In March 2016, a major overhaul of the Approved Persons Regime, predominantly for bank employees, will come into effect, the aim of which is to strengthen the accountability of bank senior management and to raise standards of individual conduct. In this article, we set out the key aspects of the new regime and its likely impact.
Why? Increase individual responsibility and accountability
- The main rationale behind the new Senior Managers Regime (‘SMR’) is to improve banking culture and increase individual accountability across the industry.
- The reforms are contained in Part 4 of the Financial Services (Banking Reform) Act 2013 (‘the Act’).
- The legislative provisions are based on the recommendations contained in the 2013 report of the Parliamentary Commission on Banking Standards. The recommendations set out in the report were largely supported by the Government and welcomed by the two UK regulators, the Prudential Regulatory Authority (‘PRA’) and Financial Conduct Authority (‘FCA’).
- The new regime marks a shift away from corporate responsibility towards individual accountability.
Who and when? Still need clarity
- The original proposals applied only to UK-incorporated PRA-designated firms, UK-incorporated banks, building societies and credit unions but the Treasury intends to extend the regime to all banks operating in the country, including branches of foreign banks.
- There have also been proposals to extend the new regime to cover other authorised firms, such as hedge funds.
- The government announced in written statement HCWS336 that the new regime will come into effect from 7 March 2016, and firms and foreign institutions will have until 8 February 2016 to notify the regulators of the approved persons who are to be Senior Managers in their UK branches.
What? The new regulatory regime comprises of four elements
- Senior Managers regime
- Certification regime
- New conduct rules
- Criminal offence
1. Senior Managers Regime
Who will the SMR apply to?
- The SMR adds an additional layer of regulation for the most senior decision-makers in banks who carry out designated senior management functions ('SMF'). This will be primarily executive or non-executive board members, although it will include some Senior Managers.
- In addition to the responsibilities inherent in each of the SMFs, banks will also need to allocate the Prescribed Responsibilities to Senior Managers. These are fairly broad and include things such as responsibility for firm culture and standards.
What are the requirements of the SMR?
- Senior Managers need to be approved by the regulators. The inclusion of some fairly broad classes of SMF will lead to a significant extension of the current approved persons regime in relation to Senior Managers.
- There will be an increased documentary burden on banks due to Statements of Responsibilities and Responsibilities Maps, which the regulators will require to show that there are no gaps or excessive overlaps in the allocation of Prescribed Responsibilities.
- A "reverse burden of proof" will be introduced for Senior Managers. This means that there will effectively be a presumption of individual responsibility on the part of Senior Managers who must demonstrate that they took "reasonable steps" to prevent, stop or remedy breaches in their areas of responsibility.
Statements of Responsibility
- Aimed at ensuring all Senior Managers are aware of their responsibilities and have formally accepted them.
- Statements will need to be kept up to date and the regulators informed if there is a significant change in a Senior Manager's responsibilities.
- If a Senior Manager relinquishes his/her responsibilities, they will need to prepare a handover certificate setting out how those responsibilities have been exercised and identifying any issues which the person taking over will need to be aware of.
2. Certification Regime
The new certification regime will extend further downwards into institutions than the current Approved Persons Regime.
In the words of the Parliamentary Commission for Banking Standards,“The Approved Persons Regime has created a largely illusory impression of regulatory control over individuals, while meaningful responsibilities were not in practice attributed to anyone. As a result, there was little realistic prospect of effective enforcement action, even in many of the most flagrant cases of failure”.
- ‘Certified Persons’ are to replace the old category of ‘Approved Persons’ under the Approved Persons Regime.
- Firms will have to certify certain employees as being fit and proper to perform certain functions, known as ‘significant harm functions’.
- A function will be a significant harm function if the person performing it will be involved in aspects of the firm’s affairs (so far as relating to a regulated activity carried on by the firm) that might involve a risk of significant harm to the firm or any of its customers.
- The category of Certified Persons is greater than the group of people classed as ‘approved persons’ under the old regime.
No direct approval from a regulator
- An individual performing a certification function will no longer be subject to direct approval by the PRA or FCA.
- Under the new regime, the relevant firm will be responsible for ‘certifying’ on an ongoing, annual basis a person’s fitness and propriety to perform a certification function.
- A Senior Manager within each relevant firm will assume responsibility for the internal assessment and certification process of the Certified Persons.
- The relevant firm (and not the regulators) will take on primary responsibility for the appropriateness of its regulated workforce.
Fitness and Propriety
- There will be no fundamental changes to the standard of fitness and propriety that will apply.
- Under previous rules, the regulator would need to be notified if anything changed the position relating to whether someone was fit and proper to perform their role. Now, the obligation is on the regulated firm and they decide whether to certify or not.
3. Conduct Rules
- A new framework of behavioural standards against which individual conduct will be judged with a requirement to notify the regulator of breaches and formal disciplinary action taken.
- Some rules only apply to Senior Managers, however, many rules will apply to all employees who are not purely ancillary. This significantly extends the scope of the rules down through the management structure compared to the current rules.
- The FCA and PRA will be able to take enforcement action against Senior Managers and Certified Persons who do not comply, which includes fines and suspension.
- There will be obligations on banks to provide tailored training to Senior Managers and Certified Persons and to notify breaches to regulators.
4. Criminal Offence
- A new criminal office of reckless misconduct leading to the insolvency of a bank will be introduced for Senior Managers. A person guilty of the offence is liable to an unlimited fine and/or up to seven years’ imprisonment.
The shift towards individual responsibility may make it harder to attract and retain Senior Managers.
Employers will want to ensure that the Statement of Responsibilities is detailed and comprehensive while Senior Managers are likely to want to minimise the areas for which they would be held responsible, leading to lengthy negotiations. It is likely that Senior Managers will want to obtain independent legal advice and may look to the employer to cover this cost.
Senior Managers keeping more detailed records of decision making within their business area may fuel a practice of ‘finger pointing’.
Exits could become more protracted with Senior Managers potentially threatening to provide unhelpful handover certificates unless their demands for severance are met.
Banks could see an increase in whistleblowing allegations from Senior Managers who are exited to try and minimise culpability and extract exit packages.
In future, a Senior Manager's entry on the FCA database will include more information on disciplinary action taken against them. This could have implications for a manager's future employment prospects.
The new regime may require changes to employment contracts and policies such as ensuring that there is a requirement to comply with the Conduct Rules, complete Statements of Responsibilities and handover certificates and a contractual basis for dismissing with immediate effect where these requirements are not met.
Although much of the focus of the new regime is on Senior Managers, the conduct rules will be extended to cover more employees than the previous regime.