a predecessor and the person taking up a new Senior Manager role. However, this process may prove challenging if a departing employee is leaving a Relevant Firm on bad terms. The incoming Senior Manager is unlikely to be willing to take responsibility for any breaches that did not take place on his or her watch. However, this will not be a simple exercise of drawing a line in time and apportioning responsibility before and after the marker. Ongoing investigations into alleged misconduct or control weaknesses may well straddle the tenure of incumbent and outgoing Senior Managers, which will make the handover arrangements another area where conflicts of interest are likely to arise. As a result, it is likely that incoming Senior Managers may seek indemnities from their employers for any legacy risks or regulatory concerns. Relevant Firms will face restrictions in terms of any indemnities that they may be able to offer Senior Managers. Due to the potential issues that handover certificates may cause, Relevant Firms may wish to consider advising departing and incoming Senior Managers to obtain independent legal advice in relation to them. This may assist with what, in some circumstances, could become a difficult and adversarial process. Allen & Overy LLP 2014

21 21 Implications for Relevant Firms systems and controls Firms current processes regarding handovers between senior managers vary. However, the regulators proposed new requirements regarding handover arrangements will mean that Relevant Firms will have to formalise their handover processes to ensure that these requirements are met. In addition, the new draft rules proposed by the FCA and the PRA state that Relevant Firms must have policies regarding how they comply with the new requirements relating to handover arrangements and that they must also make and maintain adequate records of the steps taken to comply with these requirements.

22 22 The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct A guide to the current proposals 2014 Regulatory approvals for Senior Managers How will the current approval process change? The approval process for obtaining regulatory approval for Senior Managers is expected to remain largely the same as it currently is for SIFs. For example, Relevant Firms will be required to fill out application forms for candidates applying to become Senior Managers (a single joint application may be made if a candidate requires approval from both the FCA and the PRA) and candidates will typically be invited to attend an in-depth interview with the one or both regulators. However, the following changes will be made to the approval process when the Senior Managers Regime is implemented: Relevant Firms will be under a legal obligation to satisfy themselves, before applying for Senior Manager approval on behalf of an individual, that the individual is fit and proper to perform the function to which the application relates. In doing so, Relevant Firms will need to have regard to the standards of fitness and propriety set by the FCA and the PRA (see page 24 below). The FCA and the PRA will assess whether Relevant Firms have undertaken appropriately rigorous recruitment and due diligence processes when considering Senior Manager applications. Relevant Firms will be required to submit additional evidence when submitting an application for an individual to be approved as a Senior Manager including, for example, Statements of Responsibilities (see page 15 above), the results of any regulatory references requested (see page 31 below) and the results of any criminal records checks (both UK and non-uk) conducted (see page 32 below). Conditional or time-limited approvals In addition, FSMA, as amended by the Banking Reform Act, has given the FCA and the PRA the power to: approve applications to perform a Senior Management Function subject to any conditions that they consider appropriate or for a limited time period; and vary existing Senior Management Function approvals, either at the initiative of a Relevant Firm or on the initiative of the FCA or the PRA. Such variations may include imposing, varying or removing conditions and/ or time-limits on approvals. The FCA and the PRA may only exercise these powers where it appears to the regulator granting the approval or making the variation, that it is desirable to do so. In practice, these new powers will mean that the Senior Manager approval process will not be a binary process. The FCA and the PRA will be able to vary or apply conditions to a Senior Manager s approval at any time. The FCA has set out guidance which indicates the broad range of circumstances in which it may make an approval to perform a Senior Management Function subject to conditions. These include if an individual is taking up a position on an interim basis, if an individual needs to undertake additional training or if a Senior Manager is subject to an enforcement investigation (or an enforcement investigation in relation to them is in prospect), the results of which may call into question their fitness and propriety. If conditions that are imposed on a Senior Manager s approval are breached, the regulator that imposed those conditions may impose a financial penalty on the individual concerned. Allen & Overy LLP 2014

23 23 Variation of approvals Senior Manager approvals may be varied at any time at the request of a Relevant Firm or on the initiative of the FCA or the PRA. Examples of when the FCA or the PRA may choose to vary a Senior Manager s approval include cases where: there are concerns about a Senior Manager s fitness and propriety and these concerns can be dealt with by imposing conditions on the Senior Manager; a Senior Manager has taken on additional responsibilities and needs to undertake further training; and/or a Senior Manager has been required to personally support supervisory or remedial action in relation to a Relevant Firm.

24 24 The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct A guide to the current proposals 2014 Presumption of Responsibility As a result of changes made to FSMA by the Banking Reform Act, Senior Managers will be required to satisfy the FCA and/or the PRA that they took reasonable steps to prevent, stop or remedy regulatory breaches that took place in their area(s) of responsibility. This new statutory requirement will place an evidential burden on Senior Managers who the FCA and the PRA consider should, by virtue of their rank and seniority, have the knowledge and authority to prevent or tackle regulatory failings. If Senior Managers cannot demonstrate that they took reasonable steps then they may be held accountable for the regulatory breaches committed by their firm and have enforcement action taken against them personally. This is significant change and a reversal of the current burden of proof in regulatory enforcement matters, where the FCA and the PRA must prove that a person did not take reasonable steps to prevent, stop or remedy regulatory breaches. In practice, it may be difficult for Senior Managers to positively prove to the FCA or the PRA that they have taken reasonable steps to prevent, stop or remedy regulatory breaches within their areas of responsibility. In order to help ensure that Senior Managers can demonstrate that they took reasonable steps if required at a later date, Senior Managers should ensure that records of actions and decisions they take in their role are documented and retained. The FCA and the PRA have emphasised that by reversing the burden of proof in enforcement cases against Senior Managers they are not trying to establish a strict liability regime for Senior Managers. The regulators have explained that what will constitute reasonable steps taken by a Senior Manager will be determined on a case-by-case basis. In particular, the Consultation Paper recognises that reasonable steps may include the delegation of certain tasks for which a Senior Manager remains responsible, provided that delegation was appropriate and undertaken effectively in the circumstances. Potential criminal liability The Banking Reform Act provides that Senior Managers of banks and building societies that are Relevant Firms may be prosecuted by the FCA or the PRA for taking a decision that causes their institution to fail. For an offence to have been committed, the Senior Manager must, at the time the decision was taken, have been aware of a risk that its implementation would cause the institution to fail. In addition, their conduct must fall significantly below what could reasonably be expected of someone in their position. The FCA and the PRA have stated that they expect prosecutions under this new power to be rare. Decisions on whether to prosecute a Senior Manager under this new power and which regulator should prosecute will be made on a case-by-case basis. When deciding whether to bring criminal proceedings against a Senior Manager, the FCA and the PRA will apply the principles set out in the Code for Crown Prosecutors, which requires consideration to be given as to whether there is sufficient evidence to justify a prosecution and whether a prosecution is in the public interest. Allen & Overy LLP 2014

25 25 The new Certification Regime The approaches of the FCA and the PRA to the new Certification Regime are aligned in many respects. However, the FCA is intending to take a broader approach to the scope of its Certification Regime on the basis that the FCA considers that there is a wider population of employees within Relevant Firms who may cause harm to consumers than those who may cause prudential harm. Further information about the proposed approaches of the FCA and the PRA to the new Certification Regime and how they will operate together in practice is set out below. Who will fall within the scope of the PRA s Certification Regime? Relevant Firms In light of its statutory objectives, the PRA s proposed approach to the Certification Regime focuses on employees and functions which may pose a risk to the safety and soundness of a Relevant Firm. The PRA is proposing that the scope of its Certification Regime should, to the extent possible, be based on the criteria used to define material risk takers for remuneration purposes under the Capital Requirements Directive as supplemented by the Commission Delegated Regulation (EU) No.604/2014. On the same day as the Consultation Paper was published, the PRA and the FCA also published another consultation paper regarding proposed changes to the Remuneration Code. 3 This consultation paper includes a definition for staff that are material risk takers in UK financial institutions and are therefore subject to the Remuneration Code. The PRA believes that those who can expose their firm to material risks are capable of causing significant harm to the firm. As a result, the PRA considers that the two concepts of material risk-takers and significant harm functions should effectively be synonymous for prudential purposes. However, the PRA has also noted that not every individual who is classified as a material risk taker for the purposes of remuneration arrangements will fall within its Certification Regime. For example, the following categories of employees will not be subject to the PRA s Certification Regime: employees who fall within the new Senior Managers Regime; and employees whose functions are not related to the regulated activities of a Relevant Firm. Credit unions The PRA is proposing to introduce a separate and simplified definition of material risk takers for credit unions for the purposes of the new Certification Regime. 3. Consultation Paper FCA CP14/14, PRA CP15/14: Strengthening the alignment of risk and reward: new remuneration rules (July 2014) (

