HR professionals need to prepare for the rollout of accountability and conduct rules to the broader financial sector in 2018.
In 2016, the Financial Conduct Authority (FCA) introduced the senior managers regime to enhance senior-level accountability in the financial sector. The regime initially applied to banks, building societies, credit unions and the Prudential Regulation Authority (PRA) – designated investment firms. It was followed swiftly by the new certification regime for other employees at these firms, and the conduct regime. The FCA has now proposed to extend these rules across the financial sector to include insurers, consumer credit companies and all regulated firms.
The current regime
The senior managers regime requires businesses to map out the roles of their senior managers and to allocate responsibilities to them to make them individually accountable. There is 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’. These senior people need FCA approval before starting their roles.
The certification regime applies to mid-level employees and it is the responsibility of their firm to certify that they are fit and proper on an ongoing basis. An assessment by the company that an individual is not fit and proper could have very serious implications for the individual from an employment and regulatory perspective.
In addition, a set of conduct rules has been introduced for all individuals working in financial services at relevant authorised firms. The regulators (FCA and PRA) expect these employees to know the standards of behaviour and rules that apply to them, and employers must take all reasonable steps to verify that those individuals understand how the rules influence their professional activity.
At the end of the July, the FCA published a consultation exercise to extend these regimes to all companies regulated by the FCA and everyone performing financial services roles at those institutions.
It is proposed that the ‘core regime’ of the senior managers regime, the certification regime and conduct rules will apply to every firm. Then extra requirements – an ‘enhanced regime’ – will be imposed on a small number (less than 1 per cent) of solo-regulated companies whose “size, complexity and potential impact on consumers warrant more attention”. A reduced set of requirements will be developed for a group of firms under ‘limited scope’.
Some of the conduct rules only apply to senior managers and others to employees in the certification scheme as well. The FCA presents these as representing a “meaningful change in the standards of conduct we expect from those working in the industry”.
Firms subject to the new regime have until 2018 to get ready. They will need to take a number of steps to prepare, which include:
- Preparing a responsibilities map showing the scope of responsibility of each senior manager. Generally speaking there should be no areas of shared responsibility and all prescribed areas must be covered. This may involve changing reporting lines.
- Putting in place a statement of responsibilities for each senior manager to sign, setting out the areas they are accountable for.
- Reviewing appraisal and exit processes to ensure that they support the firm’s new responsibilities under the certification regime, including the need to certify at least once a year that employees are fit and proper.
- Reviewing processes relating to regulatory references.
- Considering what training is required to ensure that employees understand the standards of behaviour expected of them and comply with their responsibilities under the new regime.
Ten years after the financial crisis, it remains a key priority for the FCA to “promote the right cultures, behaviours and effective governance across the industry”. However, the onus is very much now on regulated financial firms themselves to support that effort, and the burden will fall as much on the HR department as compliance and other functions within the affected companies.