Today, 7 March 2016, is the day when the Senior Managers and Certification Regime enters into force. Whilst we have already passed a numbers of staging posts along the way - and deadlines are set into next year and beyond for the Certification regime–today should mark the introduction of a culture shift in banking. Louise Hodges and Adrian Crawford examine this new focus on personal responsibility and individual accountability at the highest levels and what it might mean for Senior Managers and also mid-level employees under the Certification Regime.
Top down accountability
As Tracey McDermott (Acting CEO Financial Conduct Authority) said at the end of last year, the Senior Managers Regime emerged from a turbulent and“troubled time” for the financial services industry. She argued that the“ultimate ambition we all have is for the industry to serve its clients in a way that is innovative, vibrant, competitive and clean”, she explained that the Senior Managers regime was created against “a back-drop of a clear – and shared understanding - that… a culture of personal responsibility had to be embedded." We can expect that her successor, Prudential Regulatory Authority’s Andrew Bailey, will continue with this approach. Meeting the spirit of the new rules, not just the letter of the law, is now expected. “Firms must take ownership of the regime and embrace opportunities it presents for their business.”
The Senior Managers Regime applies to all individuals exercising a senior management function (SMF). In many cases non-executive directors will also be covered, for example if they chair any committee directly relevant to a firm’s safety or soundness. From 8 February 2016 firms have been required to ensure that each Senior Manager has a Statement of Responsibilities – setting out the areas for which they are personally accountable for. These need to have been plotted on a firm-wide Responsibilities Map. Firms had to ensure that all Senior Managers were pre-approved by the regulators before carrying out their roles. A “grandfathering” regime was put in place to ensure that existing Approved Persons can proceed directly into the regime without have to undergo a fresh-round of approval.
With a focus squarely on individual accountability at the top, it is important that firms fairly assess the responsibilities of their employees and that the exact extent of their remit is acknowledged and clearly defined so that an individual is not allocated responsibilities outside the scope of their duties, either in their individual statement of responsibility or the firm’s overall responsibilities map.
Senior managers will need to carefully examine the scope of the responsibilities allocated to them by the and to refute anything that is outside their actual responsibility or expertise – as serious consequences may ensue.
The Government has introduced a statutory duty on senior managers to take reasonable steps to prevent regulatory breaches in their areas of responsibility – the so-called “duty of responsibility”. (Though the original “presumption of responsibility” proposed by the FCA was pulled in favour of duty). In addition they also face criminal liability if they recklessly make a decision (or fail to prevent a decision) that leads to the failure of a bank. A new criminal offence introduced today under s.36 of the Financial Services (Banking Reform) Act 2013 (FSA 2013) The maximum custodial sentence for an individual found guilty of the new offence is imprisonment for 7 years or a fine (or both).
Certification regime – wider application of new conduct rules
Mid-level employees will be subject to the Certification Regime under which it will be the responsibility of their firm to certify that they are fit and proper on an on-going basis. An assessment by the firm that an individual is not fit and proper could have very serious implications for the individual from an employment and regulatory perspective.
The new conduct rules will be applicable to a much wider number of individuals working in financial services than under the current regime and are broader in scope.
The FCA published a policy paper on 2 March, Consequential changes to the Senior Managers Regime, which sets out how the FCA will implement changes to rules and forms for the commencement of the regime.
With the overall aim being to improve accountability for individuals working in financial services, the FCA will be carefully monitoring how firms implement the new regime and it will ultimately impact on their regulatory risk in the future.
For a full list of milestones for the Senior Managers and Certification Regime see here.