26 26 The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct A guide to the current proposals 2014 Who will fall within the scope of the FCA s Certification Regime? Relevant Firms The FCA intends to also specify material risk takers (using the same definition as that adopted by the PRA) as roles that should fall within the scope of its Certification Regime However, the FCA has stated that it will only require employees to be certified by a Relevant Firm if they perform their function from an establishment in the UK or are dealing with clients in the UK. This is because, while individuals operating overseas may be able to have an impact on the safety and soundness of a UK firm, in the FCA s view, they are unlikely to have an impact on the FCA s statutory objectives if they are not dealing with UK customers. The FCA has stated that it feels it would be disproportionate for the FCA to require such individuals to be certified. However, in addition to material risk takers, the FCA considers that there is a wider population of employees within Relevant Firms that will be in a position to cause harm to consumers. As a result, the FCA is also proposing that the following categories of individuals will fall within the FCA s Certification Regime: Those individuals performing functions that would formerly have been SIFs but will not fall within the scope of the new Senior Management Functions under the Senior Managers Regime (see above). The FCA considers that these individuals are, by definition, important individuals who can seriously impact the way that a Relevant Firm conducts its business. For example, the FCA envisages that individuals that are currently approved for the following roles may fall within the new Certification Regime: individuals who are approved for the CF29 (significant management) function, individuals who hold client asset oversight functions and individuals who hold benchmark submission functions. Individuals in customer-facing roles which are subject to qualification requirements (eg mortgage and retail investment advisers). The FCA has identified these roles as giving rise to a risk to consumers in the event that employees do not have the correct qualifications. Anyone who supervises or manages a Certified Person, if they do not hold a Senior Management Function. The FCA s rationale for including this category of individuals in the Certification Regime is that they are likely to have a considerable influence over how their staff carry out their roles and, as a result, should be subject to the same rigorous standards. Credit unions The FCA envisages that its proposed rules relating to the scope of the FCA s Certification Regime will generally apply in the same way to credit unions. The FCA notes that the PRA has created a separate definition of material risk taker for credit unions. However, the FCA does not think that the individuals who will be caught by this definition will necessarily have an impact on the FCA s statutory objectives. As a result, the FCA envisages that the only individuals within credit unions who will fall within the FCA s Certification Regime will be those falling within the specific categories set out above. Allen & Overy LLP 2014

27 27 How will the FCA and the PRA Certification Regimes work together in practice? Scope The scope of the FCA s Certification Regime is significantly broader than the proposed scope of the PRA s Certification Regime. This reflects the different statutory objectives of each regulator. With the exception of some overseas employees (see above), all employees falling within the PRA s Certification Regime will also fall within the FCA s Certification Regime. Fitness and propriety The FCA and the PRA have made it clear that, regardless of which regulator s Certification Regime an employee falls within, the question that a Relevant Firm will need to address is whether the employee is fit and proper to perform the role that brings them into the Certification Regime. The FCA and the PRA are intending to take a similar approach to the factors that they will require Relevant Firms to take into account when assessing an employee s fitness and propriety (see page 29). As a result, in practice, the FCA and the PRA have stated that they expect Relevant Firms to implement a single process for certifying the fitness and propriety of each employee who falls within either regulator s Certification Regime. This will mean that Relevant Firms will be able to make a single assessment The FCA stated in the Consultation Paper that, once implemented, it intends to assess the effectiveness of the Certification Regime in firms and whether it is operating as expected. regarding the fitness and propriety of an employee and issue a single certificate of fitness and propriety for each employee that holds a Certification Function. Where an employee performs multiple Certification Functions, their fitness and propriety for each Certification Function needs to be assessed against the applicable standards, although their multiple Certification Functions may be covered by a single certificate. To minimise the administrative burden, as well as affording fitness and propriety the attention it requires, it is recommended that Relevant Firms include their annual process for assessing the fitness and propriety of those performing Certification Functions in their existing annual review and performance management processes. Role changes FSMA, as amended by the Banking Reform Act, makes it clear that the requirement for Relevant Firms to take reasonable care to ensure that a person does not perform a Certification Function without having been certified as fit and proper to do so applies on a continuous basis. In practice, this means that if an employee s role changes so that they perform a different Certification Function, the Relevant Firm that employs them must satisfy itself that the employee is fit and proper to perform their new Certification Function. The Relevant Firm could not, for example, wait until the annual renewal of the employee s certificate to assess whether they are fit and proper for their new role. This would also apply if an employee s role changed in a way which meant that they went from only falling within the scope of either the FCA or the PRA Certification Regime to falling within both the FCA and the PRA Certification Regimes.

28 28 The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct A guide to the current proposals 2014 Temporary emergency cover If a Certification Function is to be performed by a person for a period of less than two weeks in order to provide cover for a person who holds a Certification Function and whose absence was reasonably unforeseen, the role will not be treated as a Certification Function for this period. This means that the Relevant Firm in question will not be required to issue a certificate of fitness and propriety for the person providing temporary and short-term cover for Certification Functions. Both the FCA and the PRA have stressed that the exception will only apply in exceptional circumstances. In addition, the FCA has stated that the exception will not apply to FCA Certification Functions if that function has a qualification requirement (ie one set out in the FCA s Training and Competency Sourcebook). Allen & Overy LLP 2014

29 29 Fitness and propriety Under the Senior Managers and Certification Regime, Relevant Firms are required to take primary responsibility for assessing the fitness and propriety of their employees. In accordance with this approach, the Banking Reform Act has made amendments to FSMA in order to impose an obligation on Relevant Firms to establish that candidates for Senior Manager Functions or Certification Functions are fit and proper to perform the role for which they are applying. Relevant Firms will also be required under FSMA (as amended by the Banking Reform Act) to assess the fitness and propriety of Senior Managers and persons falling within the Certification Regime continuously on at least an annual basis. If a Relevant Firm believes that an individual is no longer fit and proper to perform their role, the Relevant Firm must: in the case of Senior Managers, report this to the relevant regulator; or in the case of individuals falling within the Certification Regime, refuse to renew their certificate of fitness and propriety. If a Relevant Firm refuses to renew an individual s certificate, reasonable care must be taken to ensure that the individual ceases to perform the Certification Function in question. In the Consultation Paper, the FCA and the PRA set out the standards of fitness and propriety that are required for individuals who hold Senior Management Functions and Certified Functions. Information is also provided regarding the evidence that the FCA and the PRA will expect Relevant Firms to gather when making their assessment as to the fitness and propriety of an employee.

30 30 The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct A guide to the current proposals 2014 Proposed approaches to assessing fitness and propriety FSMA, as amended by the Banking Reform Act, requires Relevant Firms assessing the fitness and propriety of Senior Managers and individuals falling within the Certification Regime to have regard to any general rules that the FCA and the PRA have made regarding the qualifications, training, competence and personal characteristics required by an individual in that role. The FCA and the PRA recognise that Relevant Firms will be responsible for assessing the fitness and propriety of a much larger number of employees under the Senior Persons and Certification Regime than they are under the current approved persons regime. With this in mind, the FCA and the PRA have set out guidance as to how they expect Relevant Firms to assess their employees fitness and propriety. Both the FCA and the PRA have stated that this proposed new guidance does not materially alter the standards of fitness and propriety that they already apply under the existing approved persons regime. The FCA s proposed approach The FCA already has a number of rules under its current approved persons regime relating to employees qualifications, training, competence and personal characteristics (for example, in the Senior Management Arrangements, Systems and Controls Sourcebook (SYSC) and the Training and Competency Sourcebook). As a result, the FCA has stated that it does not intend to make any new rules relating to these areas. Although the FCA is not proposing to make material substantive changes to its existing guidance regarding fitness and propriety, the FCA is proposing to make certain amendments and clarifications to its existing rules which are set out in the Fit and Proper Test for Approved Persons (FIT). These amendments are intended to make the application of the FCA s standard for fitness and propriety and its relevance for firms assessments readily apparent, both for Relevant Firms initial assessments of Senior Managers and individuals in Certification Functions, as well as for their ongoing appraisals of their fitness and propriety. The PRA s proposed approach The PRA currently has considerably fewer rules than the FCA relating to the fitness and propriety of individuals who work in financial institutions. As a result, the PRA is intending to make general rules (in the form of a supervisory statement) requiring all persons within the PRA s Senior Managers Regime and Certification Regime have the personal characteristics, the necessary level of competence, knowledge and experience and appropriate qualifications and training to enable the sound and prudent management of a Relevant Firm. The PRA has stated that these rules will not be substantially different from the standard it currently applies when assessing fitness and propriety. Relevant Firms will need to have regard to the factors set out by the PRA in its draft supervisory statement when assessing an individual s fitness and propriety to perform a Senior Management Function or a Certification Function. The PRA has stated that it is likely to take the same factors into account when assessing a Senior Manager s fitness and propriety. Allen & Overy LLP 2014

