HMT Announces Changes to the Senior Managers Regime – Holding Individuals to Account

Posted by Felicity Rowan on

What is the Senior Managers Regime?

In March 2016 the Senior Managers Regime ("SMR") will replace the Approved Persons Regime for all UK incorporated banks; building societies; credit unions and PRA designated investment firms. The regime aims to improve banking culture by ensuring that individuals within organisations are held personally accountable for regulatory breaches. HMT announced last month that it intended to extend the SMR to all financial firms.

Under the SMR, organisations will have to identify those individuals who carry out core Senior Management Functions ("SMFs"): a list of seventeen SMFs, including that of the Chief Executive and the Head of Internal Audit, has been produced. Senior managers will need to be approved by the relevant regulators. On top of this, organisations will have to allot overall Prescribed Responsibilities to individuals. Each senior manager will be provided with a "Statement of Responsibilities" which records exactly what he or she is responsible for. All the responsibilities must then be collated in a firm-wide "Responsibilities Map".

Recording individuals and their responsibilities is not the only way in which the SMR aims to hold individuals to account. The SMR also introduces a statutory duty of responsibility (rather than as originally envisaged a "presumption of responsibility"): where misconduct is identified, the senior manager responsible for that activity may be held liable unless they can show they took all reasonable steps to prevent a breach. It will be up to the regulator to prove the opposite is the case and establish liability.

What is the Certification Regime?

The SMR goes hand-in-hand with the introduction of a new Certification Regime ("CR"). Under the CR, individuals who are employed within a role where they could pose a risk of significant harm to the firm or its customers must be certified by the firm as being fit and proper to hold this role. Specific Rules of Conduct will also apply to individuals caught by the SMR and CR, and to other employees throughout the firm.

When and who is affected?

The SMR, CR and Rules of Conduct will be initially applied to the banking sector, with commencement on 7 March 2016, although a grace period will be given until 7 March 2017 for firms to complete their certifications of existing staff. During 2018, it is envisaged the new regimes will be extended across all sectors of the financial services industry.

The SMR has no territorial limitation, meaning responsibilities must be allocated even when the business area, transaction or function is taking place overseas. Furthermore, the regime applies to individual legal entities, rather than groups, meaning that each entity must identify individuals responsible for its own functions.

What should firms be doing now?

There will be a lot to do before the regimes come into force, including:

  • identifying senior managers in the firm;
  • preparing individual Statements of Responsibilities;
  • reviewing employment contracts to ensure there is no conflict with individual statements;
  • preparing the firm-wide Responsibilities Map;
  • carrying out certifications of existing individuals; and
  • communicating the changes to staff and providing appropriate training;
  • grandfathering notifications for the first limb of the SMR must be submitted to the FCA by 8 February 2016.

The individual statements will likely be the subject of much negotiation, possibly involving the provision of independent legal advice to both the individual and the firm. Furthermore, recruitment into senior management roles may become more onerous as individuals demand greater incentives to balance out the increased risk of their role.

If you require any further information on this important upcoming change, please contact Felicity Rowan.

About the Author

Specialising in financial services regulation, Felicity advises regulated firms and Approved Persons, private individuals and businesses on financial services issues.

Felicity Rowan
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