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Final Rules on Accountability in Banking

FCA & PRA Final Rules on Accountability:

08 July 2015

Following the release of their final rules on variable pay and the issuance of a New Remuneration code last month, the Financial Conduct Authority and the Prudential Regulation Authority have now published the finalised rules on Strengthening Accountability in the Banking sector.

These new rules aim at improving individual accountability within the financial sector, thus implementing the Senior Managers Regime (SMR) and Certification Regime for Banks, Building Societies, Credit Institutions and PRA designated investment firms that are dual regulated.

There are three main aspects of the new accountability rules:

1. The Senior Managers Regime

This focuses on individuals that hold key roles and responsibilities within relevant firms

1. The Certification Regime (Fitness & Propriety)

This applies to staff providing investment advice who have the potential to cause significant harm to the firm or its customers

1. Conduct Rules

These set out the basic standards for behaviour and accountability by individuals within relevant firms.

What do I need to do now?

Affected firms will now need to start preparing for the implementation of these new regimes as both the Senior Managers Regime (SMR) and Certification Regime will come into force on 7 March 2016.

Senior Managers Regime: Preparations for the new rules will involve mapping out and allocating responsibilities as well as preparing Statements of Responsibilities for those individuals that carry out Senior Management Functions. Individuals that fall under the SMR will be required to be approved by the regulator, however it will also be a legal responsibility for the firm to ensure that they have the necessary procedures in place to assess the fitness and propriety of staff not only before requesting approval, but also at least once a year thereafter.

Certification Regime:  Firms will need to put in place procedures for assessing for themselves the fitness and propriety of staff, for which they will be accountable to the regulators. These procedures will be not only be important when firms are recruiting for roles that come within the Certification Regime but also when reassessing the fitness and propriety of staff that are subject to the regime each year.

Conduct Rules: Firms must ensure that staff who are subject to the new rules are aware of the conduct rules and how they apply to them. Individuals subject to either the Certification Regime or the Senior Managers Regime will be subject to Conduct Rules from the commencement of the new regime on 7 March 2016. Firms will have an additional year after this to  before the wider application of the Conduct Rules will apply to other staff on 7th March 2017.

Key Summary of the Final Rules:

The Senior Managers Regime (SMR) will ensure that senior managers can be held accountable for any misconduct that falls within their areas of responsibility, however the new Certification Regime and Conduct rules will aim to hold individuals working at all levels in banking to appropriate standards of conduct.

With the finalised rules now published for consultation, we highlight the following key points to those that are affected:

• The regulators have clarified the allocation of Prescribed Responsibilities to different categories of Senior Management Function (SMF) holders

There is now a single table covering both FCA and PRA Prescribed Responsibilities, further outlined by application to large or small firms (this can be found in Annex 4 of the FCA’s Consultation Paper 15/22).

• The regulators have clarified which individuals will need to be pre-approved for Significant Management Functions 1 to 17. SMF Function 18 has now been revised in name from Significant Responsiblity Function to Other Overall Responsibility Function.

This also helps to highlight that SMF18 is now a ‘catch-all’ function specifically to cover those individuals who are not approved to perform the other SMF functions 1-17.

• The regulator has informed that Statements of Responsibility must be a self-contained, stand alone document, not usually exceeding 300 words, however firms and their Senior Managers are able to create more detailed statements for Senior Managers if need be, to ensure that they adequately outline the scope of responsibilities both fully and accurately.
• Breaches of Conduct Rules in relation to other staff (i.e. not Senior Managers), need only be reported on an annual basis.
• CASS Managers have now had their Prescribed Responsibility altered from that detailed in the near-final rules so that it is now more encompassing. Thus, it CASS Managers now have overall responsibility for the firm’s compliance with CASS and not just for the firm’s policies and procedures for this area.

Transitional Arrangements & Next Steps for Implementation:

Those already approved under the existing Approved Persons Regime (e.g. currently holding Significant Influence Functions) and who will be moving to an equivalent Significant Management Function under the new regime will need to complete a Grandfathering notification and submit this to the regulator before their deadline early next year. Notifications will also require the submission of a firm responsibilities map and a Statement of Responsibilities for each individual being grandfathered.

Individuals who will perform significant harm functions (and which therefore fall within the Certification Regime) must be identified by firms by the Commencement of the new regime in March 2016, at which point they will become subject to the Conduct  Rules. Firms will, however, have one year from Commencement in which to issue certificates of fitness and propriety to these individuals. Firms will also have an additional year (to March 2017), for when all other individuals will become subject to the Conduct Rules:

Implementation Timeline:

• Autumn 2015: Electronic grandfathering forms will become available for submission

• 8th February 2016: Submission deadline for grandfathering notifications

• 7th March 2016: Commencement date of Senior Managers Regime and Certification Regime

• October 2016 (end of): First annual submission notifying breaches of the Conduct Rules required for staff included in the Certification Regime

• 7th March 2017: Application of Conduct Rules to staff who are not within the SMR or Certification Regime

• October 2017 (end of): First annual submission notifying breaches of the Conduct Rules including other staff who are not within the Senior Managers Regime or Certification Regime

What is a Senior Management Function?

With regards to a firm’s regulated activities a Senior Management Function (SMF) is:

A function that requires the person performing it to be responsible for managing one or more aspects of the firm’s affairs and those aspects involve, or might involve, a risk of serious consequences for the relevant firm, or for business, customers or other interests in the UK.

‘Managing’ could include taking  or participating in the taking of decisions on how a firm’s affairs should be run.

Therefore non-executive directors and directors in other group entities, that join in the decision making of a firm, could be specified as SMFs.