31 31 New evidence requirements Even though the FCA and the PRA are not intending to make any material changes to the standards of fitness and propriety that they apply to individuals subject to the Senior Managers and Certification Regime, they are intending to introduce some new requirements relating to the evidence that Relevant Firms should collect as part of their process of assessing whether candidates for Senior Management Functions and Certification Functions are fit and proper. Regulatory references When considering candidates who are applying for a Senior Management Function, the FCA and the PRA will continue to draw on the intelligence they are to gather about candidates employment histories and previous conduct. However, individuals falling within the new Certification Regime will not be subject to regulatory approval by the FCA or the PRA. As a result, the FCA and the PRA are intending to implement rules which will require Relevant Firms to request a reference from an individual s previous employers if they are applying to take up a Senior Management Function or a Certification Function. These references will need to cover the candidate s employment history for the last five years and will need to disclose (if applicable): facts that led a previous employer to conclude that a candidate breached the new Code of Conduct (details of which are set out on page 33); and a description of the basis and outcome of disciplinary action taken in relation to a breach by a candidate of the new Code of Conduct (see page 33). This requirement relating to regulatory references may have practical implications for Relevant Firms and their internal processes. This is because Relevant Firms will be required to keep comprehensive records about employees conduct for at least five years, in case they are requested by another Relevant Firm. The FCA and the PRA have stated that, as the Conduct Rules (see below) will not have retrospective effect, Relevant Firms will not be required to provide the information listed above relating to a date before the Conduct Rules came into force. As is currently the case with any employee references provided, Relevant Firms will be required to ensure that any regulatory references provided to other Relevant Firms are true, accurate and fair. This may lead to difficulties if, for example, an employee who denied having engaged in conduct that breached an FCA or PRA Conduct Rule resigned before this could be determined or resigned before disciplinary proceedings were completed. In such circumstances, the Relevant Firm would need to include the factual details in the reference, stating that the individual resigned before the investigation could be concluded and whether a decision was made in their absence. More common will be the situation where regulatory references are negotiated before the departure, as individuals intending to remain within the financial sector will know that a reference going back five years will be required from previous employers as part of the due diligence process. This aspect is unlikely to change under the new regime but will be more onerous for HR departments as the requirement to provide reference will apply to a wider category of individuals.

32 32 The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct A guide to the current proposals 2014 Criminal records checks for Senior Managers Firms are already required to declare if a candidate who is applying to the FCA or the PRA for regulatory approval has a criminal record, including any spent convictions of which an employer has a legal right to be made aware. This will continue to be the case under the new Senior Managers Regime. The FCA and the PRA are proposing to require Relevant Firms to run a criminal records check in order to ensure that the information the candidate has provided is accurate and complete. This will require Relevant Firms to sign-up to the Disclosure and Barring Service or to use an umbrella firm that allows them to access this facility. As most financial institutions already run criminal records checks in relation to all employees, it is unlikely that this new requirement will have a significant impact on Relevant Firms existing internal processes. If an employee has spent a considerable amount of time working or living outside the UK, the FCA and the PRA are proposing to advise that Relevant Firms consider undertaking equivalent criminal records checks with other appropriate regulatory bodies located overseas, where available. Systems and controls relating to assessing fitness and propriety It will be important that Relevant Firms implement robust written policies and procedures as to how they will go about assessing the fitness and propriety of individuals who are subject to the Senior Managers and Certification Regime. Steps should also be taken to ensure that any such policies and procedures are adhered to through a Relevant Firm. The FCA and the PRA may decide to test the robustness of Relevant Firms policies and procedures for reviewing and assessing the fitness and propriety of relevant individuals who are subject to the Senior Managers and Certification Regime as part of their supervision of management and governance. If the FCA or the PRA identify enhancements that may be made to Relevant Firms policies and procedures in this area, they may require Relevant Firms to make changes to the way in which they assess the fitness and propriety of employees. Allen & Overy LLP 2014

33 33 New Code of Conduct The FCA and the PRA are proposing to introduce a new Code of Conduct which will replace the principles and guidance set out in APER for employees who work for Relevant Firms. Out of the proposals set out by the FCA and the PRA in the Consultation Paper, the introduction of the new Code of Conduct is likely to have the most significant and wide-ranging impact on Relevant Firms and their employees. The Code of Conduct will apply to all Senior Managers and Certified Persons. The FCA will also apply the Code of Conduct to all other employees within Relevant Firms, other than those performing ancillary functions (see below). Conduct relating to both regulated and unregulated activities will be covered by the Code of Conduct. Breach of the new Code of Conduct could lead to the FCA or the PRA taking enforcement action against an individual. This will mean that the vast majority of employees in Relevant Firms will be exposed to the risk of potential regulatory enforcement action. Who will be subject to the new Code of Conduct? The PRA s proposed approach The PRA intends to require its Conduct Rules to all individuals who fall within the scope of: the PRA or FCA Senior Managers Regime; or the PRA s Certification Regime. The PRA s rationale for applying its Conduct Rules to these individuals is that the PRA considers these individuals are able to cause significant prudential harm to Relevant Firms, and thus have an impact on the PRA s general objective of promoting the safety and soundness of the firms it regulates. The PRA has justified its decision to apply its Conduct Rules to individuals falling within the FCA s Senior Manager Regime on the basis that most of the individuals holding such positions would fulfil the criteria for inclusion in the PRA s Certification Regime if they had not been certified as Senior Management Function holders by the FCA. The PRA has also stated that this approach should help reduce the risk that an individual is uncertain as to whether the PRA s Conduct Rules apply to them.

34 34 The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct A guide to the current proposals 2014 The FCA s proposed approach The FCA is intending to take a much broader approach than the PRA in terms of who will be subject to its new Conduct Rules. The FCA is proposing to apply its Conduct Rules to the majority of people working within Relevant Firms, including: all individuals approved by the FCA or the PRA as Senior Managers; all individuals covered by the FCA Certification Regime; all individuals covered by the PRA Certification Regime, with the exception of some individuals who are based overseas and do not deal with UK clients; and all other employees within Relevant Firms, with the exception of staff who perform ancillary roles that are not specific to the financial services business of a Relevant Firm. The ancillary functions listed by the FCA includes receptionists, switchboard operators, mailroom staff, reprographics/print room staff, security guards, catering staff, cleaners, personal assistances, HR administrators and secretaries. A full list of the ancillary functions listed by the FCA in the Consultation Paper is set out on page 53. The FCA has decided to take such a broad approach to the application of its Conduct Rules because it intends for them to apply to all individuals within Relevant Firms who may be in a position to impact its statutory objectives. In the Consultation Paper, the FCA has stated that it will challenge Relevant Firms senior management as to how they identify and follow-up in relation to underlying issues revealed by trends in disciplinary reporting. Allen & Overy LLP 2014

