On 3 October 2016, the FCA issued consultation paper CP16/26 on guidance on the “duty of responsibility” (the Duty) on senior managers (SMF Managers). CP16/26 identifies the factors that the FCA will take into consideration in determining whether to take disciplinary action against a senior manager where a firm has breached a regulatory requirement for which the manager had management responsibility.
Key points from the FCA's guidance include:
- addressing the formal considerations for regulatory action, the guidance is useful in that it informs the Duty’s substance and, more practically, the steps which a firm and SMF Manager will need to take to satisfy themselves that the manager has and continues to discharge the Duty;
- the guidance highlights the importance of an SMF manager’s statement of responsibility and the firm’s responsibilities map, as the FCA identify these as the starting point in determining whether the Duty applies;
- it also highlights the importance of the standard of the “competent manager” in determining whether the SMF Manager breached the Duty identifying eighteen considerations which firms designing SMF compliance and monitoring systems; and
- this raises the question of what firm’s should be doing by way of benchmarking their SMF managers’ standards of conduct against other firms.
Background: Duty of responsibility
In May 2016, Parliament introduced the Duty on manager in section 66A(5) of the FSMA.
This empowers the FCA to take action against an SMF Manager where:
- there has been (or continued to be) a contravention of a relevant requirement by the SMF manger’s firm;
- at the time of the contravention, the SMF Manager was responsible for the management of any of the firm’s activities in relation to which the contravention occurred; and
- the SMF Manager did not take such steps as a person in their position could reasonably be expected to take to avoid the contravention by the firm occurring (or continuing).
Given that Duty’s location in a section of FSMA dealing with the exercise of the FCA’s disciplinary powers, guidance on the Duty, CP16/26 (the Guidance) deals with the exercise of those powers in the FCA’s Decision Procedure and Penalties Manual. The guidance is relevant to limbs 1 and 2 which deal, respectively with:
- establishing whether a SMF Manager is responsible for the business where the contravention occurred, i.e. determining whether the Duty applies; and
- establishing whether the SMF Manager took sufficient steps to avoid the contravention, i.e. determining whether the SMF Manager breached the Duty.
The Guidance also confirms that where action is taken against an SMF Manager under section 66A(5),the onus will be on the FCA to show that the SMF Manager has been guilty of misconduct.
Although it has an immediate impact on banks, building societies and some insurance companies, the FCA indicates that it is relevant to those other firms, such as asset managers, to whom the regime is to be extended,
Determining whether the Duty applies – a subjective test
The Guidance sets out the following list of considerations for determining whether an SMF Manager was responsible for the management of any of the firm’s activities in relation to which a contravention of a relevant requirement by the firm occurred. Consistent with its usual approach to such matters, the FCA notes that the list is not exhaustive:
- The SMF Manager’s statement of responsibilities, including whether the SMF Manager was performing an executive or non-executive role;
- The firm’s management responsibilities map;
- How the firm operated, and how responsibilities were allocated in the firm in practice;
- How the firm operated, and how responsibilities in the firm, to be determined by reference to, among other things, minutes of meetings, emails, regulatory interviews, telephone recordings and organisational charts; and
- The relationship between the SMF Manager’s responsibilities and the responsibilities of other SMF Managers in the firm (including any joint responsibilities or matrix management structures).
Determining whether the SMF Manager breached the Duty – an objective test
The Guidance identifies the steps which a person in the position of the SMF Manager could reasonably be expected to take to avoid the firm’s contravention of a relevant requirement occurring (or continuing) as “such steps as a competent SMF Manager would have taken:
- at that time;
- in that specific individual’s position;
- with that individual’s role and responsibilities; and
- in all the circumstances.”
Putting meat on the bones – further considerations
The FCA identifies the following further considerations in the Guidance:
- the role and responsibilities of the SMF Manager, noting, for example, the difference between an SMF Manager in a non-executive role and one in an executive role;
- whether the SMF Manager exercised reasonable care when considering the information available to them;
- whether the SMF Manager reached a reasonable conclusion on which to act;
- the nature, scale and complexity of the firm’s business;
- the knowledge the SMF Manager had, or should have had, of regulatory concerns, if any, relating to their role and responsibilities;
- whether the SMF Manager took reasonable steps to ensure that the issues were dealt with in a timely and appropriate manner;
- whether the SMF Manager acted in accordance with their statutory, common law and other legal obligations;
- whether the SMF Manager took reasonable steps to ensure that any delegation of their responsibilities, where this was itself reasonable, was to an appropriate person with the necessary capacity, competence, knowledge, seniority and skill, and whether the SMF Manager took reasonable steps to oversee the discharge of the delegated responsibility effectively;
- whether the SMF Manager took reasonable steps to ensure that the reporting lines, whether in the UK or overseas, in relation to the firm’s activities for which they were responsible, were clear to staff and operated effectively;
- whether the SMF Manager took reasonable steps to satisfy themselves, on reasonable grounds, that, for the activities for which they were responsible, the firm had appropriate policies and procedures for reviewing the competence, knowledge, skills and performance of each individual member of staff to assess their suitability to fulfil their duties;
- whether the SMF Manager took reasonable steps to assess, on taking up each of their responsibilities, and monitor, where reasonable, the governance, operational and risk management arrangements in place for the firm’s activities for which they were responsible (including, where appropriate, corroborating, challenging and considering the wider implications of the information available to them), and whether they took reasonable steps to deal with any actual or suspected issues identified as a result in a timely and appropriate manner;
- whether the SMF Manager took reasonable steps to ensure an orderly transition where another SMF Manager under their oversight or responsibility was replaced in the performance of that function by someone else;
- whether the SMF Manager took reasonable steps to ensure an orderly transition when they were replaced in the performance of their function by someone else;
- whether the SMF Manager failed to take reasonable steps to understand and inform themselves about the firm’s activities for which they were responsible, including, but not limited to, whether they:
- failed to ensure adequate reporting or seek an adequate explanation of issues within a business area, whether from people within that business area, or elsewhere within or outside the firm, if they were not an expert in that area; or
- failed to maintain an appropriate level of understanding about an issue or a responsibility that they delegated to an individual or individuals; or
- failed to obtain independent, expert opinion where appropriate from within or outside the firm as appropriate; or
- permitted the expansion or restructuring of the business without reasonably assessing the potential risks; or
- inadequately monitored highly profitable transactions, business practices, unusual transactions, or individuals who contributed significantly to the profitability of a business area or who had significant influence over the operation of a business area.
- whether the SMF Manager took reasonable steps to ensure that, where they were involved in a collective decisions affecting the firm’s activities for which they were responsible, and it was reasonable for the decision to be taken collectively, they informed themselves of the relevant matters before taking part in the decisions, and exercised reasonable care, skill and diligence in contributing to it;
- whether the SMF Manager took reasonable steps to follow the firm’s procedures, where this was itself appropriate;
- how long the SMF manger had been in role with their responsibilities and whether there was an orderly transition and handover when they took up the role and responsibilities;
- whether the SMF Manager took reasonable steps to implement (either personally or through a compliance department or other departments) adequate and appropriate systems and controls to comply with the relevant requirements and standards of the regulatory system for the activities of the firm.