This proposal is called Strengthening Accountability in banking: a new regulatory framework for individuals.

Size: px

Start display at page:

Download "This proposal is called Strengthening Accountability in banking: a new regulatory framework for individuals."

Vivian Carroll
5 years ago
Views:

1 ACE CREDIT UNION SERVICES SEPTEMBER 2014 DEEP CONCERNS ABOUT THE CHANGES PROPOSED IN A CONSULTATION DOCUMENT FROM THE PRA and FCA 14/13 This proposal is called Strengthening Accountability in banking: a new regulatory framework for individuals. The proposals concern the change from the approved persons regime to a Senior Management Regime and a Certification Regime. This is a complex and lengthy proposal 284 pages long. There are 3 lists of questions for respondents to answer, one for both regulators, one for the PRA and one for the FCA. (attached) The proposal can be accessed in ACE s Drop Box, under Consultations PRA & FCA. Or on the Internet Google bankofenglandstrengtheningaccountability. Responses have to be given by 31 October 2014 The regulators are arranging an extra meeting with the trade bodies towards the end of September to discuss the impact of these proposals on the credit union Movement. The return address for responses is: Ann Macadam, Policy Risk & Research Division, Financial Conduct Authority. 25 The North Colonnade, Canary Wharf, E14 5HS. Telephone: cp14-13@fca.org.uk It is important that credit unions provide responses relating to the costs and other key issues. Definition of small credit unions means a credit union which has average total gross assets of 25 million or less,,determined on the basis of the annual average amount of gross assets calculated across a rolling period of five years or, if it has been in existence for less than five years, across the period during which it has existed (in each case, calculated with reference to the firm s annual accounting reference date). PLEASE NOTE: this document provides two types of page numbers the usual 1, 2, 3 etc. Also the number of a page of a topic e.g 22/284 is showing the number of the topic within the total 384 pages of the proposal. You can see the page numbers by hovering your curser over the bottom of a page. This may not work if on Drop Box as the 284 numbers may not appear. The aim of changes These seem largely to relate to the behaviour and culture in the banks, which played a major role in the 2008/9 financial crisis and also more recent conduct scandals such as Payment Protection Insurance missselling and manipulation of the Libor. The aim is to assess the fitness and propriety of senior managers who could cause significant harm to the bank and the customers. The regulators want to be able to hold senior managers to account. As credit unions had no part in the banks actions ACE feels it is unacceptable that they should be charged extortionate amounts for this scheme MAIN CHANGES There are five key sections on the changes: Senior Management Regime; Certification Regime: Fitness & Propriety; Conduct Rules The Senior Managers Regime (See section 2.21on page 15 and section 2.50 below regard to special responses for credit unions) For credit unions, one or two senior people will be Senior Managers responsible for a list of prescribed responsibilities and will be responsible for carrying out Senior Management Functions and certifying other senior people to carry out other key duties. Some of these may be shared and more than one function may be carried out by one person. Some responsibilities such as treasurer, money laundering reporting officer etc. non-executive chair of internal audit (supervision), compliance oversight, identifying risk, will be carried