35 35 What are the new Conduct Rules? The new Conduct Rules that the FCA and the PRA are intending to introduce draw upon the existing principles for approved persons that are set out in APER. However, there are some key differences between APER and the new Conduct Rules. The new Conduct Rules are split into two sections: the first section of the Conduct Rules (referred to as the first tier ) applies to all employees who are subject to the Conduct Rules, the second section of the Conduct Rules (referred to as the second tier ) only applies to individuals falling within the FCA and the PRA Senior Managers Regime. Most of the Conduct Rules may be enforced by both the FCA and the PRA. However, two of the first tier Conduct Rules (Rules 4 and 5) may only be enforced by the FCA. The new Conduct Rules are as follows: Conduct Rule 4 is noteworthy as it will apply the current treating customers fairly Principle to individuals for the first time. Senior Manager Conduct Rule 4 is also important as it reflects an expectation on the part of the FCA and PRA that Senior Managers will report wrongdoing to them. The FCA is also proposing to issue quite extensive guidance regarding what each of the Conduct Rules will mean in practice. This guidance will provide examples of the types of conduct that the FCA would consider to be in breach of the Conduct Rules. As the FCA is proposing to apply the Conduct Rules to such a broad range of individuals who perform a variety of roles, this guidance will help employees of Relevant Firms to understand how the Conduct Rules apply to them and their role. First tier: Individual Conduct Rules Rule 1 You must act with integrity. Rule 2 You must act with due skill, care and diligence. Rule 3 You must be open and cooperative with the FCA, the PRA and other regulators. Rule 4 You must paydue regard to the interests of customers and treat them fairly. (FCA only) Rule 5 You must observe proper standards of market conduct. (FCA only) Second tier: Senior Manager Conduct Rules You must take reasonable steps to ensure that the business of the SM1 firm for which you are responsible is controlled effectively. You must take reasonable steps to ensure that the business of the SM2 firm for which you are responsible complies with relevant requirements and standards of the regulatory system. You must take reasonable steps to ensure that any delegation of your SM3 responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively. You must disclose appropriately any information of which the FCA or SM4 PRA would reasonably expect notice.

36 36 The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct A guide to the current proposals 2014 What activities will be covered by the new Conduct Rules? Regulated and unregulated activities The current principles that are set out in APER only apply to approved persons to the extent that they are performing regulated activities for the purposes of FSMA. In practice, this means that if an approved person engages in misconduct in relation to unregulated activities, they may not be found to have breached APER in connection with that misconduct. The FCA is proposing to significantly broaden the conduct that will be covered by the Conduct Rules. The FCA is proposing that: In the case of a person who holds a Senior Management Function, the Conduct Rules will apply to the conduct of that person in relation to the performance by them of functions relating to the carrying on of activities (whether or not regulated activities) by the Relevant Firm for which they work. In the case of all other persons who are subject to the Conduct Rules (see above), the Conduct Rules will apply to the conduct of a person in relation to their performance of functions relating to the carrying on of activities (whether or not regulated activities) by the Relevant Firm for which they work. This will mean that the FCA may take enforcement action against an individual who is subject to the Conduct Rules, regardless of whether their conduct occurred in relation to regulated activities. However, the FCA and the PRA have said that the Conduct Rules do not apply to a person s actions in their private life if those actions are unrelated to the activities they perform for a Relevant Firm. Nonetheless, the FCA and the PRA have stated that a person s conduct in their private life may be relevant when assessing their fitness and propriety. Jurisdictional scope The FCA has stated that the Conduct Rules will apply to conduct engaged in by Senior Managers, regardless of where that conduct is undertaken. For all other individuals who are subject to the Conduct Rules, the FCA has stated that the Conduct Rules will only apply to conduct that is: performed from an establishment maintained by that person s employer in the UK; or involves dealing with (which includes having contact with) a client in the UK from an establishment overseas. Allen & Overy LLP 2014

37 37 Scope for enforcement action under the new Conduct Rules The broad application of the Conduct Rules will have a significant impact on the ability of the FCA and the PRA to take enforcement action against individuals who work for Relevant Firms. In particular, the FCA will be able to take enforcement action against a much larger range of individuals who work for Relevant Firms if they are found to have breached one or more Conduct Rules. The FCA will be able to take enforcement action against: all Senior Managers in relation to alleged breaches of any of the Conduct Rules; and all employees of Relevant Firms (except those performing ancillary functions (see above)) in relation to alleged breaches of Conduct Rules 1 to 5. The PRA will be able to take enforcement action against: all Senior Managers in relation to alleged breaches of any of the Conduct Rules, except for Conduct Rules 4 and 5; and all individuals who fall within the PRA s Certification Regime (see above) in relation to alleged breaches of Conduct Rules 1 to 3. Training requirements Under FSMA, as amended by the Banking Reform Act, Relevant Firms must: ensure that all individuals who are subject to the Conduct Rules are notified of the Conduct Rules that apply in relation to them; and take all reasonable steps to ensure that those individuals understand how the Conduct Rules apply to them. In practice, this means that Relevant Firms will be required to provide employees who are subject to the Conduct Rules with regular training in relation to them. The FCA has specifically stated that such training should ensure that individuals who are subject to the Conduct Rules have an awareness and broad understanding of the Conduct Rules as well as a deeper understanding of the practical application of the specific Conduct Rules that are relevant to their role. As a result, in practice Relevant Firms will need to provide individuals who are subject to the Conduct Rules with regular training which is specifically tailored to their role and the types of activities that they carry out in the course of their employment. If a Relevant Firm is found to have not provided individuals who are subject to the Conduct Rules with adequate training in relation to them, this could expose that Relevant Firm to potential criticism or enforcement action by the FCA or the PRA for breaching the FCA or PRA Principles for Businesses.

38 38 The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct A guide to the current proposals 2014 Notifying the FCA and the PRA of breaches and suspected breaches of the new Conduct Rules As a result of changes made to FSMA by the Banking Reform Act, Relevant Firms will be required to make formal notifications to the regulators if: they are aware that or suspect that an individual has breached the Conduct Rules; having previously notified the regulators of a known or suspected breach, they reach a subsequent or different determination as to whether there has been a breach of the Conduct Rules; or they have issued a formal written warning to, suspended or dismissed, or reduced or recovered remuneration from an employee as a result of conduct which amounts to a breach of the Conduct Rules. There is some confusion in the Consultation Paper as to who Relevant Firms should notify in these situations. The FCA indicates that Relevant Firms should notify the FCA only and that information will then be shared by the FCA with the PRA. However, the PRA has indicated that it expects Relevant Firms to make notifications relating to breaches or suspected breaches of the Conduct Rules directly to it. Where the breach or suspected breach of the Conduct Rules is by a Senior Manager, the FCA is proposing that the Relevant Firm should be required to notify them within seven business days of the firm becoming aware of the matter. This requirement may subject Relevant Firms to considerable time-pressures as they will be required to investigate and determine within seven business days whether a Senior Manager s conduct may have breached the Conduct Rules. Internal investigations into employee conduct, especially allegations relating to senior employees, can often take considerably longer than seven days to complete. As a result, in some instances, it may not be possible for Relevant Firms to have come to a view as to whether a Senior Manager s alleged conduct may have breached the Conduct Rules within this timeframe. Relevant Firms will be required to report breaches and suspected breaches of the Conduct Rules by other employees (ie those who are not Senior Managers) on a quarterly basis. Relevant Firms will be required to provide the FCA with an aggregated list of the actual or suspected individual breaches of the Conduct Rules, the identities of the employees to whom each notification relates and disciplinary action that has been taken. The FCA has not specified the amount of detail that Relevant Firms will be required to disclose about employee conduct which may breach or has breached the Conduct Rules. However, further guidance on this point may be provided in the future as the FCA is proposing to produce a template form that Relevant Firms will be required to use when disclosing this information. In addition, the FCA and PRA have stated that the requirement to notify them of breaches or suspected breaches of the Conduct Rules do not change or remove firms obligations to report concerns about an individual s conduct under existing rules and Principles, such as FCA Principle 11 and PRA Fundamental Rule 7. 4 The formalisation of the process for disclosing suspected or actual breaches of the Conduct Rules to the FCA and the PRA is likely to further heighten awareness amongst employees who are subject to internal investigations and disciplinary processes about what their employer may say about them to the FCA and the PRA. For example, it is very likely that employees will: request to know whether they will be included on their employer s quarterly list of suspected or actual breaches of the Conduct Rules which will be provided to the FCA; and if they are to be included on that list, request to know and have a right to comment on what is to be said about them and their alleged conduct. Such requests may cause additional difficulties for those who are managing internal investigations and disciplinary processes. They may also make dealings and negotiations with employees more challenging. 4. A firm must deal with its regulators in an open and cooperative way, and must disclose to the appropriate regulator appropriately anything relating to the firm of which that regulator would reasonably expect notice Allen & Overy LLP 2014

