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Changing banking for good? The new FCA and PRA senior managers and certification regime

On Wednesday, the top story on the front covers of many newspapers was regarding the record fines of $5.6bn (£3.6bn) imposed on five of the world's largest banks for manipulating foreign exchange or interest rates.  Scandal after scandal in the financial services industry (from PPI mis-selling to the attempted manipulation of LIBOR) has put trust and confidence in banks at an all-time low.  Whilst significant fines have been levied on the big financial institutions, individual accountability remains a major challenge across the industry.

The Parliamentary Commission on Banking Standards (PCBS)' recommendations

In June 2013, the Parliamentary Commission on Banking Standards (PCBS) published a report, "Changing Banking for Good"; in which it made proposals to enable trust to be restored in banking.  In its report, the PCBS criticised the existing Approved Persons regime, stating that "a more effective sanctions regime against individuals is essential for the restoration of trust in banking.  The current system is failing: enforcement action against Approved Persons at senior levels has been unusual despite multiple banking failures.  Regulators have rarely been able to penetrate an accountability firewall of collective responsibility in firms that prevents action against individuals."   The PCBS recommended a new framework for senior individuals, a licensing regime to apply to other bank staff, and the replacement of the Statements of Principles and the associated Codes of Conduct with a single set of Banking Standards Rules to apply to both senior persons and licensed bank staff, a breach of which would constitute grounds for enforcement action by the regulators.

The PCBS' recommendations have been welcomed by the Government, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) with the FCA and PRA consulting jointly in July 2014 on a new regulatory framework for individuals working in banking ("Strengthening accountability in banking: a new regulatory framework for individuals") using powers given to them in the Financial Services (Banking Reform Act) 2013.  In March 2015, the FCA published feedback on the decisions it had made as a result of the consultation (the PRA has published separate feedback) as well as a set of near-final rules for the new regime.  These are discussed briefly below.

The new Senior Managers' Regime (SMR)

A new SMR will replace the Significant Influence Function (SIF) element of the existing Approved Persons regime (APER), which will be abolished.  The SMR will cover a smaller number of individuals than APER and will be limited to the most senior individuals within relevant firms; those who carry out "senior management functions" (SMFs).  These individuals will be subject to regulatory approval.   Relevant firms will be required to allocate key responsibilities to these senior managers and each senior manager will have a "statement of responsibility" setting out the responsibilities that individual is accountable for.  

Management responsibilities maps

Relevant firms will be required to draw up, and keep up to date, comprehensive "management responsibilities maps" that describe their management and governance arrangements, including details of reporting lines and lines of responsibility and reasonable details about the persons who are part of those arrangements and their responsibilities.

Reverse Burden of Proof

Senior managers will face a presumption of responsibility for contraventions of relevant requirements by firms in areas for which they are responsible.   No personal culpability will be required.   It will be for the individual to prove that s/he took all reasonable steps to prevent the contravention by the firm occurring or continuing. 

The Certification Regime (CR)

There will no longer be a requirement for pre-approval of lower-level employees by the regulators.  Under the new CR, relevant firms will instead be required to assess (and reassess at least once a year) and certify the fitness and propriety of employees in certain positions (known as significant-harm functions) where the decisions they make could pose a significant harm to the bank, its reputation or its customers. 

New Conduct Rules

New rules will replace the existing Statements of Principle and Code of Practice for Approved Persons.  The new rules will apply to all bank employees, except for a specific list of "excepted employees", who carry out specific non-banking  functions, including for example receptionists, post-room staff, security guards and cleaners.  The Conduct Rules will therefore apply to a far wider group of individuals in banks.  Relevant firms will be required to ensure that all staff covered by the new rules are aware of them, receive training on them and how they apply to their roles.

The number of individuals who may be disciplined by the regulators through financial penalties will be significantly greater than under the current system and the circumstances in which firms must make a notification to the FCA or PRA when a rule has been contravened will be more onerous.Firms affected by these changes will need to make sure they are preparing to comply with the new rules by 7 March 2016. The FCA and PRA will publish Policy Statements, expected in the Summer, finalising the rules for the new regime. 

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