The Parliamentary Commission on Banking Standards’ (PCBS) 2013 report ‘Changing Banking for Good’ raised a number of issues surrounding professional standards within the UK banking sector. The PCBS identified a vital need to create a new regime for individuals working in banks to encourage greater transparency of responsibilities and enhanced corporate governance – with distinct individual responsibility.
The recommendation was the subject of the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) joint consultation paper FCA CP14/13/ PRA CP14/14: Strengthening Accountability in Banking: A New Regulatory Framework for Individuals, published on 30 July 2014. The Regulators proposed to introduce a new Senior Managers Regime (SMR), a Certification Regime and new conduct rules. The new regime is regarded as a milestone towards making individuals who hold key roles in relevant firms more risk-wise and accountable for their actions. The new rules represent a significant effort undertaken by the regulators to improve individual conduct and are to be applied to banks and insurers. The existing Approved Persons Regime will apply to other authorised firms although it has been indicated that the regime will, in due course, be applied to fund managers.
Final rules – PRA
On 23 March 2015, the PRA published policy statement PS3/15: Strengthening Individual Accountability in Banking and Insurance — Responses to CP14/14 and CP26/14, setting out final rules covering the majority of the proposals in CP14/14 on 23 March 2015. However, PS3/15 did not contain the Conduct Rules, nor did it contain the PRA’s Statement of Policy on conditional approvals or any supervisory statements. Please refer to Exchange – International Issue 25 – May 2015 [link to be inserted by marketing] for further information on PS3/15.
On 7 July 2015, the PRA published policy statement PS16/15: Strengthening Individual Accountability in Banking: Responses to CP14/14, CP28/14 and CP7/15, providing feedback and rules on aspects not dealt with in PS3/15 and feedback on proposals relating to non-executive directors. The PRA confirmed in this statement that they are not making any changes to the content or scope of its Conduct Rules and that it is proceeding with its original proposals in relation to its Statement of Policy on conditional approval.
PS16/15 also addressed several other issues which are summarised below.
Non-executive directors (NEDs)
The PRA stated that “The individual accountability of directors in scope of the SMR will be additional and complementary to the collective responsibilities shared by all directors under UK company law and well-established corporate governance principles, such as the FRC Code”. Therefore, the PRA’s view is that its regime is consistent with the principle of collective decision-making underpinning unitary boards.
NEDs and the section 36 offence
The PRA declined to publish hypothetical scenarios of where section 36 of the Financial Services (Banking Reform) Act 2013 (the new criminal offence of reckless misconduct leading to the failure of a bank or building society) might apply to NEDs, on the basis that the conditions are set out in the legislation.
Presumption of responsibility
The PRA clarified their approach to the “presumption of responsibility”. The PRA stated that although it cannot change the statutory test of “breach of a relevant requirement” by imposing a materiality or de minimis threshold, “the PRA is likely to take into account the nature and seriousness of the contravention in exercising its statutory powers”.
The PRA also published two further documents on 7 July 2015:
- Supervisory Statement SS28/15: Strengthening Individual Accountability in Banking which sets out the PRA’s expectations of how Relevant Firms should comply with the regulatory framework of the SMR, Certification Regime, Assessment of Fitness and Propriety, and Conduct Rules; and
- Statement of Policy: Conditions, Time Limits and Variations of Approval, which covers: time-limited approvals; probationary time limits; role-scale limited approvals (where the regulator links the duration of a Senior Manager’s approvals to certain identifiable upcoming milestones, such as a planned expansion of the firm by acquisition, after which the Senior Manager’s approvals are re-considered); performing an SMF after a time limit lapses; conditional approvals; failure to observe a condition; and variations of approval.
Final rules – FCA
Senior Managers Regime
- Firms will need to ensure that staff holding senior management functions (SMFs) are pre-approved by the regulators.
- The FCA said it was “extremely important” that firms also identify any other individuals who have overall responsibility for an activity, function or area. If an individual who has overall responsibility for an activity, function or area is not otherwise included in the list of SMFs (i.e. he or she does not hold any of functions SMF1 to SMF17), that person will need to be pre-approved for SMF18.
- A firm should not (in the normal course) split an FCA prescribed responsibility between several senior managers, with each only having responsibility for part, or for them to be allocated to two or more senior managers jointly. However, the FCA clarified that they “accept that there will be limited circumstances where sharing or dividing a responsibility may be appropriate, providing the firm can confirm that no gaps in the allocation of responsibilities arise as a result.”
The FCA clarified that a firm does not have to assign overall responsibility additionally for those areas where Prescribed Responsibilities exist and are assigned to senior managers.
The FCA also confirmed that the overall responsibility provisions do not apply to NEDs.
- The FCA amended its rules to make clear that where a person provides temporary cover for a person holding an SMF or a certified person without seeking approval or becoming certified – as permitted by the FCA rules for up to twelve and four weeks respectively – that person is automatically subject to the conduct rules during that period.
CP15/22 stipulates that firms are required to certify certain employees as being fit and proper to perform certain functions. These employees are identified by the Fourth Capital Requirements Directive as “material risk takers” for remuneration purposes, i.e. persons whose actions could have a material impact on the risk profile of the firm.
These rules set out a basic standard of behaviour that all persons covered by the new regimes will be expected to meet. Firms will have to ensure that staff who are subject to the new rules are aware of compliance requirements. Individuals subject to either the SMR or the CR will be subject to Conduct Rules from the commencement of the new regime on 7 March 2016.
Notwithstanding the clarity provided by CP15/22 and PS16/15, a number of issues remain outstanding.
The FCA noted in CP15/22 that it will provide feedback and final Handbook text in Autumn 2015 on the following matters:
- guidance on the presumption of responsibility;
- senior management responsibility regarding whistleblowing;
- other guidance relating to enforcement matters; and
- requiring firms to obtain regulatory references (in light of the Fair and Effective Markets Review’s (FEMR) recommendations).
The FCA also said that it will consider whether to publish additional guidance for use by banks and other relevant firms in relation to reporting breaches of conduct rules.
The PRA also noted in PS16/15 that it expects to amend its final rules (to take into account the FEMR’s June 2015 recommendations) on the requirement to require a reference from former employers before the SMR and Certification Regime come into force in March 2016.
Extension of new regimes to UK branches of non- EEA banks
On 13 August 2015, the FCA and the PRA published final and near-final rules on how they will apply the SMR and Certification Regime to UK branches of non-EEA banks. These rules are set out in the FCA’s feedback statement FS15/3: Strengthening Accountability in Banking: UK Branches of Foreign Banks and the PRA’s policy statement PS20/15: Strengthening Individual Accountability in Banking: UK Branches of Non-EEA Banks.
The regulators are not able to make all the final rules necessary to extend the new regimes until Parliament approves HM Treasury’s order extending the definition of “relevant authorised person” to incoming branches. HM Treasury laid out the new definition before Parliament on 22 July 2015, but Parliament has not yet given its approval. It is expected that approval will be given later in 2015 and therefore non-EEA branches should start preparing for implementation as soon as reasonably practicable. This is because all firms are required to submit a grandfathering notification to the regulators which sets out how the firm proposes to grandfather existing approved persons into the new regime by 8 February 2016.
The regulators confirmed that the SMR will only apply to UK deposit-taking institutions (banks, building societies, credit unions) and PRA-regulated investment firms who have permission to deal as principal. The intention is for the regime to capture the most senior individuals and decision makers within such institutions. However, the PRA also confirmed that it is “keen to minimise the risk of individuals being unnecessarily exposed to conflicting or overlapping regulatory regimes”.