The Senior Manager and Certification Regimes in Financial Services: Update and Practical Problems Tom Ogg ELA National Conference, May 2016
Road map Overview of SMCR Senior Managers Regime: Allocation of responsibility Duty of responsibility Criminal offence General Counsel Conduct rules Certification Regime Notifications Whistleblowing Regulatory references 11kbw.com 2
Which, who, where, how?... Which regime applies? From 7 March 2016: Deposit takers and PRA-designated investment firms (relevant authorised persons, s.71a FSMA): Senior Managers and Certification Regimes Insurers: PRA Senior Insurance Managers Regime, FCA modified Approved Persons Regime Others (IFAs, brokers, funds, consumer credit): Approved Persons Regime From 2018 (?) : SMCRs applied to all FSMA firms 11kbw.com 3
Overview of new regime (1/2) Senior Managers Certified Persons MRTs Certified Persons other (FCA only) Relevant persons (Conduct Rules apply) Ancillary staff (Conduct Rules do not apply) 11kbw.com 4
Overview of new regime (2/2) Timeline for implementation: Key points pre-implementation: Parliamentary Commission on Banking Standards: July 2012 June 2013. The Financial Services (Banking Reform) Act 2013. 7 July 2015: final (ish) rules on SMR and SIMR from FCA and PRA. 6 October 2015: final rules on whistleblowing. 27 January 2016: FCA announcement re: status of a firm s general counsel. 4 and 15 February 2016: FCA and PRA interim rules on regulatory references. 7 March 2016: SMR came into force; conduct rules apply to SMs & certified persons; certification begins. 7 September 2016: whistleblowing requirements come into effect. 7 March 2017: certification process must be completed; conduct rules apply to nearly all other employees. 2018: SMCRs apply to all FSMA firms. 11kbw.com 5
SMR (1): Allocation of responsibilities Prescribed responsibilities & FCA s flexible approach: Role-specific responsibilities: SM1 to SMF18 (no SMF15!). PRA-prescribed responsibilities (20): All firms: responsibility for SMR; certification; allocation of prescribed responsibilities; responsibilities map. Executive responsibilities: capital, funding and liquidity; regulatory reporting; stress testing; resolution plan; development of culture. NED responsibilities: integrity of audit/risk/compliance functions; remuneration; whistleblowing champion. Plus FCA-only PRs: financial crime / CASS. SMF18: FCA s flexible other overall responsibility function where responsible for reporting to board re activity, function or area of business. 11kbw.com 6
SMR (2): Allocation of responsibilities Documents: Statements of responsibility. Responsibilities maps. Tracey McDermott on the allocation of responsibility: The real core of the problem that we have had with individual accountability over the years is the lack of clarity about who is responsible for what. 11kbw.com 7
SMR (3): Duty of Responsibility From a presumption to a duty of responsibility : Senior Manager (SM) is guilty of misconduct if: There was a contravention by the firm, SM was responsible for the activities in relation to which the contravention occurred, and SM did not take such steps as a person in the SM s position could reasonably be expected to take to avoid the contravention occurring (or continuing). Section 66A/66B of FSMA proposed to be amended by the Bank of England and Financial Services Bill. Compare SM3: 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. 11kbw.com 8
SMR (4): Criminal Offence Section 36 of the Banking Reform Act 2013: A senior manager (S) takes a decision (or fails to prevent a decision being taken): at the time of the decision, S is aware of a risk that the implementation of the decision may cause the failure of the [bank] ; in all the circumstances, S s conduct in relation to the taking of the decision falls far below what could reasonably be expected of a person in S s position ; and, the implementation of the decision causes the failure of the [bank]. But one decision rarely causes banks to fail, particularly in the circumstances described in the offence! 11kbw.com 9
SMR (5): General Counsel FCA proposed consultation on GCs Does the General Counsel have: ultimate responsibility, under the governing body, for managing or supervising a function; with direct responsibility for reporting to the governing body, and putting matters for decision to it? If so, they are a SMF18 (overall responsibility). FCA, 27 Jan 2016: We now recognise that some confusion exists in this area, but don t change plans. Firms concerned about a possible perception that a General Counsel might be required or pressured by regulators to disclose privileged information. 11kbw.com 10
Certification Regime (1) Significant harm functions Material risk takers Those formerly significant influence functions Customer-facing roles with qualification requirements Management or supervision role for anyone who is certified 11kbw.com 11
Certification Regime (2) Firms must: Identify all certified individuals by 7 March 2016 Assess them as fit and proper by 7 March 2017 Have procedures in place to re-assess the fitness and propriety of certified staff on an annual basis 11kbw.com 12
Label Conduct Rule Regulator Statements Rule 1 You must act with integrity PRA/FCA Rule 2 You must act with due skill, care and diligence PRA/FCA 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 PRA/FCA FCA only FCA only 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 PRA/FCA PRA/FCA PRA/FCA PRA/FCA 11kbw.com 13
