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Out-Law News | 07 Aug 2019 | 11:08 am | 3 min. read
The Financial Conduct Authority (FCA) has published the findings of a short review of the impact of the new rules on the banking sector based on interviews with bank staff, trade associations, the Banking Standards Board and regulators. The SMCR took effect in the banking sector in March 2016, was extended to insurers in December 2018 and will apply to smaller FCA solo-regulated firms from 9 December 2019.
The FCA said that most firms had "tak[en] actions to move away from basic rules-based compliance towards embedding the regime in the organisation". However, firms have not always sufficiently tailored training on the conduct rules to the roles of their own staff, and were "often unable to explain what a conduct breach looked like in the context of their business".
Naturally managers will want clarity on how they can comply with their duty to take reasonable steps to prevent regulatory contraventions without being unnecessarily cautious.
The regulator intends to increase its supervisory focus on the conduct rules following its review, as well as building on the links between the new regime and firm culture and governance. It noted that firms had "found it challenging" to find appropriate ways of measuring culture.
The senior managers' regime requires financial firms to assign responsibility for certain areas of the business to named senior individuals, who must be approved by the regulators, while the certification regime requires firms themselves to annually assess the fitness and propriety of staff in certain roles. The regime also incorporates additional conduct rules, applicable to all staff other than those in ancillary roles.
The FCA found that senior managers across all firms were clear on the accountability aspects of the new regime in the context of their jobs and day to day activities. They were less clear on their understanding of the meaning of the requirement to take 'reasonable steps' to avoid a breach in their area of the business, as provided for by the 'duty of responsibility' aspect of the rules; while some firms were using the management responsibilities map setting out senior managers' roles beyond what it was originally created for.
Financial services employment expert Jon Fisher of Pinsent Masons, the law firm behind Out-Law, said that the concerns raised by senior managers in their interviews with the regulator about their duty to take reasonable steps to prevent regulatory contraventions were "particularly topical".
"According to comments at a recent Treasury Select Committee meeting, both the PRA and the FCA are investigating a number of senior managers who may have breached this duty in connection with IT failures at financial services firms," he said.
"These investigations emphasise the degree to which individuals will be held accountable for failings which fall within their area of responsibility, and naturally managers will want clarity on how they can comply with their duty without being unnecessarily cautious. However, the FCA has declined to provide specific guidance in its report and has simply said that its expectation of senior managers is 'that they should be doing what they reasonably can to prevent misconduct'," he said.
Firms were less clear on the requirements for certified staff, according to the review. Most were unable to demonstrate the effectiveness of their approach to the 'fit and proper' assessment or how they were able to ensure consistency. There were potentially more significant weaknesses in the implementation of the conduct rules for other staff according to the FCA, which was concerned that firms had not "clearly mapped the conduct rules to their values" when providing staff with examples.
"The conduct rules are a critical foundation for firms' culture and the conduct of individuals," the FCA said in its report. "It is essential that staff understand the rules and how they apply to them."
Whilst it is understandable that much of the focus has been on senior managers, it is important not to lose sight of the fact that the conduct rules need to be embedded and tailored to each individual firm.
Every firm interviewed by the FCA as part of the review was "positive" about the concept of regulatory references, designed to prevent people with poor conduct records moving easily to new employers. However, the majority of respondents felt that the quality and timeliness of references had to be improved, while a lack of consistency in how firms recorded breaches of the conduct rules also created issues for firms.
Financial regulation expert Elizabeth Budd of Pinsent Masons, the law firm behind Out-Law, said that the review exercise was a "timely" one, which "contains some important pointers for solo regulated firms who enter the regime this December".
"In particular, whilst it is understandable that much of the focus has been on senior managers, it is important not to lose sight of the fact that the conduct rules need to be embedded and tailored to each individual firm and staff trained in how those rules apply to them personally rather than generically," she said.
15 Aug 2018
15 Apr 2016