I understand that, from 2018, the senior managers regime that already applies to UK banks and building societies will be extended to apply to investment firms and asset managers. What implications will the new regime have for me, as a senior manager at an asset management firm?
It is intended that the senior managers regime (SMR) that has applied to UK incorporated banks, building societies,credit unions and Prudential Regulation Authority (PRA)-designated investment firms in the UK since March 2016 will be extended to apply to investment firms, asset managers, mortgage brokers and consumer credit firms, to replace the Approved Persons Regime.
The proposal is to extend the regime to these firms, regulated by the Financial Conduct Authority (FCA), during 2018. It has not yet been announced when in 2018 this will happen.
The PRA is also introducing a senior insurance managers regime (SIMR) for insurance firms in 2018. However, this note is concerned with the extension of the SMR to the financial services firms listed above.
The new rules are designed to make senior managers in financial services more personally accountable for their firms' failures. This means that these individuals will have an increased risk of personal liability.
How will the new regime work?
The SMR focuses on individuals performing a senior management function (SMF). The FCA will approve individuals wishing to perform these SMFs before they can be appointed to their specific role.
The certification regime will apply to the employees of relevant firms who, in the light of their roles, could pose a risk of significant harm to the firm, or any of its customers. These individuals are not pre-approved by the FCA but must be certified by their firms that they are fit and proper for their roles on a continuing basis.
What are the key features of the new regime?
- Individual senior managers will be allocated specific "prescribed responsibilities" by their firm. For each senior manager, the firm must provide a form which is submitted to the regulator, recording precisely what the senior manager is responsible for.
- New key controlled functions must be allocated to individuals approved to perform such functions by the FCA. The firm must draw up a map to specify the responsibilities assigned to each SMF, and any other information that is relevant to the controlled function they perform.
- The new conduct rules will apply to senior managers and staff caught by the SMR and the certification regime. The conduct rules are a key feature of the regime, designed to hold individuals to account by means of disciplinary action at the hands of the FCA, including fines and suspension. The regulator can take disciplinary action up to six years from the date it becomes aware of the issue.
- A person will only be in breach of the conduct rules if they are personally culpable, which will arise if either:
- their conduct was deliberate
- their standard of conduct was below that which would be reasonable in all the circumstances
- There are fitness and propriety checks. The requirement to ensure that individuals are fit and proper is a continuing one which means having regular appraisals and performance reviews as well as additional checks if necessary, depending on the nature and level of an individual's responsibilities.
- New rules concerning regulatory references are also being introduced. The final rules are not yet available – the FCA and PRA intend to publish these in the summer.
What are the implications for senior managers?
The emphasis on personal accountability will increase the risk for senior managers of more investigations into possible misconduct which could have serious consequences for the individual concerned. The increased prospect of being held personally culpable will in turn lead to more whistle-blowing by senior managers, as well as stricter recordkeeping.
Senior managers will be keen to ensure not only that the firms they work for are in the best possible position to comply with the new rules, but also that they are protected from any personal liability.
Firms can help their managers from inadvertently breaching the rules by putting appropriate policies and procedures in place. In addition, senior managers may ask their employers for a contractual indemnity for any legal costs they may incur in defending themselves in any investigations by the regulator, or any subsequent proceedings, as a result of any alleged regulatory breach.