39 39 Transition to the new regime Both the FCA and the PRA appear to be mindful that implementing the changes that will be brought about by the new Senior Managers and Certification Regime, as well as the new Code of Conduct, are likely to require Relevant Firms to make significant changes to their existing processes and controls. The FCA and the PRA intend to publish their finalised proposals for the Senior Managers and Certification Regime as well as for the Code of Conduct by the end of this year. Due to the tight timeframe, as well as the fact that a number of elements of the new Senior Managers and Certification Regime, are already enshrined in FSMA, we do not anticipate that the proposals set out by the FCA and the PRA in the Consultation Paper will change significantly before they are implemented. The FCA and the PRA anticipate that the Senior Managers and Certification Regime, as well as the Code of Conduct, will be implemented in The precise date for this will be set by HM Treasury later this year. Set out below is a brief overview of the transitional arrangements that the FCA and the PRA are proposing to implement in order to help Relevant Firms comply with the Senior Managers and Certification Regime, as well as the Code of Conduct. Senior Managers Regime Subject to further legislation introduced by HM Treasury, the FCA and the PRA intend to grandfather all existing SIF roles to their Senior Management Function equivalents, where applicable. Grandfathering will mean that an individual who has been authorised under the current approved persons regime and who is not changing their role will not need to go through the authorisation process again in order to become approved as a Senior Management Function. A list of existing SIF roles and their possible Senior Management Function equivalents is set out on page 36. In order for grandfathering to take place, Relevant Firms will need to notify the FCA and the PRA of a person s existing SIF approval and the equivalent Senior Management Function that they will take up. As a result, Relevant Firms will need to ascertain who will fall within the Senior Managers Regime before it is implemented. Relevant Firms will also need to confirm to the FCA and the PRA that they and the individual remain satisfied of their suitability to transfer to the equivalent Senior Management Function in the new Senior Managers Regime. At the point of transition to or approval for a Senior Management Function, individuals will become subject to the requirements of the new Senior Managers Regime. For this to occur, by the point of transition, the FCA and the PRA are expecting Relevant Firms to have prepared: an attestation of how individuals who already hold SIF positions will transfer to their new Senior Management Functions (see page 44); Statements of Responsibilities for each individual who will become a Senior Manager under the new regime (see page 15); and an initial draft of the Management Responsibilities Map (see page 18).

40 40 The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct A guide to the current proposals 2014 Certification Regime The FCA and the PRA are proposing that the majority of the requirements of the Certification Regime will come into effect on the day that the new regime is implemented. As a result, Relevant Firms will need to have identified which employees will be covered by the Certification Regime by this point. The FCA and the PRA are proposing to allow firms 12 months from the date upon which the Certification Regime is introduced in order to issue individuals covered by the Certification Regime with their first certificate of fitness and propriety. The FCA and the PRA have stated that this will allow Relevant Firms to incorporate the issuance of certificates of fitness and propriety into their annual review cycles if they wish to do so. Code of Conduct Individuals who are covered by the Senior Managers and Certification Regime will be required to comply with the new Code of Conduct from the point at which the new regime comes into force. This will mean that Relevant Firms will need to have provided individuals who are covered by the Senior Managers and Certification Regime with training on the new Code of Conduct and how it applies to their roles and responsibilities before it comes into force. For all other individuals who will be subject to the new Code of Conduct, the FCA is proposing to implement the Code of Conduct 12 months after the initial commencement of the regime. The FCA expects Relevant Firms to use this additional time in order to provide training to employees who may not have been subject to APER but will be subject to the Code of Conduct. Allen & Overy LLP 2014

41 41

42 42 The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct A guide to the current proposals 2014 Glossary Ancillary functions APER Approved persons Banking Reform Act Certification Regime Code of Conduct Conditional Senior Manager approvals Consultation Paper FCA Key Functions Fitness and propriety FSMA Handover Certificates Management Responsibilities Maps The FCA is proposing that all employees within Relevant Firms are subject to the new Code of Conduct with the exception of those carrying out ancillary functions. This term is used by the FCA to describe roles within Relevant Firms, the holders of which will not be required to comply with the new Code of Conduct. See page 28 for more detail. A full list of ancillary functions is set out on page 53. FCA and PRA Statements of Principle and Code of Practice for Approved Persons. For Relevant Firms, APER will be replaced by the new Code of Conduct. Individuals who are approved by the FCA or the PRA under the current regime for approving individuals who work in financial institutions in the UK. Financial Services (Banking Reform) Act This legislation made various amendments to the FSMA which have enabled the FCA and the PRA to introduce the new Senior Managers and Certification Regime, as well as the new Code of Conduct. Under FSMA (as amended by the Banking Reform Act), Relevant Firms will be required to certify certain employees as being fit and proper to perform certain functions. This arrangement is referred to by the FCA and the PRA as the Certification Regime. See page 21 for more detail. For Relevant Firms, the FCA and the PRA are intending to replace APER with a new Code of Conduct. See page 25 for more detail. Senior Managers will be subject to regulatory approval. The FCA and the PRA may approve Senior Managers subject to conditions and/or time limits both at the initial approval stage and subsequently by varying a Senior Manager s approval. See page 22 for more detail. Consultation Paper FCA CP14/13, PRA CP14/14: Strengthening accountability in banking: a new regulatory framework for individuals published on 30 July This briefing sets out the proposals contained in the Consultation Paper. The FCA intends to require Relevant Firms to designate Senior Managers who have overall responsibility for one or more of certain key functions that have been prescribed by the FCA. A full list of the proposed FCA Key Functions is set out on page 47. The FCA and the PRA intend to require Relevant Firms to confirm that employees who fall within the Senior Managers and Certification Regime are fit and proper to perform their roles. The FCA and the PRA have set out factors that Relevant Firms should consider when assessing whether an employee is fit and proper. See page 29 for more detail. Financial Services and Markets Act The provisions that enable the FCA and the PRA to introduce the new Senior Managers and Certification Regime, as well as the new Code of Conduct, are contained in FSMA. The FCA and the PRA are intending to implement rules which will require Relevant Firms to provide newly-appointed Senior Managers with all the information and materials that they could reasonably be expected to have in order to perform their role. This information will need to include input from the outgoing Senior Manager. The FCA and the PRA have suggested that an outgoing Senior Manager could provide his or her handover information in the form of a handover certificate. The FCA and the PRA have stated that handover certificates should contain all that it would be reasonable to expect [an incoming Senior Manager] to know and consider relevant, including [their] opinions. Management Responsibilities Maps will need to set out a significant amount of detailed information about a Relevant Firm s governance arrangements, including details of reporting lines and lines of responsibility, as well as details about the people who are part of these arrangements and their responsibilities. See page 18 for more detail. Allen & Overy LLP 2014

43 43 Material risk taker PCBS PRA Prescribed Responsibilities Presumption of Responsibility Regulatory references Relevant Firms Senior Manager Regime SIF/Significant Influence Function SMFs/Senior Management Functions Statements of Responsibilities The test used in order to determine whether an individual will be subject to the Remuneration Code. The FCA and the PRA are proposing that Relevant Firms (with the exception of credit unions) will adopt this test in order to determine who will fall within the Certification Regime. Those found to be material risk takers will fall within the Certification Regime. Parliamentary Commission on Banking Standards. Recommendations that were made by the PCBS have led to the FCA and the PRA introducing the new Senior Managers and Certification Regime, as well as the new Code of Conduct. The PRA is intending to implement rules detailing a set of responsibilities (known as PRA Prescribed Responsibilities) which all Relevant Firms (except credit unions) will be required to allocate amongst their Senior Managers. A list of proposed PRA Prescribed Responsibilities can be found on page 49. As a result of changes made to FSMA by the Banking Reform Act, Senior Managers will be required to satisfy the FCA and/or the PRA that they took reasonable steps to prevent, stop or remedy regulatory breaches that took place in their area(s) of responsibility. If Senior Managers cannot demonstrate that they took reasonable steps then they may be held accountable for the regulatory breaches committed by their firm and have enforcement action taken against them personally. See page 24 for more detail. Relevant Firms will be required to obtain regulatory references for individuals who are going to be subject to the Senior Managers and Certification Regime. Regulatory references will need to cover a candidate s employment history for the last five years and will need to disclose (if applicable): (a) facts that led a previous employer to conclude that a candidate breached the new Code of Conduct, and (b) a description of the basis and outcome of disciplinary action taken in relation to a breach by a candidate of the new Code of Conduct. See page 31 for more detail. UK banks, building societies, credit unions and PRA-designated investment firms. The FCA and the PRA have specified functions which constitute Senior Management Function (see below). Individuals who hold Senior Management Functions will be covered by the Senior Managers Regime and will be subject to regulatory approval. The FCA and the PRA intend for the Senior Managers Regime to focus on the top two tiers of management within Relevant Firms. Under the existing approved persons regime, individuals occupying senior positions that mean that they exercise significant influence over the business of a firm are referred to as Significant Influence Function holders or SIFs. FSMA (as amended by the Banking Reform Act) defines a Senior Management Function as: A function that will require the person performing it to be responsible for managing one or more aspects of the relevant firm s affairs, so far as relating to regulated activities, and those aspects involve, or might involve, a risk of serious consequences for the authorised person, or for business or for other interests in the UK. The FCA and the PRA have specified which functions constitute Senior Management Functions. See pages 10 and 13 for more details. Applications for Senior Managers to be approved by the FCA and/or the PRA will be required to contain or be accompanied by a Statement of Responsibilities that sets out the aspects of the affairs of a firm that the person applying to be a Senior Manager will be responsible for. Statements of Responsibilities must be resubmitted to the FCA and/or the PRA whenever there is a significant change in a Senior Manager s responsibilities.

