Introduction of the FCA’s new Accountability Regime continues apace. The one-year Transitional Period for issuing certificates to affected staff has just expired. All dual regulated investment firms have now met the requirements of the new regime, and FCA-regulated firms are now preparing for implementation beginning in 2018. This is a good opportunity to take stock, reminding ourselves of the new accountabilities required of firms, senior managers, line managers and certified staff, and the cultural change it is intended to create.
With the advantage of hindsight, we can now better reflect on the changes seen and the experiences we have had in assisting firms adapt to this new culture; common concerns expressed in 2015/16 will enhance the understanding and communication of the new regime in the new firms captured. This continues to be a great opportunity for L&D professionals to link with HR and Compliance functions in the successful implementation of cultural change.
The new Regime holds individuals working at all levels within relevant financial services firms to appropriate standards of conduct, thereby helping reduce conduct risk in the future. Senior managers are held to account for misconduct that falls within their area of responsibility, something that has happened all too infrequently in the past. Line managers and staff also have new accountabilities, which are discussed in this article.
To be ‘accountable’ means that one has power, and one is held answerable to others about the way in which one uses this power. Ensuring and increasing this accountability for those working within firms is the fundamental idea behind the new regulatory regime. Adapting to the rigours of this new regime will require significant cultural change for many firms.
A major change for firms is in the way in which fitness and propriety of managers and staff is assessed. In the past, the regulator assessed all individuals seeking to perform controlled functions within all authorised firms. This process would be carried out once upon initial appointment, and would not be repeated unless the individual sought permission to move to a different controlled function.
Fitness and propriety
The assessment of fitness and propriety revolves around three key areas:
- Honesty, integrity and reputation
- Competence and capability
- Financial soundness
Certification staff are accountable for remaining fit and proper, and following the Conduct Rules. Line managers are accountable for assessing the fitness and propriety of their certification staff, and ensuring that this process is properly documented. Line managers need training in making such an assessment, and the documentation of evidence of assessment for all three areas.
The new regime splits the task of assessing senior managers and certification staff between the regulator and firms and, in doing so, frees up significant resource for regulators to scrutinise senior managers much more closely. Senior managers are still assessed by the regulator.
The Certification Regime, however, puts the onus on line managers to assess the fitness and propriety of certification staff (employees in roles which could pose a risk of significant harm to the firm or any of its customers). The certificate, once issued, is valid for a maximum of 12 months (or until the employee transfers to a different certified role), at which point the line manager must repeat the assessment before issuing a new certificate. Certified staff remain accountable for ensuring they remain fit and proper once assessed as such.
Line managers must adapt to their new responsibilities, and for some this requires a significant cultural paradigm shift.
Although daunting for line managers, the process makes sense. Line managers, after all, are in the best position to carry out such assessments, but the additional burden of the proper documentation of senior manager responsibilities, line manager assessments and other areas of compliance with the new regime is challenging.
The new regime will give assurance that certified employees retain fitness and propriety on an ongoing basis. Line managers are personally accountable for the assessment of those they manage for issues that they are or ought to be aware of, and for properly documenting this assessment. Reassessment of fitness and propriety should be built into the performance management appraisal cycle of firms so that line managers can ensure this happens – with, of course, the ongoing support of their firm’s L&D, HR and Compliance functions.
Line managers must adapt to their new responsibilities, and for some this requires a significant cultural paradigm shift. Old expectations of the FCA, or their Compliance team, performing the task of assessing fitness and propriety for their staff need to be replaced by line managers themselves performing this work. Additionally, this is no longer a ‘set-piece exercise’ carried out on recruitment but an ongoing process requiring planning, supervision and communication on a real-time basis; a culture change for both managers and staff. This suggests a greater understanding of cultural change would be helpful.
Cultural change is about behavioural change. For the vast majority, the natural human disposition to being told to change is to resist. This occurs either through burying our heads in the sand hoping the change will go away or rebelling against the change. Bringing people on board is key to any sort of success. This involves being creative in terms of translating the vision into actionable behaviours that can be observed and recognised.
Although many change models might be useful here, at Fitch Learning we like Dr Kotter’s model of change. It has three clear stages; Planning, Enabling and Embedding.
During this stage the climate for change is created. This means that when the required changes are initiated they are far more likely to be accepted. Skip this stage and any new culture is unlikely to be robust enough to withstand future challenges to it. Carrying out the Planning stage requires the creation of a sense of urgency, getting people excited about the forthcoming regime and the benefits it offers. This stage also requires sponsorship from senior management, showing leadership in adopting the cultural change and developing strategic initiatives to deliver the vision for change.
It is during this stage that the change is communicated and action to change begins. If the planning stage has gone well this stage can be hugely exciting as employees get involved in making the vision relevant to themselves and their roles. The enabling stage requires clear and consistent communication of the vision for change, explaining to line managers and certification staff what the vision requires, and giving them the resources (training, time etc.) to deliver the changes required.
This is when the new culture gets cemented into the fabric of the organisation. During this stage, initial excitement around new ideas has died down and the newness fades. ‘Embedding’ requires building upon the momentum established in the Enabling stage by extending the scope of the annual review process for fitness and propriety towards other performance management related areas, and by communicating the success of the new regime to all those involved in it. Ultimately assessment of fitness and propriety should become linked to performance appraisals during which a portion of the discussion can be around how these values have been demonstrated over the year with specific examples, and identifying tasks for next year for retaining fitness and propriety.
Naturally, in order to evaluate the success of the cultural changes made in delivering the new Certification Regime, measures have to be designed of the success of those changes. Although firms should develop measures that are relevant to their structure and business model, suggestions could include the speed or accuracy of the certification process, the number of breaches of conduct rules or company policy by certified staff, and so on.
The Individual Accountability Regime, and the cultural changes necessary to deliver it, will bring benefits to firms, their managers and staff. Ongoing and more diligent assessment of fitness and propriety should bring about fairer recruitment and remuneration processes by allowing recognition of high quality staff. The new focus ought to provide clear avenues for staff and managers to discuss targets and concerns, enhancing communications and allowing more proactive risk management, by allowing the recognition of potential issues before they turn into major problems. These benefits will be maximised by firms whose L&D professionals liaise with Compliance and HR to ensure that the correct plan for meeting the needs of the Individual Accountability Regime is developed and communicated effectively throughout all levels of their firm.