2 out by a senior person who is able to carry out a Significant Influence Function. The new Conduct Rules and the Fitness and Propriety requirements must be met. The Senior Manager would be responsible for a new duty the Certification of senior influential persons. Under the new Certification Regime, the Senior Manager will be responsible for providing an initial, and then annual, certification for those who perform a role which could pose a risk of significant harm to a firm or its customers. (Grandfathering in will be available at the start of the new regimes.) The senior manager(s) will also have to draw up the statement of responsibilities and maintain the single Responsibilities Map which will set out the governance and management arrangements. These must be kept for 10 years. There could be confusion as Senior Managers grapple with following the procedures required by both the PRA and FCA. Figure 6 on page 26 28/284 Section 2.60 provides a Combined List of Senior Management Functions may help with this, as it lists all the functions and which relate to the PRA and to the FCA (attached). Certification Regime From sections 3. 9 and 10, and & 14 below, credit unions will not be required to follow all items in this regime. The regulators are seeking views on how this regime should be used with regard to credit unions, so it is therefore very important that Questions 15 and 16 receive responses to their questions. Fitness and Propriety Pages 4.1 to 4.22 Page 34 36/284 Complications may arise about how the PRA and FCA approach to the question of fitness and propriety, although they seem to be taking a similar approach. Firms will be able to make a single assessment and issue a single certificate to a person in respect of particular certification functions. Where a person performs multiple certified functions, their fitness and propriety will need to be assessed for each function, although their multiple certification functions may be covered by a single certificate. (Page 33 35/84 section 3.16.) No fundamental changes are being made to the existing system for deciding whether a person is fit and proper to carry out a function which are set out in FIT. They say that assessments must take into consideration knowledge, experience, characteristics, confidence competence, training and qualifications. However the regulators will now require firms to run a criminal records check. Smaller firms may wish to use an umbrella organisation to access the DBS for them. (Disclosure Baring Service). There is an emphasis on assessment in terms of employees and references which are not relevant to many credit unions as they are run by volunteers. Credit Unions therefore may need to respond to Question 19 about assessment for volunteers. Once the regime has commenced, relevant firms will need to keep appropriate records for at least five years to allow them to comply with the Conduct Rules-focused disclosure requirements. The Conduct Rules do not apply retrospectively, so firms will not be required by the proposed rules to give such information relating to a date before the Conduct Rules come into force. Fitness & propriety assessments could pose problems for credit unions so they should respond to questions, 17, 18 and 19. Figure 11 Current Controlled Functions PRA senior Management functions and FCA management functions. (attached) Conduct Rules There is a new set of enforceable conduct rules, although the regulators have different views/aims? Section 5.9 states that the PRA will apply certain of the Conduct Rules (SM1-SM4 on page 42) to Senior Managers only, that is to say, persons performing an SMF which has been specified by either regulator. (pages ) Section 5.12 the FCA proposes that Conduct Rules will apply to: all individuals approved by the FCA or PRA as Senior Managers all individuals covered by the FCA or PRA s Certification Regime and

3 all other employees other than those ancillary staff who perform a role that is not specific to the financial services business of the firm (see list on section 5.13 page ) 5.22 The FCA proposes to introduce two additional rules to the Conduct Rules which are: Rule 4: You must pay due regard to the interests of customers and treat them fairly. Rule 5: You must observe proper standards of market conduct. (Pages 43 45/284) 5.27 Figure 9 (Pages 44 46/284) (attached)shows all the rules: 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 pay due regard to the interests of customers and treat them fairly. Rule 5: You must observe proper standards of market conduct. Second tier Senior Manager Conduct Rules SM1: You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively. SM2: You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system. SM3: You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively. SM4: You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice. Firms should train their staff to understand the rules and how to apply them, plus additional training on specific issues. The regulators must be notified if they suspect there is a breach, or if they have taken formal disciplinary action. SPECIAL SECTIONS REFERRING TO CREDIT UNIONS 2.21: page 15. The PRA proposes to apply the SMR in a tailored way to small credit unions (identified as those with assets lower than or equal to 25 million). In particular, the PRA proposes to require at least one individual in each small credit union to be approved, typically the Chief Executive or equivalent. The relevant individual (s) will be approved as a credit union Senior Manager, which the draft PRA rules define as having responsibility for the conduct of, or chairing the committee of management of, a small credit union. This narrower application to credit unions means that, as a general matter, the PRA believes that the impact on mutual societies of its proposed rules for the SMR will not be significantly different from their impact on other relevant firms. 2.50: page 23. In developing the SMR, the FCA has considered the impact on credit unions. The FCA believes the approach set out above (which will apply to credit unions) allows for proportionality. It is important to clarify the FCA would expect a credit union or other small deposit taker to have an individual approved for each of the SMFs listed in Figure 3, or that there is an expectation that such firms are carrying out all the key functions set out in figure 4. The need for approval will be determined by the number of individuals performing these functions and the way in which the credit union allocates responsibilities. In practice the FCA expects these proposals would generally maintain the status quo for credit unions in terms of the senior roles that would require regulatory pre- approval. They are seeking view from credit unions. 3.9 & 10: page 31 33/284 Credit unions are not subject to the CRR or the associated remuneration requirements. Therefore they will not have an existing obligation to identify material risk takers for remuneration purposes and the PRA