Notifications New requirements (SUP 15.11 and s.64c FSMA): RAPs must notify FCA if take disciplinary action against an employee due to a breach of a conduct rule. Disciplinary action = written warning, suspension, dismissal, reduction/recovery of remuneration. Form H for certified persons and others; Form C and D for senior managers. Notification requirement for knowing or suspecting conduct rule breach (s. 64B(5)) will not be brought into force. Pre-existing requirements: Qualified Form C : ceases performing the function by dismissal, suspension, resignation under investigation, or where fitness and propriety may be affected. (SUP 10A.14.10R) Form D: information material to fitness (SUP 10A.14.17R). General notification requirements: SUP 15.3.11R. 11kbw.com 14
Whistleblowing (1) The current position Fitness and propriety: SYSC 18.2.3 G A duty to blow the whistle? Statement of Principle 4 and SM4: You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice FCA final notice for Craig McNeil FCA and PRA are prescribed persons (s.43f ERA) No financial incentives 11kbw.com 15
Whistleblowing (2) FCA policy statement PS15/24: No (express) regulatory duty to blow the whistle NED SM/SIM as whistleblowers champion by 7 March 2016 Whistleblowers champion responsible for implementation of new procedures by 7 September 2016 Future consultation on application to UK branches of overseas banks 11kbw.com 16
Whistleblowing (3) FCA policy statement PS 15/24 Mandatory internal whistleblowing arrangements for reportable concerns for all persons - i.e. not limited to PIDA Inform UK-based employees about FCA/PRA whistleblowing services Record-keeping; annual report on whistleblowing; training Explanation of ERA position / prohibition on warranties in settlement agreements Inform FCA if ET finds whistleblower suffered a detriment 11kbw.com 17
Regulatory References (1) Timeline: From APER to the certification regime; FEMR. 15 October 2015: radical proposals to apply to all PRA-regulated firms (banks and insurers), and significant proposals for all firms. 4 and 15 February 2016: regulators issue interim rules. Further consultation in the summer. 11kbw.com 18
Regulatory References (2) Current rules for all firms under the FCA s interim rules: FCA rules apply to approved persons only, and not to FCA certified persons. No obligation to seek references, but see PRA rules. If asked, a firm must as soon as reasonably practicable, give to [the requesting firm] all relevant information of which it is aware (SUP 10A.15.1 R) Regardless of employee agreements / COT3 upon termination (SUP 10A.15.4 G) Actionable for damages: s.138d FSMA 11kbw.com 19
Regulatory References (3) Current PRA rules for BANKS: Rules apply to new PRA certified persons (MRTs), new senior managers, and new notified NEDs (see F+P 6). (1) Before deciding whether a person is fit and proper, a firm must take reasonable steps to obtain appropriate references covering at least the past 5 years from that person s current and previous employers, and from organisations at which that person served as, or is currently, a non-executive director (PRA Rulebook, CRR Firms, Fitness and Propriety 2.7). (2) if Firm B is asked for a reference by a Firm A: B must, as soon as reasonably practicable, provide a reference and disclose to A in the reference all information of which B is aware that is relevant to A s assessment of whether P is fit and proper (PRA Rulebook, CRR Firms, Fitness and Propriety 5.1). (PRA PS5/16, which modifies the rules in PS16/15 and PS 22/15) 11kbw.com 20
Regulatory References (4) Current PRA rules for INSURERS: Rules apply to new PRA certified persons (MRTs), new senior managers, new notified NEDs, and new key function holders. Equivalent obligations as apply to banks (see previous slide) are applied to insurers by the PRA Rulebook, SII Firms, Insurance Fitness and Propriety, rules 2.5 and 3.1. Plus 2.6: Where a firm (A) seeks a reference pursuant to 2.5 from an FCA-authorised person or a PRA- authorised person (B), A must also request that B discloses all matters of which B is aware that are relevant to the assessment of that person s fitness and propriety. (PRA PS5/16, which modifies the rules in PS16/15 and PS 22/15) 11kbw.com 21
Regulatory References (5) What may be coming later (FCA/PRA CP15/31): A clearer rule? Firms, if asked, must disclose information relevant to fitness & propriety Clear ban on firm entering into agreements with any person that limit its ability to disclose information Record keeping requirements: 6 years + 11kbw.com 22
Regulatory References (6) What may be coming later (FCA/PRA CP15/31): Firms must take reasonable steps to collect references for previous 6 years, whether or not in authorised firms For regulated roles: SMR/SIMR/CR/CF/KF/NEDs Firm-moves and internal moves (including to first regulated role) Current employees: no requirement to collect references if they stay in current role Mandatory template 11kbw.com 23
Regulatory References (7) What may be coming later (FCA/PRA CP15/31): Must include employer-determined breaches of conduct rules and disciplinary action Permitted, but not required, to include undetermined allegations (subject to common law) Requirement to update previous references if the firm becomes aware of significant F+P issues, up to 6 years after reference given 11kbw.com 24
Regulatory References (8) The reasons for the delay (FCA PS16/3 / PRA PS5/16): Data protection; Updating references; Rationale for applying reference requirements to intrafirm moves; Obtaining references from overseas firms; Timetable for implementation (including transitional period); Proportionality and cost-benefit analysis. 11kbw.com 25
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