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by Neil Herbert Director of HRComply,

Presumption of Responsibility
The FCA have issued final rules on the implementation of the Senior Managers Regime (SMR) which will apply from March 2016. These rules will operate in conjunction with the PRA’s final rules and will aim to capture those individuals with overall responsibility for the activities of a firm. A further consultation has been launched in relation to the much discussed Presumption of Responsibility, including the necessary steps a Senior Manager would need to take to rebut the presumption. The latest developments in this regard suggest an eleventh hour victory for bankers in that the presumption of guilt is to be dropped – however the ‘the letter and the spirit of the regime’ – which has responsibility at its centre remains the key focus – as Tracey McDermott the acting Chief Executive of the FCA has confirmed. Bankers now have a duty rather than a presumed responsibility for their actions.

Neil Herbert
Neil Herbert

The new rules will certainly up the ante for those firms affected – UK banks, building societies, credit unions and PRA designated investment firms. The regulators are already consulting on pushing these rules out to a broader swathe of the investment industry – potentially to capture asset managers and hedge funds. The implications therefore are wide ranging and profound: they will force firms to invest in and improve their governance and control processes, their T&C and Conduct policies and, most critically, their risk management and assessment processes. Those in Senior Management functions will need to sign up to and accept the new levels of responsibility and accountability. All staff will need to be assessed in terms of Competence, Conduct and their Fitness and Propriety to perform critical roles. Anyone holding real responsibility for operations, market risk and clients will be affected in some way. They will need to evidence that at any given point they have taken reasonable steps to control the business, ensure regulatory compliance and delegate effectively (with full oversight and knowledge of delegated tasks).

What the regulators mean by ‘reasonable steps’ could be open to some interpretation, but any firm or individual not taking this very seriously (and not adhering to rigorous control and assessment processes) should be very worried indeed.

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

In summary the key elements are:

  • The Senior Managers Regime Involves allocating and mapping out responsibilities and preparing Statements of Responsibilities for individuals carrying out Senior Management Functions (SMFs). SMF’s will continue to be pre-approved by regulators but firms will be legally required to ensure that they have procedures in place to assess fitness and propriety (including competence) before applying for approval and at least annually thereafter.
  • The Certification Regime applies to other staff who could pose a risk of significant harm to the firm or any of its customers (for example, staff who give investment advice or submit to benchmarks). The firm is solely responsible for ensuring the competence and fitness and propriety of these staff (for which they will be accountable to the regulators).

Both of these elements have profound implications for recruitment, for employment contracts and HR management of roles and their incumbents. They will require significant investment in systems that can define, control and assess the performance, competence and fitness and propriety of all affected staff.

  • The Conduct Rules set out a basic standard for behaviour that all those covered by the new regimes will be expected to meet. Firms’ preparations will need to include ensuring that staff who will be subject to the new rules are aware of the conduct rules and how they apply to them. Individuals subject to either the SMR or the Certification Regime will be subject to Conduct Rules from the commencement of the new regime on 7th March 2016, while firms will have a year after commencement to prepare for the wider application of the Conduct Rules to other staff.

The FCA has also consulted on amendments to the rules in regard to the certification of individuals involved in wholesale activity, such as traders. The change is designed to expand the certification regime to ensure that individuals working in wholesale markets in relevant firms who could pose significant harm to the firm, or its customers and markets, are subject to the new accountability rules.

Individuals will quite rightly expect their employer to provide clear guidance both contractually and in terms of MI and governance control processes as well as appropriate training for all – to ensure that they feel confident. They will also want some assurance on what support (both legal and parochial) they might expect in the event that things go awry. Much work here then for HR teams and their advisers.

Clear definitions of roles and responsibilities, the equipping of individuals holding such roles with the required knowledge and the thorough oversight of those functions under their control are essential. Some may feel nervous about this new presumed responsibility and the lack of clarity surrounding the definition of ‘reasonable steps’ and the consequences they face should they fall short. It is every employers’ responsibility to deal with and allay such concerns as much as possible. One critical way to do this is by providing appropriate oversight, internal management information and the ability to ‘interrogate and monitor that information.’

This last point is critical – and at the heart of it is assessment. Defining key benchmarks and KPI’s that are robustly monitored and tracked (with shortfalls quickly identified, remediation actions taken and evidence being recorded will all be critical. Putting in place clear lines of delegation and supervisory oversight is also critical. Roles must be clearly defined – policies, conduct rules and general responsibilities and indeed limitations must be enshrined contractually and attested to regularly. Training must be given that maintains competence and knowledge at appropriate levels and the outcomes of this training in the way staff deliver and behave has to be assessed and monitored. Defining such KPI’s and benchmarks is a challenge in itself, but the assessment and supervision of these is even more complex. The simple and much despised ‘how are you doing‘ once-a-year appraisal – instantly filed and then forgotten – simply won’t cut it. Those firms covered by RDR will already have much of this in place. Others (particularly in the wholesale sector) are less likely to. Significant cultural changes need to occur in many of these firms.

All of this presents a challenge. Cultures must change and attitudes must be challenged. Those individuals that don’t comply must be dealt with. Significant investment in process and indeed in systems to manage those processes must be made. HR and Compliance / T&C professional should be licking their lips in anticipation!

In one investment bank where I was head of HR some years ago the CEO used to enjoy referring to me as that bloke from ‘Health and Safety (partly because he probably couldn’t remember my name and partly because he considered HR to be a lowly – and irritating – function). How ironic then that the HR functions of all banks will now likely be taking a seat at the Executive table, along with their Compliance colleagues who really should already be there!