New FCA Regime Will Emphasize Individual Accountability
This article by partner Rosemarie Paul and former counsel Kirsten Lapham was published by Law360 on June 14, 2019.
From Dec. 9, 2019, all Financial Conduct Authority solo-regulated firms, as well as European Economic Area and third-country branches will be subject to the Senior Managers and Certification Regime which will replace the current FCA Approved Persons Regime.
The SMCR has applied to banks, credit unions, building societies and dual-regulated investment businesses since March 2016 and in December will be extended to all remaining FC-authorized firms. It establishes a clear road map for enforcement action (potentially significant fines and other actions) against individuals through the introduction of increased administrative and regulatory requirements that firms are well advised to stay on top of.
The main aim of the SMCR is to make individuals more accountable for their conduct and competence, and will require staff at all levels to take personal responsibility for their actions. Firms and staff will therefore need to clearly understand and demonstrate where responsibility lies under the new regime. Individual accountability has been an FCA focus for some time; it was notably referenced as a key focus for the FCA in its 2017 asset management market review and in its 2018/2019 business plan. The SMCR is a significant part of the FCA’s efforts to increase personal accountability in this sector.
The regime forms a central part of U.K. regulators’ post-financial crisis drive to deter misconduct and while it has been somewhat overshadowed by events surrounding Brexit, SMCR will have a wide-ranging impact on the regulatory landscape, introducing changes relevant to all FCA-authorized financial services firms.
Changes Introduced by the SMCR
Under the SMCR, almost all staff (including those who are not senior managers) will be subject to the FCA’s conduct rules. As was the case under the APR, senior managers will continue to be approved by the FCA. Employees that are not senior managers but are carrying out functions that could pose a risk of significant harm to the firm or its customers however will now be assessed as fit and proper by the firm itself.
Firms will be required to provide the FCA with a clearer picture of individuals’ responsibilities, and to ascertain, certify and monitor the fitness and propriety of their staff on an ongoing basis, provide training to staff and hold their staff to high standards of personal conduct.
The FCA has increased responsibility for senior executives under the new regime and has emphasized that it will take action against firms and individuals for governance and cultural failings. Notably, the SMCR test of competence is one that gives the FCA discretion to apply its own standards on what constitute “reasonable steps.” The regulator has already demonstrated a willingness to act forcefully in response to breaches, issuing six figure fines to high profile individuals.
Crucially the SMCR will also apply to overseas-based personnel performing a senior management function for an FCA-authorized firm and certain persons based in the U.K. branch of an overseas firm. For example, in the context of a U.S. asset manager with an FCA authorized entity, those individuals categorized senior managers will need to be directly approved by the FCA and individuals who are ‘material risk-takers’ or who deal with U.K. clients may also need to be certified under the SMCR.
Experience has shown during the implementation phase of the SMCR to the banking sector that identifying staff who are in scope of the regime can take more time and resources than firms may initially envisage. Updating non-U.K. firms on the SMCR regime and agreeing scope of personal responsibilities can take time to negotiate. Practical issues such as obtaining criminal records checks for new staff being on boarded (or existing staff in the context of annual certification) may present difficulty for firms in assessing fitness and propriety where those individuals are based in countries where local laws do not permit the same level of criminal record checks as permitted in the United Kingdom.
Firms will need to consider global application of the rules and make suitable amendments to employee handbooks and relevant policies as well as global compliance manuals, to meet the requirements of SMCR. This will likely require involvement of human resources personnel and suitable senior managers will need to be involved in all key aspects of the implementation phase and continuing oversight of the regime.
What Should Firms Do?
Firms should take the following steps to ensure they meet their SMCR obligations:
- Act promptly to identify individuals who will act as senior managers and the responsibilities that will be assigned to those individuals. Time should be allowed within the implementation process for early and measured discussion of whether particular individuals will be required to be approved as senior managers and where the boundaries lie between individuals’ responsibilities. Prospective senior managers should be actively involved in the process of mapping and recording their responsibilities and wider governance arrangements.
- Review activities in all jurisdictions and the influence exerted by individuals in other group entities (who may sometimes be located overseas). Individuals based within other group entities (who may sometimes be located overseas) may exert sufficient influence over the affairs of U.K. entities to bring them within scope of the regime. The territorial reach of the regime can be wider than it might first appear.
- Identify staff members who need to be certified as fit and proper and put in place appropriate mechanisms to conduct certification assessments.
- Provide training to staff on their obligations under the FCA’s conduct rules and confirm at an early stage which senior manager will be responsible for training.
- Provide support to senior managers and others with understanding their ongoing responsibilities and the approaches they should take to minimizing their potential liability.