The current Significant Influence Functions (“SIF”) regime  will soon be replaced by a new Senior Managers regime  for Banks.  This month’s briefing considers what SIFs are  and key aspects of the approach towards them; what the  new Senior Managers regime is and who it applies to; its  enforcement; and its ramifications.

Since its inception, the FCA has shown a desire to “clean  up” the image of the financial services industry.  In particular it  has placed a greater emphasis on the accountability of senior  individuals in authorised firms.

Under the current Approved Persons regime, individuals wishing  to perform a controlled function - most of which are SIFs - at an  authorised UK firm need approval from either the FCA or PRA.

Bank staff will soon come under a new regime, derived from Part 4 of the Financial Services (Banking Reform) Act 2013 (the “Act”).   The changes follow on from the Parliamentary Commission on  Banking Standard’s 2013 report on the deficiencies of the current  system.

Significant Influence Functions

What are SIFs?

SIFs, as you might anticipate, are functions which the FCA has  identified where the person responsible for their performance can  exercise significant influence on the conduct of an authorised firm’s  affairs.  As such, those holding SIFs are typically in senior roles.

The table below sets out the SIFs, which are split into categories of  function.

Click here to view table

The regulators have to approve candidates for SIF roles.  Employers  are expected to carry out due diligence on candidates, but the  regulators will carry out their own investigations and routinely  interview candidates for substantial roles such as chairman, chief  executive, finance director and other important positions.

So, what is the current impact if you are deemed  responsible for a SIF?

  • “SIF Interview” by the FCA and/or PRA prior to  approval;
  • more intensive supervision by the FCA and/or PRA;
  • possible disciplinary proceedings for breached  regulatory requirements; and
  • you may be asked to attest to the accuracy of  information provided in response to FCA requests.

In practice, the SIFs system is currently linked to the Approved  Persons regime.  However changes are soon to be implemented  for Banks under the Senior Managers Regime, putting the focus  firmly on individual liability.

Senior Managers regime

Who will it apply to?

Under the Act, the new regime will apply to, broadly, Banks, Building  Societies and Credit Unions (referred to in this briefing simply as  “Banks”).  At the moment only UK-incorporated Banks will be affected  by the changes, although the Treasury may choose to extend the  system to non-UK-incorporated Banks.

For the relevant institutions, the current regime will be replaced  with:

  1. for junior employees, a licensing regime under which the  Bank will be responsible for certifying that the employee is a  fit and proper person to carry out his job; and
  2. a strengthened regime for the regulation of senior persons.

The regulators have not yet specified which roles will come under  category (b), but it is likely to refer only to the most senior individuals in  a Bank: those who carry responsibility for managing an aspect of the  Bank’s affairs that might involve a risk of serious consequences.

What will it mean for Senior Individuals in banks?

  1. You will need to provide a “statement of responsibilities”,  setting out your key future responsibilities, whenever you  apply for a senior management role;
  2. Before relinquishing your role you will be required to prepare  a “handover certificate” for your successor, clarifying key  aspects of your role;
  3. The Bank must notify the relevant regulator of any  disciplinary action taken against a senior person;
  4. The Bank must regularly check whether any grounds exist  which might cause the regulators to withdraw their approval  of a senior person;
  5. Employers are required to carry out formal vetting of  candidates for senior roles; and
  6. The regulators will have the power to make approvals of  senior persons subject to conditions or time limits.

How will it be enforced?

Significantly, the Act reverses the burden of proof; where there is a  contravention by the firm and the senior person is responsible for the  activities in relation to which the contravention occurred – it will be for  the senior person to prove that they are not guilty of misconduct and  that they took reasonable steps to avoid the contravention.

The Act also creates a new criminal offence of reckless misconduct  leading to the insolvency of a Bank. The sanctions for this are high: an  unlimited fine and/or up to seven years’ imprisonment.  However, we anticipate the regulators will mostly opt for disciplinary action as the  elements of the criminal offence may prove difficult to establish.

Key Business impacts

These changes, and in particular the increased risk of disciplinary  action, will add to the burden on senior managers.  It may even  discourage some individuals from taking up senior positions in Banks.

The new “statement of responsibilities” will be critical in light of the  new reversed burden of proof.  It will allocate key risks and activities to  individuals who will be accountable for these matters.  Care will need to  be taken in drafting these and updating them to reflect any changes to  the role and responsibilities.

It is likely that there will be important implications for a Bank’s  governance structure.  For example, senior persons may become  unwilling to delegate tasks which relate to their area of responsibility,  and the consciousness of their potential exposure may make it harder to  reach compromises and take collective decisions.

Conclusion

It is clear that the behaviour of senior individuals is coming under  increasing scrutiny, with personal responsibility now being the focus.The FCA is being provided with increasing powers and tools with which  to discipline those falling below the standards required.

Whilst senior individuals in Banks are currently the subject of the FCA’s  attentions, there have already been calls to apply the new regime,  or something similar to it, across the financial sector.  The impact of  revised rules is likely to be felt more widely in the future.