This morning the FCA and PRA published the long-awaited next batch of final rules, guidance and consultation in relation to the Senior Managers and Certification Regimes. Among the 500 or so pages, the following points struck us as worthy of comment:
- We at last have some guidance on how the regulators will use their new powers to approve Senior Managers subject to conditions or time limits. Our reading of this guidance suggests that these new powers will give flexibility to the regulators that is actually likely to benefit Senior Managers. For instance, where a Senior Manager is seeking approval for a new role, but is involved in an enforcement investigation (whether as a subject or a witness), the guidance clearly envisages that a time-limited approval would ordinarily be granted, pending the outcome of the investigation. This represents a dramatic improvement for individuals who are caught up in enforcement actions: currently, they are often effectively barred from moving to a new firm pending the outcome of the enforcement action, leading to significant injustice in many cases.
- Helpfully, the previously impenetrable provisions relating to the allocation of Prescribed Responsibilities to different categories of SMF holder have been clarified, with a single table covering both PRA and FCA Prescribed Responsibilities, broken down by application to large or small firms (at Annex 4 to the FCA’s CP 15/22).
- The FCA has attempted to clarify which individuals will need to be pre-approved as SMF 18 by changing the name of the function from “Significant Management Function” to “Other Overall Responsibility Function”. This is to emphasise that it is a catch-all function designed to cover only individuals who are not approved to perform other SMF functions.
- The regulators remain of the view that a Statement of Responsibility should be limited to 300 words. They have, however, stopped short of making the word limit mandatory – begging the question as to what the point of an “indicative” word limit is. The important point is that firms and their Senior Managers are free to take as many words as they need in order to frame the Senior Manager’s scope of responsibilities fully and accurately.
- However, the regulators have listened to firms’ concerns about the burden of having to report Conduct Rules breaches (for staff other than Senior Managers) on a quarterly basis. As a result, the requirement will now be to report such breaches annually. Whilst this is less burdensome, firms will need to ensure that they keep adequate records in case of subsequent follow-up by the regulators.
- There is some bad news for CASS managers. The Prescribed Responsibility that previously referred (in the near-final rules) to “Overall responsibility for the firm’s policies and procedures for compliance with CASS” has been amended to read “Overall responsibility for a firm’s compliance with CASS”. Somebody eagle-eyed at the FCA has spotted, and eliminated, some wriggle room here.
- The FCA is proposing (subject to consultation) that the Certification Regime be extended to cover two additional categories of staff: “Individuals dealing with clients” and “Individuals responsible for the deployment of trading algorithms”. These changes were foreshadowed in previous publications and make sense, but the first category in particular will greatly increase the compliance burden on some larger firms.
- As envisaged by last July’s original consultation papers, the Conduct Rules will not come into force for employees who are neither Certification Staff nor Senior Managers until March 2017. This gives firms a bit of breathing space to bed down the new regime without worrying about the swathe of people who are becoming regulated for the first time.
By contrast, we were disappointed not to see the following points explained in today’s papers:
- How far the Certification Regime extends to contractors. Under the new FSMA 2000 Section 63E(9), the definition of “employee” includes a person who “personally provides, or is under an obligation personally to provide, services to the firm under an arrangement between the firm and the person providing the services or another person; and is subject to (or to the right of) supervision, direction or control by the firm as to the manner in which those services are provided”. This definition would catch most contractors, meaning that firms will need to put performance management systems in place for their contractors who carry out significant harm functions, so that they can assess their fitness and propriety on an annual basis.
- Clarification regarding regulatory references. The Fair and Effective Markets Review final report last month had plenty to say about this, calling for a template regulatory reference to be agreed. The PRA and FCA are taking time to consult upon this recommendation, with further guidance not expected until shortly before commencement of the new regime in March 2016. It would have been much more efficient for firms to be able to amend their policies and procedures on references at the same time as amending their other HR policies in readiness for the new regime.
- How firms might mitigate or manage the conflicting duties that arise from being both judge and jury in relation to their employees’ fitness and propriety under the Certification Regime. In borderline cases, a firm must choose between risking certifying an individual as fit and proper where they may not be, and risking not certifying them, which may be career-ending for the individual and will almost certainly result in expensive employment litigation. A rock and a hard place doesn’t begin to describe the predicament firms will find themselves in on an annual basis.