SMCR regulatory announcements and timelines

On 28 September 2016 the FCA and PRA published a package of updated rules, guidance and proposals:

Regulatory references

After delayed consultation the FCA and PRA published its policy statement for requirements on regulatory references. Part of the new SMCR regimes introduced in March 2016 the new rules require relevant firms to: request and provide employment references, using a set form containing information on candidates’ conduct and expressing a view on fitness and proprietary in respect of recruits to “relevant functions” and comply with the new rules for all candidates being recruited to senior management functions, senior insurance management functions, FCA-controlled functions or significant harm functions.

The new rules will come into force on 7 March 2017 to coincide with the implementation of the full certification regime and application of the Conduct Rules to the “other conduct staff” not just senior managers within banks and firms under SMCR. The regulators suggest that firms should start using the regulatory reference template before 7 March 2017 as a matter of good practice.

Buy-outs of variable remuneration

The PRA final rules on buy-outs of variable remuneration are stated to ensure that the buy-outs do not undermine existing rules on malus and clawback, so that employees are not able to avoid the proper consequences of their actions. Buy-outs are permitted but will be subject to clawback just as with regular bonuses.

Clawbacks from a previous employer will continue to apply after moving to a new employer despite the difficulties over the change in the relationship. The new PRA rules on buy-outs of variable remuneration come into force on 1 January 2017 and will apply to the buy-out of contracts concluded on or after this date.

Whistleblowing

The PRA and FCA are proposing to extend, where possible, existing whistleblowing rules to ensure people working at UK branches of overseas banks and insurers are aware of how to safely raise concerns they may have to the regulator and challenge poor practice and behaviour.

Duty of responsibility consultation

On 28 September the FCA set out a consultation paper with guidance for senior managers on the vexed question of their “duty of responsibility” which replaced the much criticized presumption of responsibility. The proposed guidance in CP16/26 sets out:

  • The circumstances in which the FCA will apply the duty of responsibility.
  • A non-exhaustive list of considerations that may be relevant when determining whether a senior manager was responsible for the management of any of a firm’s activities in relation to which a contravention of a relevant requirement by the firm occurred.
  • A non-exhaustive list of considerations the FCA will keep in mind when determining whether or not a senior manager took such steps as a person in their position could reasonably be expected to take to avoid the firm’s contravention occurring or continuing.

Conduct Rules to extend to NEDs

The FCA is also consulting on extending the conduct rules to all non-executive directors of banks and insurers.

General counsel as Senior Managers

The FCA also published a discussion paper on how those heading up the legal function in firms should be treated under the SMCR. The purpose is to clarify how and why the legal function is currently captured under the SMR and to consider whether it should continue to be part of it. The paper sets out reasons to exclude the head of legal function from the SMR which include matters relating to the function being advisory, legal professional privilege and the independence of the function. It also sets out the reasons to keep it in SMR which include matters of operational management of the function, privilege and the duty of responsibility and the fact that failings in the legal function can impact the wider business. The paper is open for comments until 9 January 2017.

FCA 6 month feedback statement on SMCR compliance so far

The FCA has published four feedback statements containing findings of its supervisory review of the statements of responsibilities and responsibilities maps supplied with grandfathering notifications for SMCR firms. The FCA is concerned that some firms may not have fully understood the regime or implemented it correctly. It summarises the main issues as follows:

  • In a few cases, it was not clear whether firms had identified sufficiently senior individuals to hold SMFs or particular responsibilities. Examples included where one SMF manager reports to another or where SMF managers do not appear to have sufficient seniority, resources or authority to discharge their responsibilities effectively.
  • In some firms’ submissions, it was not clear that all the business functions and activities of the firm had been allocated as overall responsibilities. Where responsibilities had been shared or divided, statements of responsibilities and responsibilities maps were not always clear enough to enable the FCA to understand how the sharing or division of responsibilities worked.
  • Responsibilities, as given in the statements of responsibilities and maps, were not always clear. Some firms did not provide enough detail in these documents to delineate the scope of an individual’s responsibilities. In other cases, they were not sufficiently focused on what an individual was actually responsible for.

In a few cases, statements of responsibilities were not consistent with management responsibilities maps. There was wide variation in the quality of management responsibilities maps. Some maps did not clearly set out senior managers’ responsibilities and many maps omitted other required information.
In a number of cases, maps did not give enough information around governance arrangements. This was particularly noticeable where firms are part of a larger group. These firms often provided quite limited information about how the firm’s management and governance connects to the group. These omissions could make it difficult for supervisors to understand how a firm is managed and governed in practice.

