On 7 March 2016 the Senior Managers and Certification Regime (SM&CR) was introduced to improve accountability in the financial services sector. The SM&CR applies to UK banks, building societies, credit unions, PRA designated investment firms and branches of foreign banks operating in the UK. It consists of three elements: the Senior Managers Regime (SMR), the Certification Regime and the Conduct Rules, all of which have an impact on the employment of individuals. It is proposed to extend the regime to all firms regulated or authorised under the Financial Services and Markets Act 2000, although the exact date for that implementation has not been finalised.
Senior Managers Regime
Under the SM&CR relevant firms must allocate responsibilities to senior managers to ensure there is an individual senior manager accountable for every aspect of regulated activity within relevant firms. Any application for approval as a senior manager must be accompanied by a statement of responsibility (SOR), which sets out the areas of a firms regulated activities that each senior manager is responsible for. The Senior Manager will be responsible for their particular area, and will have to show that they took all reasonable steps to prevent any issues from arising.
New rules on regulatory references also apply to firms covered by the SM&CR. The purpose of the regulatory references is to make it harder for senior staff with poor conduct records to be “recycled” between firms, so that, where a firm is proposing to hire a candidate for certain senior management roles a reference must be sought from all the candidate’s employers over the preceding six-year period. A firm who receives a request for a reference must respond within six weeks using a mandatory template. The reference need only disclose matters where a firm has concluded particular points – and this would not cover matters where disciplinary issues have come to light but a firm has not yet reached a conclusion or where the individual has resigned prior to the completion of the investigation or disciplinary process. This will also affect the terms of any settlement agreement as employers are prohibited from entering into an agreement with the employee about the information in the regulatory reference. Employers who are regulated also have a duty to update regulatory references within six years of the employee leaving the business where they become aware of information which would have affected the original drafting.
The Certification Regime extends the application of Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA) to individuals whose involvement in the firm’s activities might involve a risk of significant harm to the firm or its customers. The relevant firm must undertake the assessment of fitness and propriety prior to appointment to the role and therefore, any interview questions should be sufficiently probing to establish fitness and propriety. The assessment should also be made an annual basis and this should therefore form the basis for any employment appraisal.
The Conduct Rules are an important component of the regime to increase the accountability of senior individuals. The rules will now apply directly to almost all staff within the relevant firm. Only those staff who are considered ancillary staff (i.e. whose role is not specific to the financial services business of the firm, for example, catering staff) will not be covered. The rules are intended to provide a framework against which the regulators in the UK (the FCA and the PRA) can judge an individual’s actions as part of the general supervision of a firm. Relevant firms must notify the regulators when they have taken formal disciplinary action against a person for breach of the conduct rules. This will require the employer to ensure that the disciplinary and regulatory requirements combine. Firms must also ensure that all staff who are subject to the rules are aware of them and how they apply to their jobs. This includes delivering suitable training to provide a broad understanding of all of the rules and a deeper understanding of the practical application of the specific rules which are relevant to the employee’s individual work.
Finally, the regulators have introduced new whistleblowing rules which apply to the Financial Services sector. The aim of the rules is to encourage an environment in which individuals feel able to raise concerns about practices without fear of detriment or dismissal. The rules apply to UK regulated banks, building societies and credit unions with total gross assets exceeding £250 million, PRA designated investment firms, and insurance and re-insurance firms regulated by the PRA. In relation to other regulated entities, the rules will act as non-binding guidance. In summary the whistleblowing rules require that relevant firms should:
- put internal whistleblowing arrangements in place;
- inform their UK based employees that they can blow the whistle to the FCA or the PRA regardless of whether they have made an internal report;
- require its appointed representatives and tied agents to tell their UK based employees about the FCA whistleblowing service;
- include a specified passage in settlement agreements clarifying that nothing in the agreement prevents an employee or ex-employee from making a protected disclosure;
- allocate responsibility for whistleblowing under the SMR to a “whistleblowers’ champion”;
- inform the FCA if it loses an employment tribunal case with a whistleblower; and
- present a report on whistleblowing to its board at least annually.