HM Treasury has announced as part of a new bill introduced in the UK parliament, that the current proposals for rules requiring senior banking individuals to have more responsibility in designated areas within banks operating in the United Kingdom should be extended to all UK firms regulated by the Financial Conduct Authority (FCA) and/or the UK Prudential Regulation Authority (PRA) (i.e., the whole of the UK financial services industry).
The Senior Managers and Certification Regime (SM&CR) comes into effect in March 2016 for all British and overseas banks operating in the United Kindom. It requires that senior managers must have identified areas of responsibility and introduces a “duty of responsibility” for such individuals so that key individuals can be identified and penalized if they fail to meet such duty. The SM&CR for banks was introduced by the UK government as a reaction to the financial crisis and the associated public frustration that few individuals were prosecuted for failures at the banks despite the fact that key banks had to be bailed out using vast sums of public money. With the new SM&CR, the FCA or the PRA will be able to point to key individuals if management failures are identified in banks operating in the United Kingdom and, consequently, those individuals will need to ensure that their areas of responsibility are properly managed to avoid incurring liability.
HM Treasury announced that “it is now appropriate to extend the SM&CR more widely, creating a more rigorous, comprehensive and consistent approach across the financial services industry” and it will replace the current approved persons regime, which, scathingly, the UK’s Parliamentary Commission on Banking Standards commented was a “complex and confused mess” with a restricted scope and a lack of clarity as to which specific persons in regulated firms had responsibility for particular areas of the business. Instead, it is intended that the SM&CR will require the creation of “responsibilities maps,” causing senior individuals within all regulated firms to be more visible and thereby allow regulators to take direct action against them, if necessary.
HM Treasury’s paper announced that:
- The Senior Managers Regime will directly replace the approved persons regime in relation to persons performing the senior roles in a firm. These roles, known as Senior Management Functions (SMFs), will be specified in rules made by the PRA and FCA. Firms need to provide for individuals already approved (e.g. as CF1 directors, CF2 non-executive directors, CF3 chief executives and CF4 partners) to be “grandfathered” into relevant roles in the new SM&CR. Those regulated firms planning a new senior manager appointment, or a material change in role for currently approved individuals, will have to apply to the FCA or the PRA to get such persons approved. As with the current approved persons rules, individuals will not be permitted to take up an SMF role until the FCA or the PRA have given their written consent.
- The parallel Certification Regime will apply to individuals who are not carrying out SMFs but whose roles are deemed capable of causing significant harm to the firm or its customers. Such roles will almost certainly include all persons currently registered with the FCA and the PRA under the approved persons CF30 controlled function, which includes all customer-facing individuals such as advisors, as well as portfolio managers. The certification regime will require regulated firms themselves to assess the fitness and propriety of persons performing such key roles, and to formally certify this at least annually. Persons in these significant harm functions will likely also be notified by firms to the FCA and the PRA, although it will not be necessary to obtain the relevant regulator’s prior consent.
HM Treasury has stated that it anticipates that most current approved persons below senior management level are expected to be certified. It is not yet clear whether there will be any certification requirements for a firm’s general counsel, chief compliance officer (CF10 in the approved persons rules) or the money laundering reporting officer (CF11), or if such persons will be considered as senior managers requiring regulatory approval. However, what is clear is that the burden of proof will be on regulated firms to certify at least annually that applicable staff are (to use UK regulatory terminology) “fit and proper” to be able to perform their role. That will likely include comprehensive due diligence in obtaining references for new candidates, as well as ensuring that updated training is undertaken by relevant current employees. Any failings within a firm could lead to the relevant senior manager having personal liability and being penalized by the PRA or the FCA.
The SM&CR will come into operation for banks, building societies, credit unions and PRA-regulated investment firms on March 7, 2016, and such firms will have one year from this date to complete the certification of existing staff. It is intended that the SM&CR will apply to all other regulated UK firms beginning in 2018.
The HM Treasury paper on the extension of the SM&CR is available here.