The FCA and PRA have issued a number of consultation, discussion and policy statements on SM&CR related matters. We have summarised the consultation on conduct rules for standard/notified NEDs and the feedback statements on findings following implementation of the regime in March this year.
Conduct Rules for Standard/Notified NEDs
Consultation (CP16/27) on applying the conduct rules to 'standard' or 'notified' NEDs - The proposal from the regulators is to extend the application of the conduct rules to standard NEDs so that all Board members are required to adhere to basic standards of good conduct. Given that the conduct rules will be applied to junior staff with effect from March 2017, it did not seem fair that standard NEDs were not included hence the proposal from the regulators.
The FCA does not propose to apply senior conduct rules 1 (control), 2 (compliance) and 3 (delegation) to standard/notified NEDs – this seems appropriate because standard NEDs do not have roles and responsibilities requiring compliance with those particular rules. However, they will be subject to senior conduct rule 4 (openness with regulators – and the requirement to disclose appropriately any information of which the FCA or PRA would reasonably expect notice”) and to all five individual conduct rules, which include integrity; due skill, care and diligence and treating customers fairly.
Interestingly the consultation makes reference to providing additional guidance on Conduct Rule 2 (due skill care and diligence) to clarify that it applies when acting as a member of the board or other governing body or its committees, this additional guidance seems to be a mechanism of emphasising the collective responsibility position for all directors within the governing body. This all again makes good sense in the context of a unitary Board.
The proposal is also designed to apply the Code of Conduct Sourcebook (COCON) to standard NEDs which has closed the gap for the regulators in being able to fine standard NEDs where appropriate. Since the regime was introduced whilst the regulators have been able to take enforcement action against a standard NED, they have not been able to fine them which is at odds with the MIFID II requirements of being able to impose a financial penalty against an institution’s management body. The proposals also mean that standard NED conduct rule breaches leading to disciplinary action will need to be notified to the regulator annually.
The proposals, if made final, would come into effect two months after the final rules are confirmed in Q2/Q3 2017, to allow time for training although our experience to date is that many firms have already proceeded on this basis and that the NEDs have already had training on the rules and their applicability to their roles.
The FCA has requested responses to the consultation by 9 January 2017 you can access the consultation here.
Supervisory quality checks
The FCA has provided feedback on how well or not so well firms have implemented aspects of the new regime to date particularly relating to statements of responsibilities and responsibility maps. The statements for the various institutions covering UK and overseas banks, building societies and credit unions are FS16/6 to FS 16/9. You can access the feedback statements here
There are some common themes running through the feedback and whilst there are nuances depending on the type of organisation ie overseas bank or building society, there is a degree of consistency in the “problem” areas and the feedback statements highlight some of the key regulatory rules, mainly in SYSC and SUP, that are relevant to the concerns raised.
FCA has noted that in some firms there has been a failure to allocate functions or responsibilities to sufficiently senior individuals particularly it seems in relation to the MLRO role and allocation of prescribed responsibility “d” - Overall responsibility for the firm’s policies and procedures for countering the risk that the firm might be used to further financial crime.
In addition FCA has also found unclear or even lack of allocation of business functions and activities; insufficient detail about individuals' actual responsibilities or that the statement of responsibility is not clear enough or does not reflect what is referred to in the responsibilities map in terms of governance arrangements. These are all issues which will frustrate the FCA in their ability to supervise those firms going forward.
An issue that received attention prior to implementation of the regime revolved around the sharing of responsibilities and generally the fact that the regulator did not necessarily favour sharing or at the very least the clarity around the sharing had to be very clear and unequivocal. The FCA has again referenced this point in their feedback statements and challenged firms where the sharing is opaque or how the firm can demonstrate that the sharing of the responsibility works in practice.
The overall quality of responsibilities maps was very varied and firms will have been contacted (or are being contacted) if the regulators had significant concerns. The key deficiencies seem to have been around gaps in coverage of the business operations, lack of information on committee structures and governance arrangements not being specific to the firm concerned.
What is perhaps a telling comment to focus attention for firms and relevant senior managers is the frequency of reference to prescribed responsibility “a” - Responsibility for the firm’s performance of its obligations under the senior management regime. Our observation on this reference is that if the responsibilities map and associated matters are not fit for purpose the individual holding “PRa” will be having some challenging questions to answer over the coming months as FCA begin their supervision of the regime’s implementation.
We are anticipating the regulators gearing up their supervisory techniques over the coming months so we consider it vitally important firms retain a state of readiness for a potential thematic visit and take the opportunity to revisit and test their operational effectiveness in implementing the regime.