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12 Aug 2015

Strengthening accountability in banking: the next piece of the jigsaw


Regulatory litigation alert email

On 3 March 2015 the Treasury announced that the overhaul of the UK's Approved Persons framework (comprising the Senior Managers, Certification and Conduct Rule regimes) should be extended to UK branches of foreign banks ('incoming branches') as well as UK banks.

There promptly followed a joint PRA/FCA consultation on the proposed extension, the results of and response to which were published today by the FCA in Feedback Statement 15/3 "Strengthening accountability in banking: UK branches of foreign banks - Feedback on FCA CP15/10" ("FS15/3")

Senior Managers Highlights

Non-EEA Branches
The FCA will apply two functions to non-EEA branches i.e. UK branches of non-EEA banks. The first is that of Executive Director (SMF3). This will operate in a similar way to the existing Director controlled function (CF1) for non-EEA branches. For non-EEA branches this will be limited to individuals performing a senior management function in relation to the branch only, rather than in relation to the whole firm. The second is Other Local Responsibility (SMF22). This is a new function which will broadly operate in a similar way to the Other Overall Responsibility (SMF18) function for UK banks. It will capture any individuals that have local responsibility for any of the activities, business areas or management function of the branch, but are not approved to perform any other SMF in relation to the branch.

FS15/3 also provides that non-EEA branches must ensure that responsibility for compliance oversight is allocated to an appropriate senior manager of the branch even if there is no requirement to have an individual approved to the specific role of SMF16 (Compliance Oversight).

EEA Branches
EEA branches will be required to have an individual approved to the EEA Branch Senior Manager (EBSM) function. This function (SMF21) will apply to "individuals responsible for a significant business unit including any of the activities set out in the function's definition (e.g. accepting deposits)." Although the term "significant" is highly subjective, the FCA suggests that in determining whether an individual should be SMF21 one should consider (among other factors) the risk profile and P&L of the business unit.

Certification Highlights

To recap, the Certification regime will apply to staff that carry out 'significant harm functions' i.e. activities that might involve a risk of significant harm to the firm or any of its customers. In respect of UK banks and non-EEA branches, the regime will apply to individuals that are either based in the UK or dealing with a client in the UK. For EEA branches, the regime will only apply to individuals based in the UK.

FS15/3 clarifies the scope of certain significant harm functions in respect of EEA branches. For example, the "Significant Management" function will apply only in relation to the branch. This will prevent the function from capturing individuals in the wider firm that are not involved with the activities of the branch.

The vexed question of regulatory references, however, will be consulted on separately. Nevertheless, FS15/3 confirms that incoming branches will not be required to carry out criminal records checks for individuals applying for certified roles; albeit this does not diminish the responsibility on firms to ensure the fitness and propriety of their staff.

Conduct Rules Highlights

Individuals in EEA branches will be subject to the Conduct Rules, but only in relation to matters that are within the UK's scope of responsibility as the host state regulator. If a particular conduct rule covers a matter reserved to the bank's home member state, neither the rule nor the obligation to report breaches of the rule will apply. This mirrors the existing framework under APER. If, however, breaches come to the FCA's attention it will notify the home state regulator where appropriate.

In respect of non-EEA branches, the Conduct Rules apply to individuals that are based in the UK or are dealing with a UK client (but please note that the Conduct Rules apply to senior managers without territorial limitation).

Following consultation, the FCA has maintained the seven day time limit for notifying actual or suspected breaches of the Conduct Rules by senior managers (whether in respect of UK banks or incoming branches).


By 8 February 2016 all firms must submit a grandfathering notification that informs the PRA and FCA of how the firm proposes to grandfather existing approved persons into the new regime (which due to come into force on 7 March 2016).

Following the extension of the regime to incoming branches, a separate order allowing incoming branches to grandfather existing approved persons into senior management functions is expected to be made later this year. The FCA's rules will not be made final until all relevant legislation has been passed. It would nevertheless be wise for incoming branches to begin their preparations now.



Tony Woodcock

Tony Woodcock

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