The obligations proposed by the regulators in relation to individuals appear to be particularly onerous for bank HR teams; we examine the potential consequences
The far-reaching proposals set out in the PRA and FCA joint consultation paper “Strengthening accountability in banking: a new regulatory framework for individuals” overhaul the current Approved Persons regime that came in for so much criticism from the Parliamentary Committee on Banking Standards following the financial crisis. A new three-tier framework intended to make it easier for regulators and banks to hold individuals to account has major ramifications for banks’ Human Resources teams and their interaction with other functions.
A new Senior Managers Regime will replace the current Significant Influence Function arrangements and apply primarily to Board and Executive Committee members and heads of key business areas and control functions. Such individuals will still need to be pre-approved by the regulators. In addition, banks will be required to submit a Statement of Responsibilities identifying the areas for which each Senior Manager is responsible. Banks will also need to produce and maintain a Responsibilities Map setting out their overall framework for the allocation of responsibilities to ensure there are no gaps in accountability.
A new Certification Regime will apply to employees who perform roles which are not Senior Manager functions but which relate to a bank’s regulatory activities and which could pose a risk of significant harm to the firm or any of its customers. The onus of assessing and certifying the fitness and propriety of such individuals to perform their roles will shift from the Regulator to banks themselves. Banks will also have to undertake annual reassessment and formal certification. The number of individuals caught by this regime will extend significantly beyond those covered by the existing Approved Persons regime.
A new set of Conduct Rules will apply to all staff except those undertaking prescribed “ancillary” roles (including secretaries, IT and security staff and HR processors and administrators). The rules will apply to a significantly wider population than is currently covered by the Statements of Principle for Approved Persons.
These changes present various issues and challenges from an HR perspective. A high proportion of a bank’s workforce will fall within the scope of the Certification Regime and/or the Conduct Rules. HR will need to be involved in defining and monitoring roles carefully to establish which roles fall within the Certification Regime and which are covered only by the Conduct Rules.
One of the most significant changes is that the regulators are now essentially outsourcing to banks the responsibility for assessing the “fitness and propriety” of Certification staff. Larger institutions are likely to require dedicated teams to set up and run this process. As well as ensuring that no staff perform a Certification function without being certified by the bank as fit and proper to do, banks will also be required to reassess the fitness and propriety of Certification staff at least annually before renewing their certification.
I anticipate that most banks will incorporate the certification renewal process into the annual appraisal process, in which case, annual appraisals will need to be undertaken in time to ensure the certification renewal takes place annually. The primary focus of the appraisal itself may well shift to an assessment of whether an individual is fit and proper to undertake their role. Will banks be able to certify employees as having the necessary level of competence if they have been awarded a low performance grade or identified as “Needs Improvement”? Similarly, where a disciplinary issue does not justify dismissal but nevertheless raises questions over an employee’s fitness and propriety to undertake their role, banks may need to consider redeploying such employees into other noncertification roles. Where employees cannot be redeployed, there may be no alternative but to terminate their employment, which may result in legal claims from employees.
Accordingly, HR will need to undertake a comprehensive review of contractual documentation and make it a condition of employment that Certification staff continue to be deemed fit and proper to undertake their role throughout the duration of their employment.
It is also worth noting that any breach, or suspected breach, of a Conduct Rule by an employee to whom the Conduct Rules apply will be notifiable to the appropriate regulator within seven business days for Senior Managers or on a quarterly basis for other individuals. The regulator will also need to be notified of any disciplinary action taken in relation to the breach. HR professionals will need to be alive to the much greater scope for potential disciplinary issues to be reportable to the regulator, which in turn is likely to lead to a significantly increased volume of notifications being made.
HR personnel also need to be aware that banks considering appointing a candidate to perform a designated Senior Manager or specified significant harm function are likely to have to obtain references from any relevant authorised firm that has employed the candidate during the previous five years. Such references need to detail any notification to the Regulator of a breach of the Conduct Rules and/or the basis and outcome of any disciplinary action taken in relation to such breach whilst ensuring that any reference is true, accurate and fair. One does not need a crystal ball to foresee greatly increased scope for disputes in this area but there will be no way to avoid the obligation. The duty to disclose information relating to breaches of the Conduct Rules expressly overrides any agreement entered into by a bank and employee upon termination of the employee’s employment. This could affect the current practice of providing an agreed reference as part of a settlement agreement, if this conflicts with a bank’s obligations to provide complete and accurate information.
Finally, the proposed rules impose fairly onerous duties on firms to put in place sound arrangements for the handover of responsibilities to a new Senior Manager, to ensure that the individual taking on the role is fully equipped to fulfil his or her personal responsibilities.
Given the political will behind the consultation, we do not anticipate these proposals changing dramatically. Accordingly, HR teams need to be ready for this vast overhaul. At the time of writing, the government proposes implementing the new regime in mid-2015. We, and many of our clients, have strongly opposed such a swift implementation timetable as banks will need longer to understand and put measures in place to implement the new regime.