To fulfil their regulatory obligations, banks, building societies and credit unions will need to have robust systems and controls in place to deliver the regulatory objective of ensuring that individuals in senior positions have a strong sense of personal engagement with and responsibility for shortcomings and/or misconduct within their line of responsibility.

The Prudential Regulation Authority (“PRA”) and Financial Conduct Authority (“FCA”) have jointly consulted on the Senior Managers Regime (“SMR”) and Certification Regime (“CR”) imposed new requirements in respect of responsibilities maps which will provide the overall framework for the allocation of responsibilities to senior individuals.

The joint FCA and PRA consultation paper (FCA CP15/31 and PRA CP36/15) focuses on the implementation of those aspects of the Fair and Effective Market Review dealing with regulatory references. In this consultation the FCA and the PRA set out proposals for references for candidates applying for:

  • Senior management functions under the SMR
  • Significant harm functions under the CR
  • PRA senior insurance management functions under the Senior Insurance Managers Regime (SIMR)
  • FCA insurance controlled functions
  • Notified non-executive director roles and credit union NEDs
  • Key function holders within an insurer

Background

Fair and effective markets review

The Bank of England, HM Treasury and Financial Conduct Authority published the Fair and Effective Markets Review (“the Review”) final report on 10th June 2015. This report set out what the Review believes needs to be done to reinforce the confidence in the fairness and the effectiveness of the Fixed Income, Currency and Commodities (“FICC”) markets. The Review was established by the Chancellor of the Exchequer and Governor of the Bank of England in June 2014 to help to restore trust in those markets in the wake of a number of recent high profile abuses.

The lack of firm governance and controls, acceptable standards of market practice and a culture of impunity contributed to a process of ‘ethical drift’ leading to huge fines, reputational damage, diversion of management resources and the reining in of productive risk taking. The recommendations are aimed at restoring trust and fairness in the FICC markets, while boosting their overall effectiveness.

The Review contained the following broad policy recommendation: Raise standards, professionalism and accountability of individuals. A further articulation of this recommendation (within the context of potential expansion of the SMR and CR to FICC markets) was that “the FCA and the PRA should consult on a mandatory form for regulatory references, to help firms prevent the ‘recycling’ of individuals with poor conduct records between firms…”

Regulatory requirements

Under the high-level requirements, firms will need to consider the following:

  • Requesting regulatory references
    • The requirement to obtain regulatory references for individuals applying for Senior Management Functions, Certification Functions and Notified NEDs, for the preceding six years.
    • This requirement will apply irrespective of whether the candidates’ employment includes non-regulated firms or a firm within another group entity.
  • Modification of Prescribed responsibilities- the scope of responsibilities which are clarified so that PR(a) and (b) include responsibility for compliance with the rules relating to regulatory references (the wording of the responsibilities themselves will however, remain unchanged).
  • Standard format- The regulators have mandated the format of the information that need to be disclosed (Appendix 4 of the consultation paper). Where no information requiring disclosure exists, firms will be required to explicitly state this.
  • Specific disclosures are required in respect of:
    • certification or controlled function or Notified NED roles held and a summary of the role and its responsibilities;
    • details of any other roles performed for the firm
    • Breaches of the Code of Conduct, Approved Persons Regime or PRA Conduct rules
    • Details of any assessment that an individual was not fit & proper and the basis for and outcome of any disciplinary action
  • Updating regulatory references – The new rules will require firms to update previous references given in the past six years (provided from 7 March 2016 onwards) where they subsequently become aware of issues which would have affected the reference they provided. Late discovery of some misconduct or breach by an employee after they have left, is likely to be the most common trigger for updating.
  • Fettering discretion: 
    • Firms should remind themselves of the need to provide all information relevant to the fit and proper assessment of the hiring firm.  
    • legal undertakings or arrangements that have the consequence of omitting relevant information will be unenforceable vis a vis the regulatory reference rules.
  • Record retention- Firms will be required to retain records of ex-employees’ fit and proper information as well as any broader conduct related matters, for a period of six years following their departure from the firm.

Next Steps

The consultation remains open for two months with the intention that the final rules will be in place ahead of March 2016 commencement of the new regime.

View the FCA and PRA consultation Paper