44 44 The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct A guide to the current proposals 2014 New FCA and PRA Senior Management Functions The following table sets out SIF roles or controlled functions under the current approved person regime and what their likely equivalents under the new Senior Managers Regime when it is implemented. The definition of each new Senior Management Function is also set out. Current controlled function Director (CF1) Possible equivalent PRA Senior Management Functions (SMF) Chief Finance function (SMF2) is the function of having responsibility for management of the financial resources of a firm and reporting directly to the management body of the firm in relation to its financial affairs. Chief Risk function (SMF4) is the function of having responsibility for overall management of the risk controls of a firm, including the setting and managing of its risk exposures, and reporting directly to the management body of the firm in relation to its risk management arrangements. Head of Internal Audit (SMF5) is the function of having responsibility for management of the internal audit function of a firm and for reporting directly to the management body of the firm on the internal audit function. Head of Key Business Area (SMF6) is the function of having responsibility for management of a business area or division of a firm, where: 1. that business or division: (a) has gross total assets equal to or in excess of 10 billion; and/or (b) either: (i) accounts for more than 20% of the firm s gross revenue; or (ii) where the firm is part of a group, accounts for more than 20% of the total gross revenue of the group 5, and 2. the person performing that function does not report to a person performing the Head of Key Business Area function in respect of that same business area or division of the firm. The PRA recognises in the Consultation Paper that a person performing a Head of Key Business Area Senior Management Function may report to another Senior Management Function holder (including, for example, the Chief Executive of the firm). Possible equivalent FCA Senior Management Functions (SMF) Executive Director (SMF3). Is the function of acting in the capacity of a director (other than a non-executive director) of a firm. 5. The PRA s proposed rules state that the gross total assets of the firm or the percentage of the gross revenue of the firm or group shall be determined on the basis of either: (1) the assets and/or revenues for the firm and/or group, as the case may be, for the firm s financial year immediately preceding that in which the person is allocated with the specified responsibilities, or (2) if the threshold amount is not met for that period, on the basis of the annual average amount calculated across a rolling period for five years (calculated by reference to the firm s annual accounting date). Where the firm and/or the business line or division has been in existence for less than five years, the calculation will be made on the basis of the annual average amount for the period during which the firm and/or that business line or division has existed (calculated by reference to the firm s annual accounting date). Allen & Overy LLP 2014

45 45 Current controlled function Non-Executive Director (CF2) Chief Executive (CF3) Compliance Oversight (CF10) Possible equivalent PRA Senior Management Functions (SMF) Group Entity Senior Manager (SMF7) is the function of having a significant influence on the management or conduct of one or more aspects of the affairs of a firm in relation to its regulated activities (other than in the course of the performance of another PRA senior management function) and which is performed by a person employed by, or an officer of: 1. a parent undertaking or holding company of a firm; or 2. another undertaking which is a member of the firm s group. Credit Union Senior Manager (SMF8) is the function of having responsibility for the conduct of, and/or chairing the committee of management of a small credit union. Chairman (SMF9) is the function of having responsibility of chairing, and overseeing the performance of the role of, the management body of a firm. Chair of the Audit Committee (SMF10) is the function of having responsibility for chairing, and overseeing the performance of the role of, the audit committee of a firm. Chair of the Risk Committee (SMF11) is the function of having responsibility for the chairing, and overseeing the performance of the role of, the risk committee of a firm. Chair of the Remuneration Committee (SMF12) is the function of having responsibility for chairing, and overseeing the performance of the role of, the remuneration committee of a firm. Senior Independent Director (SMF14) is the function of performing the role of a senior independent director, and having particular responsibility for leading the assessment of the performance of the person performing the Chairman function. Chief Executive (SMF1) is the function of having responsibility, under the immediate authority of the management body, alone or jointly with others, for carrying out the management of the conduct of the whole of the business (or relevant activities) or a firm. Credit Union Senior Manager (SMF8) is the function of having responsibility for the conduct of, and/or chairing the committee of management of a small credit union. Possible equivalent FCA Senior Management Functions (SMF) Chair of the Nominations Committee (SMF13) is the function of acting in the capacity of the chairman of that committee. Non-Executive Director Function (SMF15) is the function of acting in the capacity as the chairman of that committee. Compliance Oversight (SMF16) is the function of acting in the capacity of a director or senior manager who is allocated the function set out in SYSC 6.1.4R(2) which states that: a compliance officer must be appointed and must be responsible for the compliance function and for any reporting as to compliance.

46 46 The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct A guide to the current proposals 2014 Current controlled function Money Laundering Reporting (CF11) Systems and Controls (CF28) Significant Management (CF29) Possible equivalent PRA Senior Management Functions (SMF) Chief Finance function (SMF2) is the function of having responsibility for management of the financial resources of a firm and reporting directly to the management body of the firm in relation to its financial affairs. Chief Risk function (SMF4) is the function of having responsibility for overall management of the risk controls of a firm, including the setting and managing of its risk exposures, and reporting directly to the management body of the firm in relation to its risk management arrangements. Head of Internal Audit (SMF5) is the function of having responsibility for management of the internal audit function of a firm and for reporting directly to the management body of the firm on the internal audit function. Head of Key Business Area (SMF6) is the function of having responsibility for management of a business area or division of a firm, where: 1. that business or division: (a) has gross total assets equal to or in excess of G 10 billion; and/or (b) either: (i) accounts for more than 20% of the firm s gross revenue; or (ii) where the firm is part of a group, accounts for more than 20% of the total gross revenue of the group 6, and 2. the person performing that function does not report to a person performing the Head of Key Business Area function in respect of that same business area or division of the firm. Group Entity Senior Manager (SMF7) is the function of having a significant influence on the management or conduct of one or more aspects of the affairs of a firm in relation to its regulated activities (other than in the course of the performance of another PRA senior management function) and which is performed by a person employed by, or an officer of: 1. a parent undertaking or holding company of a firm; or 2. another undertaking which is a member of the firm s group. Possible equivalent FCA Senior Management Functions (SMF) Money Laundering Reporting (SMF17) is the function of acting in the capacity of the money laundering reporting officer of a firm. Significant Responsibility SMF (SMF18) A person performs the significant responsibility function in relation to a firm if that person: 1. is performing a function allocated under SYSC R(2) (Allocation of certain senior management responsibilities) in relation to the firm; and 2. does not have an approval to perform any other controlled function in relation to the firm. The FCA has also set out proposed examples as to how the Significant Responsibility SMF will apply in practice (see draft SUP 10C.7.3G). 6. The PRA s proposed rules state that the gross total assets of the firm or the percentage of the gross revenue of the firm or group shall be determined on the basis of either: (1) the assets and/or revenues for the firm and/or group, as the case may be, for the firm s financial year immediately preceding that in which the person is allocated with the specified responsibilities, or (2) if the threshold amount is not met for that period, on the basis of the annual average amount calculated across a rolling period for five years (calculated by reference to the firm s annual accounting date). Where the firm and/or the business line or division has been in existence for less than five years, the calculation will be made on the basis of the annual average amount for the period during which the firm and/or that business line or division has existed (calculated by reference to the firm s annual accounting date). Allen & Overy LLP 2014