4 considers that many of the criteria in Commission Delegated Regulation (EU) No 604/2014 would not, in practice, be relevant to credit unions. Therefore, the PRA proposes a separate, simplified definition of certification functions for credit unions. This will use the elements of the material risk taker definition that the PRA believes could be relevant to a credit union. The aim is to still capture those employees deemed to have a material impact on credit unions risk profile, but without requiring credit unions to use a much longer and more complicated set of criteria for identifying these employees The PRA believes this is a proportionate approach which will minimise the administrative burden on credit unions whilst still covering those individuals who could pose a risk of significant harm to the firm. The PRA recognises that the FCA s proposed scope of SMFs for credit unions means that many of the people who would otherwise perform the PRA certification functions proposed here may be performing FCA SMFs and will not therefore require certification. The PRA would welcome views from credit unions as to how many people they think they would need to certify under the combined proposals in this paper. More generally, the PRA considers that its proposals regarding the scope of the Certification Regime should not have a significantly different or disproportionate impact on mutual societies 3.13 & 3.14 page 32 34/284. These rules on the scope of the FCA s Certification Regime will generally apply in the same way to credit unions it is important, for example, that someone asking for mortgage advice from a credit union is able to trust that their adviser is subject to the same rigorous tests as if they worked for a larger deposit taker. However, we would expect the number of people in credit unions who would fall within the criteria set out above to be relatively small The exception is that there will be no material risk taker criteria for persons within the Certification Regime for credit unions because the material risk taker concept does not apply to these firms. The FCA notes that the PRA has created a separate definition to address this issue see paragraph 3.9 above but does not think that the individuals who will be caught by this will necessarily have an impact on the FCA s statutory objectives. So the only individuals within credit unions who will be FCA Certified Persons will be those falling within the categories set out in paragraph 3.12 above. Expected effect on mutual societies page 77/ In considering the Senior Managers Regime the FCA has been mindful of the need to consider the impact on building societies and credit unions. Insofar as our proposals introduce new requirements we believe that these should apply to building societies in much the same way as they apply to banks. So far as credit unions are concerned, the Europe Economics Cost Benefit Report stated at section 6.4, The share of the wider benefits of the policies is unlikely to be equal across the affected sectors. In particular, the role of credit unions in the miss-selling scandals and systemic bank failures which characterise much of the harm referred to in the PCBS report is extremely limited; the same might be said of building societies. The costs of the policies are likely to affect credit unions disproportionately (in terms of a share of annual income). The high compliance costs, combined with the likelihood that credit union board members may be particularly unwilling to take on the additional personal accountability implied by the regime, may have an impact on the feasibility of some firms to remain in the market. 18. A key issue for credit unions is identified as the Senior Managers Regime, in particular assigning individual responsibilities, which may undermine the principles of credit unions whereby all members are able to be voted onto the Board (who are often volunteers), with Board members collectively taking responsibility for all decisions. A further key concern is retention, given that credit unions will not be able to compensate individuals for the increase in personal accountability. 19. The Act itself applies the Senior Managers Regime to credit unions, and APER already imposes individual obligations on those performing a significant influence function for a credit union. 20. We note the possible impacts identified in the EE report. It may be that some or possibly most of the concern regarding credit unions is due to a misunderstanding of the proposals or a perception that FCA will apply the regime to credit unions in a harsh way, rather than as a result of what the proposed rules say. In order to better understand the expected impact on credit unions, the FCA will seek to obtain additional information and clarification from this sector during the consultation period. ANNEX SECTION

