Employment and Pensions E-Bulletin

 

The PRA and FCA are currently in the final stages of implementing a new "Senior Managers and Certification Regime" which applies to a limited number of firms including banks, building societies, credit unions and large investment firms. The main objective of this new regime is to increase individual accountability for certain senior individuals at firms.

In October last year the government decided to extend the Senior Managers and Certification Regime to all financial services firms and that it would replace the current Approved Persons Regime. The aim of the extension is to enhance personal responsibility for senior managers across the sector rather than in just banking.

Whilst there are not yet any detailed rules in relation to the extended regime (implementation of the newly extended regime is intended to come into operation during 2018) it is expected that the key features of the regime will be applied to the sector in the same way as they have been in the banking industry. The Treasury have noted that the principle of proportionality will be particularly important to the extension of the regime as it will need to reflect the diverse business models operating in the market and the size and complexity of firms.

Whilst it is not yet clear exactly how the regime will be implemented across the remainder of the regulated sector, it is likely that the key features of the regime that have been used in the banking and insurance sector will be carried across:

SMR

This element of the new regime requires a firm to consider the regulated activities it carries out and allocate responsibility for those activities to an individual senior manager. The purpose being to ensure that for any given activity of the firm it is clear which senior manager is accountable. As noted this will replace the Approved Person Regime.

As with the approved persons regime an individual who will be performing a Senior Manager Function must obtain pre-approval from the relevant regulator to do so and firms are required to assess the fitness and propriety of individuals holding a Senior Manager Function.

The current regime introduces criminal offences for unreasonable behaviour by senior managers which cause a financial institution to fail – this could well be carried across into the extended regime.

Certification

This element of the new regime applies to staff (other than senior managers) who could, as a result of the position they hold, cause significant harm to their firm or its customers. These individuals are not required to be pre-approved by the regulators to perform their role but must have been certified by the firm as fit and proper to perform the role. – this puts the onus on the firm to satisfy itself of the individual's fitness and properness without the regulator automatically confirming or checking that assessment by the firm.

Conduct rules

These rules underpin both the SMR and the Certification regime and provide a set of high level principles which staff are expected to adhere to. For Senior Managers these rules will replace the statements of principle under the Approved Person Regime.

In summary, the extension of the regime will increase:

  1. The personal responsibility of senior managers
  2. The range of individuals subject to a formal fitness and propriety assessment by firms  
  3. The range of staff to whom conduct rules will apply

The purpose of the regime is to make it easier for the regulators to hold individuals accountable for failures at firms. It is perceived (particularly during the financial crisis) that many senior individuals were not held to account for the actions of firms and the implementation of this regime is designed to address that regulatory failing. Once details of the extended regime start to emerge, it will therefore be very important for both firms and individuals to engage with and understand the regime before implementation.

For further information please contact Alan Hughes, partner on +44 (0)1392 685266 or email alan.hughes@footanstey.com