47 47 List of proposed FCA Key Functions and PRA Prescribed Responsibilities FCA Key Functions FCA Key Functions (excluding control functions) 1 Establishing and operating systems and controls in relation to financial crime 2 Safekeeping and administration of assets of clients This includes oversight of a Relevant Firm s operational compliance with CASS. 3 Payment services This means: (1) payment services, (2) issuing and administering other means of payment (for example, cheques and bankers drafts), (3) issuing electronic money, and (4) current accounts. 4 Settlement This means clearing and settlement of any transactions described in 12 below and of transactions in those products for its own account. Investment management 5 This has the same meaning as managing investments with the following adjustments: (a) it covers all types of assets, and (b) the exclusions in the Regulated Activities Order do not apply. It also covers fund management, including: (a) establishing, operating or winding up a collective investment scheme, (b) managing a UCITS, and (c) managing an AIF. 6 Financial or investment advice This includes advising on investments. 7 Mortgage advice This has the same meaning as advising on regulated mortgage contracts but is expanded to cover land outside the UK and to cover security of any kind. 8 Corporate investments This means acquiring, holding, managing and disposing a firm s investments made for its own account. 9 Wholesale sales This means the selling of any investment to a person other than a retail customer. 10 Retail sales This means the selling of any investment to a retail customer. It includes savings accounts. 11 First line quality assurance of sales This means independent quality assurance checking of sales or advice, undertaken within the firm but not by the compliance or audit functions. 12 Trading for clients This means dealing in investments as agent and execution of orders on behalf of clients but the list of products includes money market instruments and foreign exchange. It includes market making as defined by MIFID. 13 Investment research Origination/syndication and underwriting 14 Origination includes: (1) entering into or acquiring (directly or indirectly) any commitment or investment with a view to transferring some or all of it to others, or with a view to others investing in the same transaction, (2) sub-participation, (3) any transaction described in the glossary definition of originator. Underwriting includes underwriting that is not on a firm commitment basis.

48 48 The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct A guide to the current proposals 2014 FCA Key Functions (excluding control functions) 15 Retail lending decisions Deciding whether and on what terms to lend to retail customers. Lending includes granting credit, leasing and hire (including finance leasing). 16 Wholesale lending decisions Deciding whether an don what terms to lend to persons who are not retail customers. Lending includes granting credit, leasing and hire (including finance leasing). 17 Design and manufacturing of products intended for wholesale customers Wholesale customers mean persons who are not retail customers. 18 Design and manufacture of products intended for retail customers 19 Production and distribution of marketing materials and communications This includes financial promotions. 20 Customer service This means dealing with clients after the point of sale, including queries and the fulfilment of client requests. Customer complaints handling 21 This includes oversight of the firm s compliance with the FCA s Dispute Resolution: Complaints Sourcebook (DISP). It also includes: (1) oversight of any similar procedures relating to activities that do not come under the jurisdiction of the Financial Ombudsman Service, (2) activities that take place outside the UK, and (3) activities that are not subject to any ombudsman scheme. 22 Collection and recovering amounts owed to a firm by its customers/dealing with customers in arrears Customer means any person falling into any of the definitions of client in the glossary of the FCA Handbook. The definition is extended to cover services provided by the firm that are not provided in the course of carrying on a regulated activity or an ancillary service. 23 Middle office This means risk management and controls in relation to, and accounting for, transactions in securities or derivatives. 24 The firm s information technology 25 Business continuity 26 Human resources This includes recruitment, training and competence and performance monitoring. 27 Incentive schemes for the firm s staff This is not limited to schemes based on sales. Allen & Overy LLP 2014

49 49 PRA Prescribed Responsibilities PRA Prescribed Responsibilities 1 Performance by the firm of its obligations under the senior management regime, including implementation and oversight 2 Performance by the firm of its obligations under the Certification Rules 3 Compliance with the rules relating to the firm s management responsibilities map 4 The induction, training and professional development of all persons performing senior management functions on behalf of the firm and all members of the firm s management body 5 Ensuring and overseeing the integrity and independence of the internal audit function in accordance with SYSC 6.2 (Internal audit) 6 Ensuring and overseeing the integrity and independence of the compliance function in accordance with SYSC 6.1 (Compliance) 7 Ensuring and overseeing the integrity, independence and effectiveness of the firm s policies and procedures on whistleblowing and for ensuring staff who raise concerns are protected from detrimental treatment 8 Allocation of all prescribed responsibilities 9 Leading the development of the firm s culture and standards in relation to the carrying on of its business and the behaviours of its staff 10 Embedding the firm s culture and standards in relation to the carrying on of its business and the behaviours of its staff in the day-to-day management of the firm 11 The development and maintenance of the firm s business model 12 Management of the allocation and maintenance of capital, funding and liquidity 13 The firm s treasury management functions 14 The production and integrity of the firm s financial information and its regulatory reporting in respect of its regulated activities 15 The firm s recovery plan and resolution pack and overseeing the internal processes regarding their governance 16 If the firm carries out proprietary trading, the firm s proprietary trading activities 17 If the firm does not have an individual performing the Chief Risk function, overseeing and demonstrating that the risk management policies and procedures which the firm has adopted (in accordance with SYSC 7.1.2R to SYSC 7.1.5R) satisfy the requirements of those rules and are consistently effective in accordance with the general requirement that a firm must have robust governance arrangements, which include a clear organisational structure with well defined, transparent and consistent lines of responsibility (SYSC 4.1.1R) 18 If the firm outsources its internal audit function, taking reasonable steps to ensure that every person involved in the performance of the service is independent from the persons who perform external audit, including (a) supervision and management of the work of outsourced internal auditors, and (b) management of potential conflicts of interest between the provision of external audit and internal audit services 19 If the firm does not have a person who performs the Senior Independent Director function, (a) carrying out oversight of the person who performs the Chairman function, and (b) oversight of the adequacy and quality of the resources available

50 50 The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct A guide to the current proposals 2014 Allocation of senior management responsibilities Proposed rules regarding allocation of senior management responsibilities The FCA has issued proposed rules and guidance about how it expects Relevant Firms to allocate responsibilities amongst its Senior Managers. This table sets out how the FCA will require Relevant Firms to divide activities set out in SYSC amongst its Senior Managers. The FCA has stated that the way in which Relevant Firms interpret these requirements will be important for firms when they are drafting their Management Responsibilities Maps Senior management responsibility (1) Ensuring the firm s performance of its obligations under the senior management regime, including implementation and oversight Explanation Part 1 Responsibilities The senior management regime means the requirements of the regulatory system applying to relevant authorised persons insofar as they relate to approved persons performing designated senior management functions, including SUP 10C (FCA approved persons regime for relevant authorised persons). (2) Ensuring the firm s performance of its obligations under the employee certification regime, including implementation and oversight (3) Compliance with the requirements of the regulatory system about the management responsibilities map (4) Ensuring the induction, training and professional development of all persons performing designated senior management functions on behalf of the firm and all members of the firm s management body (5) Ensuring and overseeing the integrity and independence of the audit function in accordance with SYSC 6.2 (Internal Audit) (6) Ensuring and overseeing the integrity and independence of the compliance function in accordance with SYSC 6.1 (Compliance) (7) Ensuring and overseeing the integrity and independence of the risk function in accordance with SYSC R and SYSC R (Risk control) (8) Maintaining the independence, integrity and effectiveness of the firm s policies and procedures on whistleblowing and for ensuring staff who raise concerns are protected from detrimental treatment (1) The function of having overall responsibility for any part of the risks referred to in the right hand column of this Part of this table. (2) The function of having overall responsibility for each of the business areas and activities and management functions in SUP 10C Annex 1R (The main business areas and management functions of a relevant authorised person), so far as applicable to the firm. (3) The function of having overall responsibility for any other activities, business areas or management functions of the firm. This includes: (1) oversight of compliance with conditions and time limits on approval; and (2) compliance with the requirements about the statements of responsibilities (but not the allocation of responsibilities recorded in them); and (3) ensuring that the firm has complied with its obligations under section 60A of the Act (vetting of candidates by relevant authorised persons). The employee certification regime means the requirements of sections 63E and 63F of the Act (Certification of employees) and all other requirements of the regulatory system about the matters dealt with in those sections, including SYSC 5.2 (Certification Regime). This does not include allocating responsibilities recorded in it. Part 2 Responsibilities The risks are the risks the firm has identified under the following requirements: (1) Rule 3.1. of the PRA s Internal Capital Adequacy Assessment section of the CRR firms rulebook (which implements article 73 of the CRD); (2) SYSC 4.1.1R (governance, including effective processes to identify, manage, monitor and report the risks it is or might be exposed); (3) SYSC 7.1.2R (risk management policies); (4) SYSC 7.1.3R (mechanisms to manage risk); (5) SYSC 7.1.4R (management body review of strategies and policies in relation to the risks a firm is, or might be, exposed to); and (6) SYSC R (management body has overall responsibility for risk management). (7) SYSC R (Risk function) Allen & Overy LLP 2014

