17 Jan 2017

2017 - Preparing for the extension of the New Accountability Regime

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  • Senior Managers and Certification Regime due to replace the current Approved Persons Regime for 60,000 firms, across financial services, in 2018;

  • Current Approved Persons set to become Senior Managers or Certified Staff;

  • Firms will take over responsibility, from the regulator, for certifying the fitness and propriety of staff, on recruitment and annually thereafter.

The Senior Managers and Certification Regime ("SM&CR") – introduced for banks, building societies, PRA-designated investment firms and credit unions in March last year – is due to be extended to the whole financial services industry in 2018.

The advent of the new regime will fundamentally change the way in which individuals in financial services are regulated and held accountable.

Although the precise makeup of the extended SM&CR is to be the subject of consultation in the coming months, the Government has already confirmed that the architecture of the regime, as it currently applies to banks, will remain the same.

Accordingly, the key features of the SM&CR, as extended, will be as follows:

 

Senior Management Functions

Senior management will still require approval from the regulator prior to carrying our one or more Senior Management Functions (CEO, Directors, but also the Head of Compliance and MLRO).

Firms will need to submit robust documentation on the scope of these individuals’ responsibilities, as part of the SMR approval process.

The Presumption of Responsibility

Senior Managers will be subject to the new statutory requirement to take "reasonable steps" to prevent regulatory breaches in their areas of responsibility.

As regards the meaning of "reasonable steps": the FCA has recently conducted a consultation on how it will interpret and apply the presumption of responsibility, which closed on 9 January 2017. The consultation paper can be found here.

 

Certification Staff

Perhaps the most significant new requirement of the new regime is the obligation on firms to certify as "fit and proper" any individual who performs a function that could cause "significant harm" to the firm or its customers, both on recruitment and annually thereafter.

 

The Conduct Rules

The regulators will be empowered to create and apply enforceable Conduct Rules to any individual who can impact their respective statutory objectives.

The Conduct Rules, for banks, will apply to all employees, bar ancillary support staff (such as receptionists post room staff) from 7 March 2017.

Given that any breach of the Conduct Rules may result in regulatory enforcement action (i.e. they are enforceable), their broad application, to nearly all bank staff, represents a significant widening of the scope of potential regulatory liability.

It remains to be seen whether the Conduct Rules will be applied as widely in the extended regime.

 

Preparing for the new regime

For authorised firms, the SM&CR will necessitate a fundamental reconsideration of how responsibilities are delineated and allocated among senior management. Firms that plan any structural or personnel changes to management in the coming twelve to eighteen months may wish to have in mind the pending changes to the regulatory status and obligations of senior managers.

More fundamentally, a brand new, annual process will need to be created, for "certifying" the fitness and propriety of certification regime staff. Consideration might usefully be given at this juncture to which function will take the lead on certification (typically Human Resources, with Compliance, Legal and Senior Management input).

It is almost certain that the requirement on banks to deliver training on the new Conduct Rules will be extended to all authorised firms. Accordingly, forecasts for compliance, HR and training budgets might usefully reflect the resource implications of the transition to the SM&CR.

Stephenson Hawood LLP has advised a large number of financial institutions on the transition to the SM&CR.

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