Out-Law Analysis | 05 Sep 2016 | 4:51 pm | 3 min. read
While it remains to be seen whether the SMR will achieve the desired regulatory outcomes and lead to a greater number of individuals being held to account, it is already clear that the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) will pursue individuals based on the criteria of the SMR.
The SMR came into force on 7 March 2016, promising to hold individuals working at all levels within relevant firms to appropriate standards of conduct and to ensure that senior managers were held to account for misconduct falling within their area of responsibility. Speaking as the regimes came into force, then-chancellor George Osborne said that UK financial firms now faced "some of the toughest sanctions in the world".
It is still too early to tell what these sanctions will look like. However, with the regime now in force senior managers should have been assigned a defined Senior Management Function (SMF), while their specific responsibilities should be clearly set out in a 'Statement of Responsibility'. Firms are also expected to have produced overall 'Management Responsibility Maps' describing the structure, size and complexity of the firm, including management and governance arrangements.
One of the industry's main reservations with the SMR was that those in senior positions would no longer be able to hide behind any defensive 'cloak' that they "weren't aware" or "weren't told" about any issues within their areas of responsibility at the time. By having statements of responsibilities and management responsibility maps, there will no longer be any doubt in the mind of the regulators whose door to knock on if there are any failings – and the FCA has been clear in its guidance that it will determine the extent of an individual's responsibilities with reference to these documents before it begins enforcement action.
The new rules mean many in senior positions now operate in an arena where their day to day practice and decision-making is open to scrutiny and challenge. The desirability of such a role became weakened in the face of the introduction of such personal accountability and culpability.
According to industry publication Futures and Options World, 35,000 people had been removed from the Financial Services Register between the introduction of the SMR and August 2016. There are now around 132,000 people on the register, down by one fifth on the number on the register before the SMR requirements were introduced in March.
On a more day to day basis, banks have reported an increased interest from employees around their responsibilities and the ownership of their roles, with many escalating concerns on a defensive basis. On a practical level, this puts senior managers' decisions in danger of becoming based on personal interest and liability, rather than applying a risk-based approach. Many are now even seeking independent legal advice when the firm is faced with an issue, in order to ensure that their individual positions are fully protected.
There is a clear risk that such defensive practice will only further worsen with the fast-approaching implementation of new whistleblowing requirements. These are due to come into force on 7 September 2016; and will require firms to appoint a senior manager as a 'whistleblowers' champion' and put internal whistleblowing arrangements in place to encourage the raising of concerns.
One question that remains unresolved is the relationship between a firm's general counsel and the SMR. The FCA intends to consult on whether an individual in charge of a firm's legal function requires approval under the SMR in response to uncertainty from firms. Of grave concern is that, if general counsel are captured by the SMR, they might be required or pressured by regulators to disclose information – and therefore waive legal professional privilege.
The certification regime, which requires firms to assess the fitness and propriety of staff in certain roles, has also meant significant changes for banks. At the operational and logistical level, banks themselves are now tasked with assessing staff fitness and propriety on an ongoing basis.
An assessment by the firm that an individual is not fit and proper could have serious implications for that individual from both an employment and regulatory perspective. New rules on regulatory references, which require firms looking to employ certain senior individuals to request a reference from that individual's previous employers over a five-year period, will add further burdens to banks – these requirements were delayed to allow further time for consultation, but final rules are due to be published shortly.
Michael Ruck and Elena Elia are financial regulation and enforcement experts at Pinsent Masons, the law firm behind Out-Law.com.