51 51 Draft guidance regarding the allocation of senior management responsibilities The FCA has also published the draft guidance below which relates to the allocation of responsibilities amongst Senior Managers and how this may impact Relevant Firms Management Responsibility Maps. Functions (1) The functions in Part One of the table of senior management responsibilities in SYSC R (2) The functions in Part Two of the table of senior management responsibilities in SYSC R (3) The business areas and activities and the internal management functions set out in SUP 10C Annex 1R Purpose (1) These functions relate to specific requirements of the Act and the FCA about a firm s senior management arrangements. (2) These functions are also included in the list of the PRA s prescribed responsibilities in the part of the PRA rulebook titled Allocation of responsibilities. (3) Anyone performing one of these functions should be an SMF manager, but not someone who is only approved to perform the significant responsibility function (see SYSC R). (1) Part Two of the table of senior management responsibilities in SYSC R covers anyone with overall responsibility for any of the activities, business areas, risks or management functions of a firm. (2) This will include anyone with overall responsibility for any of the functions described in Part Three of this table. However, as the FCA does not impose a single model of how firms should organise themselves, Part Three of this table may not catch every activity of a firm. Part Two of the table of senior management responsibilities in SYSC R also captures those with overall responsibility for these other activities. (3) Anyone having overall responsibility for any function of a firm will be performing an FCA controlled function, as explained in SYSC G. (1) These are key functions that the FCA thinks are likely to apply to most firms, although the FCA does not require firms to organise themselves in this way. (2) Most or all of these functions will normally apply to a complex firm. Many of them may not apply to a noncomplex firm. (3) These functions are not used directly for the approved persons regime. The head of one of these functions will not be performing an FCA controlled function unless he has overall responsibility for it, as described in paragraph (4) of this part of this table. (4) If a business area or management function to which SUP 10C Annex 1R refers is applicable to the firm, the firm should allocate overall responsibility for it to someone. That person will be performing a designated senior management function and will also fall into Part Two of the table of senior management responsibilities in SYSC R. See Part Two of this table and SYSC G for more about this. (4) PRA prescribed responsibilities (5) A function in SUP 10C Annex 1R is inapplicable to a firm if it relates to an activity the firm does not carry out. For example, if a firm does not deal with retail customers, the functions relating to retail customers will not be applicable to it. The firm s management responsibilities map should note that these functions have not been allocated because they do not apply to the firm. (1) This refers to the responsibilities defined as prescribed responsibilities and credit union prescribed responsibilities in the part of the PRA rulebook titled Allocation of responsibilities. (2) It is important that the FCA understands the firm s arrangements for these functions but this section does not have any additional specific requirements about them. (3) Some of these PRA responsibilities are also reflected in the responsibilities described in Part One of this table. This section does have specific requirements about the functions described in Part One of this table. Overlapping functions: In the accompanying notes to this guidance, the FCA has noted that the functions outlined in the table may overlap. Meaning of overall responsibility : The FCA is proposing to issue guidance as to the meaning of the term overall responsibility in the context of allocation of senior management responsibilities. In summary, the FCA has indicated that a person will be considered to have overall responsibility of a function if they have: (a) ultimate responsibility (under a Relevant Firm s governing body) for managing or supervising that function, (b) primary responsibility for briefing and reporting to the governing body of a Relevant Firm about the function and putting matters for decision about that function to the governing body.

52 52 The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct A guide to the current proposals 2014 FCA and PRA draft rules regarding the contents of Management Responsibilities Maps The draft rules published by the FCA and the PRA propose that Relevant Firms Management Responsibilities Maps will need to include at least the information set out in the table below. In addition, Management Responsibilities Maps should be consistent with any Statements of Responsibilities that are in place for Senior Managers within a Relevant Firm. Statements of Responsibilities and Management Responsibilities Maps should be prepared in a way that makes it simple to see how the responsibilities allocated in a particular Statement of Responsibilities fit into the overall system of management and governance of a Relevant Firm. Required content for Management Responsibilities Maps 1 The names of all individuals within a Relevant Firm that are approved by the FCA or the PRA (ie Senior Managers) as well as details of the responsibilities that have been allocated to them. 2 All responsibilities that are described in any current Statements of Responsibilities (see page 14) that the Relevant Firm has put in place. 3 Details of the management and governance arrangements relating to: (a) the functions defined as FCA Key Functions (a list of FCA Key Functions is set out on page 40), (b) the responsibilities defined as PRA Prescribed Responsibilities (a list of PRA Prescribed Responsibilities is set out on page 42), and (c) additional senior management responsibilities imposed by the FCA and the PRA to ensure that a Relevant Firm complies with the requirements of the Senior Managers and Certification Regime. 4 Which of the FCA Key Functions (set out on page 40) the Relevant Firm has, and details about whether and how they are shared or divided up. 5 Details relating to certain risks prescribed by the FCA and the PRA, including risks relating to capital adequacy assessments, risk management policies and a Relevant Firm s risk function (a list of the risks prescribed by the FCA and the PRA is set out on page 44 above). 6 Details of the functions allocated in relation to items 4 and 5 above, including the identity of the persons to whom they are allocated. 7 Matters that are reserved to the governing body of the Relevant Firm (including its committees). 8 How the Relevant Firm s management and governance arrangements fit together with those of its group, and the extent to which the Relevant Firm s management and governance arrangements are provided by or shared with other members of its group. 9 Details of the reporting lines and the lines of responsibility (if any) to: (a) other members of the Relevant Firm s group or other third parties, (b) persons acting as employees or officers of, or otherwise acting for, other members of the Relevant Firm s group or other third parties, and (c) committees or other bodies of other members of the Relevant Firm s group or other third parties. 10 Reasonable details about the persons described or identified in the Management Responsibilities Map, including: (a) whether they are employees of the firm and, if not, by whom they are employed, (b) whether they are employees that fall within the scope of the FCA s and PRA s Certification Regime, and (c) the responsibilities that they have in relation to other members of the Relevant Firm s group. 11 Details about how the information set out in response to items 1 to 10 above fit into the Relevant Firm s management and governance arrangements as a whole. Allen & Overy LLP 2014

53 53 List of FCA ancillary functions The FCA has designated the following roles as being ancillary functions for the purposes of the new Code of Conduct. Individuals who perform ancillary functions will not be subject to with the new Code of Conduct. All other employees within Relevant Firms will be required to comply with the new Code of Conduct when it comes into force. Ancillary function 1. Receptionists 2. Switchboard operators 3. Post room staff 4. Reprographics/print room staff 5. Property/facilities management 6. Events management 7. Security guards 8. Invoice processing 9. Audio visual technicians 10. Vending machine staff 11. Medical staff 12. Archive records management 13. Drivers 14. Corporate Social Responsibility staff 15. Data controllers and processors under the Data Protection Act 16. Cleaners 17. Catering staff 18. Personal assistants, secretaries 19. Information Technology Support (ie helpdesk) 20. Human Resources administrators/processors

54 54 The new FCA and PRA Senior Managers and Certification Regime and Code of Conduct A guide to the current proposals 2014 Key contacts Litigation Calum Burnett Partner London Arnondo Chakrabarti Partner London Philip Annett Counsel London Sarah Hitchins Associate London Tel calum.burnett@allenovery.com Tel arnondo.chakrabarti@allenovery.com Tel philip.annett@allenovery.com Tel sarah.hitchins@allenovery.com Employment Karen Seward Partner London Mark Mansell Partner London Sarah Henchoz Partner London Louise Skinner Counsel London Tel karen.seward@allenovery.com Tel mark.mansell@allenovery.com Tel sarah.henchoz@allenovery.com Tel louise.skinner@allenovery.com Banking David Cummings Senior Associate London Bob Penn Partner London Etay Katz Partner London Tel david.cummings@allenovery.com Tel bob.penn@allenovery.com Tel etay.katz@allenovery.com Allen & Overy LLP 2014

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