5 PRA Cost Benefit Analysis pages 1 21 Figures 13 & 14 provide information about PRA costs. (Attached) The PRA thinks it will reduce costs by not having to process large numbers of Approved Persons under the current system. Certification will be done by the Senior Manager who will issue certificates which will be checked by the regulators.. FCA Cost Benefits Analysis pages 1-20 Figure 15 provides information about FCA costs.(attached) On page 70/284 section 12 the FCA is concerned that a key issue for credit unions is identified as the Senior Managers Regime, in particular assigning individual responsibilities, which may undermine the principles of credit unions whereby all members are able to be voted onto the Board (who are often volunteers), with Board members collectively taking responsibility for all decisions. A further key concern is retention, given that credit unions will not be able to compensate individuals for the increase in personal accountability.

6 ANNEX 7 part of the proposed changes to the rule book 7.2 Executive does not apply to credit unions 3.1 (page 232/284) 7. 2 Credit Unions Annex Pages 234/284 Section 6 of Annex 7.2 page 233/ This Chapter applies only to small credit unions. 6.2 The Credit Union Senior Executive Manager function (SMF8) is the function of having responsibility for the conduct of, and/or chairing the committee of management of a small credit union. 6.3 (1) A small credit union must ensure that at least one person performs the Credit Union Senior Executive Manager Function on its behalf. (2) If a vacancy arises in respect of the PRA senior management functions set out in (1),a firm must ensure that it appoints a person to fill that vacancy as soon as practicable. 7.2 Combination of Senior Management Functions (pages ) 7.1 Except as otherwise provided in this Chapter, a person may perform more than one PRA senior management function on behalf of a firm. 7.2 A firm must ensure that a person who performs the Chairman function on its behalf does not simultaneously perform the Chief Executive function within the same firm. 7.3 Prescribed Responsibilities for credit unions Annex 7.3 Page 241/ This Chapter applies only to small credit unions. 5.2 Each of the responsibilities listed in this rule is a credit union prescribed responsibility: (1) responsibility for providing the committee of management with an up-to-date business plan and all relevant management information; (2) responsibility for management of the small credit union s financial resources (3) responsibility for ensuring the committee of management is informed of its legal and regulatory obligations; and (4) responsibility for oversight of systems and controls proportionate to the nature, scale and complexity of the risks inherent in the business model of the small credit union's activities 7.6 Credit Union Senior Manager Conduct Rules: must take reasonable steps to ensure that; (Page 256/284) 3.2 The credit union is controlled effectively 3.3 The credit union complies with relevant regulations and standards of the regulatory systems 3.4 Any relegation of responsibility is to an appropriate person and that person has carried out the duties effectively and responsibly 3.5 Must disclose appropriately any information of which the PRA/FCA would reasonably expect notice Conditional time limited approvals and variations of approval Some key items 1. Firms will have to have a Statements of Responsibility Annex Firms will have to provide a Responsibility Map - a single document to describe a firm s management and governance arrangements should be no gaps in accountability clear and robust governance arrangements Page 51 53/ Record keeping the above and other management records have to be kept for 10 years

7 4. Transition there is going to be grandfathering in at the transition from the old approved persons system to the new regimes. Page 58 60/284 BSH

FCA CONTROLLED. Improving individual accountability: Workshops for credit unions. Autumn 2015

FCA CONTROLLED. Improving individual accountability: Workshops for credit unions. Autumn 2015 FCA CONTROLLED Improving individual accountability: Workshops for credit unions Autumn 2015 Topics to be covered The Senior Managers Regime Grandfathering (including demo of the electronic form) Example