27 Oct 2014

The Certification Regime: banks as regulators?


Regulatory litigation alert email

Tuesday 28 October 2014

In this second of our series of three alerts on the future of individual regulation in banking, Tony Woodcock and Alan Ward consider the implications of the proposed Certification Regime, which will make banks responsible for certifying employees' "fitness and propriety" to perform so-called "significant harm functions".

A copy of the first alert in this series, on the new Senior Managers Regime, can be viewed here >

On Tuesday 18 November we will be hosting a breakfast seminar – "Strengthening accountability in banking – a bridge too far?" Request an invitation and sign up for future regulatory litigation seminars here >

From Licensing to Certification

In its report of June 2013 – Changing Banking for Good – the Parliamentary Commission on Banking Standards ("PCBS") proposed the introduction of a "Licensing Regime" to address:

"the patchy and inadequate coverage of the Approved Persons Regime [and] the need for banks themselves to be held responsible for promoting and upholding standards for their employees"

Following Parliamentary debate, in December 2013, the "Licensing Regime" was recast as the Certification Regime, and incorporated into the Financial Services and Markets Act 2000 (at s.63E) by the Financial Services (Banking Reform) Act 2013.

In July this year, in a joint consultation paper, Strengthening Accountability in Banking: a new framework for individuals, the Prudential Regulation Authority ("PRA") and Financial Conduct Authority ("FCA") set out their proposals for how the Certification Regime will be applied.

Application of the Certification Regime

For affected financial institutions (principally banks) the new Certification Regime will represent the level of regulation below the Senior Managers Regime.

Whereas the Senior Managers Regime will focus responsibility on a narrower range of individuals than the current Significant Influence Functions, Certification will apply to broader range of individuals than are covered in the current Approved Persons Regime.

Certification will apply to individuals carrying out so-called "significant harm functions", that is, those who are “involved in aspects of a firm’s affairs that might involve a risk of significant harm to the firm or any of its customers”.

What are "Significant Harm" ("Certification") Functions?

The PRA proposes to specify "significant harm" functions (also referred to in the Consultation Paper as "certification functions") with reference to the definition of "material risk takers" in the EU Capital Requirements Directive and Regulation (604/2014) ("CRD IV").

In recognition of the fact that "the population of individuals who can pose a risk of significant harm to a firm's customers is wider than the population that can harm the firm itself", in addition to material risk takers (as defined in CRD IV), the FCA proposes to include in the Certification Regime:

  • "Specified Significant Harm Functions": which are those current Significant Influence Function ("SIF") roles that will not fall within Senior Management Functions ("SMFs").

    This will include CASS oversight (CF 10A) and the benchmark submission and administration (CF 40 and CF 50) functions, and also proprietary traders, (under CF 29);
  • Individuals in consumer-facing roles which are subject to qualification requirements (e.g. financial advisors, mortgage advisors);
  • Line managers of those carrying out "Significant Harm Functions"; and
  • Potentially other roles, identified by the firm, depending on the nature of its business.

Customer-facing staff (CF/30)

Importantly, the vast majority of the 25,395 individuals identified by the PCBS as performing Customer Dealing functions ("CF 30s") in banking will no longer require FCA approval.

However, this does not mean that current CF 30s will cease to be susceptible to regulatory scrutiny.

The regulators clearly envisage that many current CF 30s will be caught within the new Certification Regime, and thus be subject to assessment as to "fitness and propriety" by their firms.

Furthermore, current CF 30s falling outside of the Certification Regime, such as those not subject to qualification requirements, will still be subject to the new Conduct Rules, and thus remain liable to regulatory disciplinary and enforcement action.

Firms' assessment of fitness and propriety

The major impact of the Certification Regime will be the onus it places on firms, to both identify “significant harm functions”, and then certify, on an annual basis, that each individual carrying out such a role is a "fit and proper" person.

The FCA will expect firms to assess fitness and propriety with reference to the FCA FIT sourcebook and, in particular, the qualifications, training, competence and the personal characteristics required for the role in question.

The PRA proposes to make rules requiring that firms consider competence, knowledge, experience, qualifications, training and personal characteristics (defined by the proposed PRA rules to include "being of good repute and integrity") when making determinations as to fitness and propriety.

In keeping with the ethos of the new Senior Managers Regime, and the “presumption of responsibility”, the Senior Manager with responsibility for the Certification Regime will be personally liable for any shortcoming if the Regulator is not satisfied that "reasonable care" has been taken to ensure that Certification has been applied as required.

What next?

The immediate priority for relevant firms will be to identify all individuals who will be covered by the Certification Regime.

In the absence of further guidance (policy statements and technical papers are expected to be issued by both regulators at the end of 2014) relevant firms are likely to take a broad view of the applicability of Significant Harm / Certification Functions in any preliminary assessment.

After commencement, likely in summer 2015, relevant firms will have 12 months to issue individuals with a first certificate of fitness and propriety under the new regime.



Tony Woodcock

Tony Woodcock

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