On 18 December 2013, the Banking Reform Bill received Royal Assent as the Financial Services (Banking Reform) Act 2013 (the "Banking Reform Act").  In our November 2013 edition, we discussed certain key elements of the Bill, including the introduction of a Senior Persons regime and a Licensing regime for certain bank employees and increased regulatory enforcement powers against senior management. A number of important changes were incorporated into the Banking Reform Bill during the final round of Parliamentary debate, particularly in relation to the Licensing regime – now renamed the Certification regime.

Background

The new Licensing regime has proved to be one of the most controversial elements of the Banking Reform Act and was the subject of considerable Parliamentary debate. In its report, "Changing banking for good", published in June 2013, the Parliamentary Commission on Banking Standards (the "PCBS") advocated the replacement of the Approved Persons regime with a new Senior Persons and Licensing regime, centred on a revised set of Banking Standards Rules applicable to a wider population of bank employees than are covered by the Statement of Principles for Approved Persons. The PCBS envisaged that the Licensing regime would cover any bank employee whose actions or behaviour could seriously harm the bank, its reputation or its customers, thereby casting the net wider than for the Approved Persons regime. Further, the PCBS was keen to ensure that the inclusion of such individuals within the Licensing regime did not require pre-approval by regulatory authorities, but instead required banks to take responsibility for verifying the fitness and propriety of such staff on an on-going basis.

Amendments to the Licensing regime

Although the House of Commons incorporated elements of the PCBS's recommendations for the introduction of a Licensing regime into the Banking Reform Bill, the House of Lords raised concerns that the House of Commons' proposals did not go far enough. The House of Lords subsequently introduced several amendments on this topic which, confusingly, implied that all persons subject to the new Licensing regime would require pre-approval by the Financial Conduct Authority (the "FCA"). In December 2013, the House of Commons refused to accept these proposed amendments as they had the potential to create a very significant additional burden on the regulator and cut across the PCBS's recommendations. The House of Commons also suggested that the terminology used to describe the Licensing regime was causing confusion and opted to replace the word 'licensing' with 'certification'.

Andrew Tyrie, the Conservative MP responsible for chairing the PCBS, shared these concerns suggesting that a Licensing regime in the form proposed by the House of Lords would "risk recreating many of the problems we had with the [current Approved Persons Regime] – the box-ticking bureaucratic culture that we are trying to get rid of".

After considerable debate, the House of Commons and House of Lords agreed upon amendments to the Certification regime which require banks and Prudential Regulatory Authority ("PRA")-regulated investment firms to:

  • verify that employees in roles in which they could cause significant harm to the firm are verified (i) before taking on such role; and (ii) annually thereafter, to ensure that they are fit and proper to perform the role and issue a certificate lasting for 12 months to this effect;
  • maintain up to date records of employees who have been issued with certificates which could be made available to regulators when required; and
  • notify the appropriate regulator when they take formal disciplinary action (including a formal written warning, suspension or clawing back of remuneration) against senior employees, other persons approved by the regulators and other employees (not limited to those subject to the Certification regime).

Comment

The new rules relating to the Certification regime are set out at Sections 63E and 63F of the Financial Services and Markets Act 2000. However, as with the majority of the provisions in the Banking Reform Act, they are yet to come into force. The next key steps will be for the Government to finalise all of the relevant secondary legislation required under the Act.  The Government has confirmed that all such secondary legislation should be completed by the end of the current Parliament in May 2015. The PRA and FCA will also need to consult on various key issues including (i) the content of the new Banking Standards Rules; and (ii) whether the new Senior Persons regime and Certification regime should apply more widely to all financial services firms. It is understood that the FCA intends to implement the Senior Persons and Certification regime for banks by 2015. Increased focus on senior management and individual accountability within the financial services industry looks likely to remain a key area of focus for regulators.