Diversity

As reported in our June FS newsletter, more than 70 FS firms have signed up to a charter intended to improve gender diversity in senior positions in the sector. Firms pledge to ensure that the pay packages of senior executives are linked to gender diversity measures. On 12 August the PRA wrote reminding all firms subject to the Capital Requirements Regulation that they are required to comply with PRA requirements to put in place a policy promoting diversity in the management body. They must also explain on their website how they comply and should consider diversity when recruiting and promoting to the management body. On 8 July the EBA published a report on benchmarking of diversity practices under CRDIV. This presents the EBA’s analysis of diversity data reported to it by competent authorities.

Gender pay gap reporting

The gender pay gap reporting information regulations were due to come into force in October but there has been a delay in producing the final regulations following the consultation in February this year. The regulations are now expected to come into force in April 2017 but it is unclear whether the timetable for the pay data snaphot of April 2017 and date for the publication of the report of April 2018 has also shifted. We consider it’s likely that the timetable will remain the same and therefore those in the sector should continue to prepare with the aim of being ready by April 2017 to take the first snapshot. In the meantime City Hall carried out its first gender pay audit which was published in July 2016. This revealed a gender pay gap of 4.6%, a difference in the average full-time hourly pay of £1.04.

We have teamed up with specialist HR consultancy to offer a package which allows you the option to outsource the work of conducting a gender pay audit. Please contact us if you would like more information on this. Gender Pay Reporting is a significant task for employers and we are really keen to help make the process easier.

Remuneration

On 28 July 2016 the European Commission published a report which concluded that CRD IV remuneration rules generally work well and have contributed to the overall objectives of curbing excessive risk-taking behaviour and better aligning remuneration with performance. However, in certain cases some of the rules may be too costly and burdensome to apply and therefore, it will conduct an impact assessment regarding a possible clarification of the rules and their application to the smallest and least complex institutions.

Tax and termination payments

The government has published its response to the consultation on how termination payments should be treated for the purposes of tax and National Insurance contributions (NICs) from 2018. The key changes are:

  • Making the tax and NICs consequences of all post-employment payments consistent. So all payments received in lieu of working any period of notice, whether contractual, or non-contractual, will be subject to income tax and Class 1 NICs.
  • Employer NICs will be payable on payments above £30,000 (which are currently only subject to income tax)
  • Abolishing the foreign service relief exemption for termination payments
  • Clarifying that the tax exemption for payments for injury does not apply in cases of payments for injury to feelings (in discrimination cases) and is only available where the injury relates to a condition that has a real impact on the employees ability to work.

The Government’s consultation response stresses that, in order to help those who lose their jobs, the first £30,000 of any termination payment (if not otherwise chargeable to tax) will remain exempt from income tax, and from employee NICs. Suggestions that the amount of the exemption should be reduced, or increased, did not meet with approval.

Practical consequences for settlement negotiations

First, employers will have to accept a rise in the cost of all terminations equal to the employers NICs payable (currently 13.8%). This could result in fewer settlements or the additional cost being recouped from the amount paid to employees.

Second, the only reason for not having the protection of a contractual PILON was the tax saving which if lost will mean that there is no reason not to have a PILON in all contracts. As PILONS reflect base salary and not the value of benefits it is again likely the value of any termination payment will be reduced.

Third, the loss of the Foreign Service relief will mean that many employees working for their employers abroad will lose what was a valuable benefit.

Finally, the loss of the tax relief for injury to feelings will make it more difficult to settle cases of discrimination as the tax fee payment is a valuable means of finding a compromise between the employer and the employee.

Key Dates

  • New whistleblowing rules for banks in force 7 September 2016
  • The whistleblowing rules are already in the Handbook on a non-binding basis for all firms.
  • The PRA will apply the new rules to buy-out contracts concluded on, or after 1 January 2017.
  • The FCA has published further consultation as to whether general counsel need to be senior managers with comments by 9 January 2017.
  • Consultation on the right proportionate approach for all firms is pencilled in for 2016. The Treasury has stated that firms not yet subject to the SMCR and whistleblowing regime will be subject to these no sooner than 2018.
  • The FCA and PRA have now published further proposals for new regulatory references. These changes apply to the whole sector. Firms’ deadline for first issuing certificates for individuals under the Certification Regime is 7 March 2017.
  • Application of the new Conduct Rules to the “other conduct staff” not just senior managers within banks and firms under SMCR on 7 March 2017.
  • The PRA proposes to extend, where possible, existing whistleblowing rules to apply to UK branches of non-EEA deposit takers and both EEA and non-EEA insurers, including reinsurers from September 2017.
  • The MiFID II Directive and Regulation impacting the structure and operation of EU financial markets and provide increased protection for investors put back to 2018.

We will comment further on these issues and how they affect the sector in our next Financial Services Employment Law newsletter.