Andy Bennett, Head of Regulatory Training at Fitch Learning, assesses the implications of the FCA/PRA consultation paper on individual accountability in the banking industry.
Article Summary: Key Facts
| Existing regime | New regime |
| Controlled functions divided into Significant Influence Functions (SIFs) and Customer-Dealing Functions | Two distinct categories of Senior Management Functions (SMFs) and Significant Harm Functions (SHFs) |
| Fitness and propriety assessed for SIFs by the regulator | Fitness and propriety assessed for SMFs by the regulator for SMFs |
| Fitness and propriety assessed for Customer-Dealing functions by the regulator | Fitness and propriety assessed for SHFs by the firm. Verification sent to the regulator every year. Regulator issues a certificate |
| Statements of Principle govern the conduct of approved persons only | Code of Conduct governs the conduct of all relevant employees |
Background
The financial crisis of 2008-2009 and the scandals that ensued led to the creation of the Parliamentary Commission on Banking Standards (PCBS). The PCBS was appointed by both Houses of Parliament to consider and report on professional standards and culture of the UK banking sector. There was specific focus on regulatory and competition investigations into the LIBOR rate-setting process. The PCBS was also charged with looking into the lessons to be learned about corporate governance, transparency and conflicts of interest, and their implications for regulation and for Government policy. Having done so, they were invited to make recommendations for legislative and other action, publishing their findings in “Changing Banking for Good”.
The findings of the PCBS cover five main themes:
- Making individual responsibility in banking a reality, especially at the most senior levels;
- Reforming governance within banks to reinforce each bank’s responsibility for its own safety and soundness and for the maintenance of standards;
- Creating better functioning and more diverse banking markets in order to empower consumers and provide greater discipline on banks to raise standards;
- Reinforcing the responsibilities of regulators in the exercise of judgement in deploying their current and proposed new powers; and
- Specifying the responsibilities of the Government and of future Governments and Parliaments.
The areas covered in this paper focus on the Financial Conduct Authority and the Prudential Regulation Authority’s response to the first two themes: individual responsibility and reforming governance.
Strengthening accountability in banking: a new regulatory framework for individuals (FCA CP14/13 – PRA CP 14/14)
On the 30th July 2014, the FCA and PRA (“the regulators”) published their response to the PCBS recommendation on individual responsibility. In this consultation paper, the regulators set out their proposed new regimes for those employees of financial services firms who could pose significant risk to the firm itself or the customers of the firm. It is introduced with a statement of joint intent, “We – the FCA and the PRA – believe that holding individuals to account is a key component of effective regulation”.
The new regime is set to replace the existing approved person regime with a more focused and rigorous regime.
The existing approved person regime
The existing regime links with the Senior Management Arrangement, Systems and Controls (SYSC) sourcebook of the regulators handbook. SYSC requires that all relevant firms apportion significant responsibilities to specific senior managers. These senior managers are charged with establishing and maintaining proportionate systems and controls within the firm. The fitness and propriety of these senior managers – and others – is then tested under the approved person regime.
Under S59 of the Financial Services and Markets Act 2000 (FSMA2000), “An authorised person must take reasonable care to ensure that no person performs a controlled function … unless the Authority approves the performance [of the controlled function]by that person….” The regulators dictate the roles that are considered controlled function in the Supervision (SUP) sourcebook of the handbook. SUP10A and SUP10B broadly divide the controlled functions into Governing, Required, Systems and controls, Significant management, and Customer-dealing functions. Firms must then ensure that all approved persons follow the regulators’ Statements of Principle for Approved Persons.
the new Code of Conduct will apply to all employees that could pose a risk to the FCA objectives.
Since the creation of the twin-peaks regulation in 2013, the responsibility of approval of these roles has been divided between the two regulators. The new regime will continue to create a clear distinction between the responsibilities of the two regulators in respect of approval.
The proposed regime
The new regime will split the existing approved person regime into two key sections; firstly, a senior managers regime and secondly, a certification regime.
The senior managers regime
The senior managers regime will be administered along the lines of the existing approved person regime. The regulators will prescribe the responsibilities that need to be apportioned; these will include both executive and non-executive functions. The regulators will also assess the fitness and propriety of the people holding these responsibilities. For dual-regulated firms, the responsibility for approving senior managers will be divided between the two regulators.
| FCA Senior Management Functions for relevant firms | |
| Executive | Non-executive |
| Executive director | Non-executive director |
| Significant responsibility senior manager* | Chair of nominations committee |
| Money laundering reporting | |
| Compliance oversight | |
| PRA Senior Management Functions for relevant firms except small credit unions | |
| Executive | Non-executive |
| Chief executive function | Chairman |
| Chief finance function | Chair of risk committee |
| Chief risk function | Chair of audit committee |
| Head of internal audit | Chair of remuneration committee |
| Head of key business area | Senior independent director |
| Group entity senior manager | |
The certification regime
The certification regime will focus more generally on other roles not included in the regulators prescribed senior management function list, but could cause significant risk to the firm and/or its customers. These roles are referred to as significant harm functions. This category will include all those individuals currently performing a significant influence function (SIF) that do not fall within the scope of senior management function. It will also include customer-facing roles that are subject to qualification requirements, such as retail advisers. In addition, anyone who supervises or manages a certified person and does not fall within the senior management function will also need to be certified.
A key change here is that the firm will be responsible for assessing all certified individuals, and this certification will need to be done on an annual basis. In order to make the task of certification less onerous on the firm, a single assessment of the fitness and propriety of the affected employees can be made and a single certificate can cover all relevant persons. However, the regulators emphasise that the assessment needs to be specific to the role that they perform; any change in role or any new person within a relevant role will require an immediate assessment.
Conduct rules
The Statements of Principle for Approved Persons is also to be replaced by a Code of Conduct. Where the statements of principle applied only to approved persons, the new Code of Conduct will apply to all employees that could pose a risk to the FCA objectives. These objectives are: ensuring relevant markets function well; customer protection; market integrity; and effective competition. Exceptions to “all employees” will apply for those whose role would be fundamentally the same if they worked for a non-financial firm, for example receptionist, cleaners, catering staff, etc.
As the current statements of principle are divided into statements for all controlled functions and statements for significant influence functions, the new code of conduct will be divided into a first tier – applicable to all staff – and a second tier – applicable to senior managers. The regulators intend to include detailed guidance on how they envisage this code of conduct to be applied.
| Combined FCA and PRA Code of Conduct |
| First tier – Individual Conduct Rules |
| Rule 1: You must act with integrity. |
| Rule 2: You must act with due skill, care and intelligence. |
| Rule 3: You must be open and co-operative with the FCA and PRA and other regulators. |
| Rule 4: You must pay due regard to the interests of customers and treat them fairly. |
| Rule 5: You must observe proper standards of market conduct. |
| Second tier – Senior Manager Conduct Rules |
| SM1: You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively. |
| SM2: You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system. |
| SM3: You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively. |
| SM4: You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice. |
Conclusion
The statement being made by the regulators through this new regime is clear. In allowing the firm to certify a large proportion of its own staff that would currently be assessed by the regulators, they free-up more resources to take a more focused and rigorous approach to the assessment and monitoring of senior managers. Specifically, the regulators have stated that competency of the senior managers will be focused more directly on the competencies relevant to the role.
Through this new regime, the regulators address the issue of enhanced accountability for senior managers. They also address the issue of reforming governance by allowing firms to take responsibility for their own certification regime.
