The Bank of England and Financial Services Bill, which was introduced in the House of Lords yesterday (14 October 2015), will bring about significant changes to the scope of the Senior Managers and Certification Regime (“SMCR”) for personal regulatory accountability that is due to come into force for Banks and PRA-authorised investment firms with effect from 7 March 2016.
Key points on SMCR
The key points in the Bill concerning the SMCR are as follows:
- The SMCR is to be extended beyond banks and PRA-authorised investment firms to cover all financial institutions that are authorised by the PRA or FCA.However, there is no imminent need to panic about the large volume of implementation work that this new regime will entail – we understand that current regulatory expectations are that the extension of the regime will not happen until 2018.
- In what many will see as the very definition of a government U-turn, the burden of proof is being reversed back to its starting position by scrapping the so-called “presumption of responsibility”. Under the presumption of responsibility, a Senior Management Function (“SMF”) holder would be deemed to be guilty of regulatory misconduct where a breach had occurred in the area of the business for which he or she was responsible, until the SMF holder proved that he or she had taken reasonable steps to prevent the breach from occurring. Instead, under the amended legislation, the FCA will need to prove that an SMF holder did not take reasonable steps to avoid the breach from occurring, in order to be able to bring enforcement action against that SMF holder. Tracey McDermott, who is currently acting CEO of the FCA, has been quick to say that “the presumption of responsibility was never a panacea” and the view from the regulators is that this will make little difference to the operation of the regime in practice – which has always been our view at BLP (see below).
- The government is abolishing the duty upon firms to report actual or suspected breaches of conduct rules to the regulators (by removing FSMA Section 64B(5), which had been inserted by Section 30(3) of the Financial Services (Banking Reform) Act 2013 and which provided that “if a relevant authorised person knows or suspects that a relevant person has failed to comply with any conduct rules, the authorised person must notify the regulator of that fact”).
- In the longer term, we see the standardisation of the regulatory accountability regime across financial services as a sensible development. Operating several different accountability regimes in parallel is at best unattractive and at worst unworkable for complex financial services groups containing legal entities that are variously caught by SMCR, SIMR and APER.
- However, the position for insurers is frustrating, in that they are required to implement the Senior Insurance Managers Regime (SIMR) (which comes into effect in a staggered way on 1 January 2016 and 7 March 2016) and then presumably will be brought within scope of the SMCR by 2018, along with other authorised firms. This looks, on the face of it, like a double implementation burden. It is to be hoped that the regulators will find a way to minimise the additional work that insurers are required to do, over and above their SIMR implementation projects, in order to comply with SMCR.
- In our view, the abandonment of the presumption of responsibility will not make a great deal of difference in practice – anybody who has ever represented an individual in FCA enforcement proceedings knows that, in practice, the burden of proof feels as though it rests with the individual under the current regime. However, it represents a gesture towards principles of fairness and justice in regulatory enforcement process, which as defence lawyers we are pleased to see.
- Finally, we are pleased to see the abolition of the duty upon firms to report conduct rule breaches by their staff. This duty would have imposed a significant (and arguably unmanageable) burden upon firms, as well as exposing firms to significant legal risk as a result of their employment law responsibilities. We also had a concern that reviewing annual conduct rules returns form each and every authorised firm would have absorbed an enormous quantity of regulatory resource that could more usefully have been used for other purposes. This amendment to the regime will therefore benefit regulators and regulated alike.