The Treasury is to extend the Senior Managers and Certification Regime currently being applied to banks, insurers and a limited range of other complex firms, across the remainder of the regulated sector. This will not happen until 2018 and, as yet, there is no further detail on how it will be applied. However, there is sufficient detail available on the objectives of the regime in the banking/insurance sector to consider how it could affect other firms when it is rolled out more widely.
The regime sets out to compel firms to have a tight grip on exactly what their internal structure is, what its different parts are doing and who is responsible for each of the areas of activity it undertakes. The firm has to map that out and formally allocate responsibilities to certain senior managers, who are then subject to approval by the FCA or the Prudential Regulation Authority (this replaces the approved persons regime for those senior managers).
It also introduces new conduct rules to replace the Statements of Principle for Approved Persons for Senior Managers.
The regime has caused some controversy within the banking/insurance sector. Initially it was proposed each senior manager responsible for an area of a firm’s business would be “presumed guilty” if something went wrong with that area. However, that has changed. Instead, senior managers have a statutory duty to take reasonable steps to prevent regulatory breaches in their areas of responsibility. It will still be up to the regulator to show a senior manager failed to take such steps and is guilty of misconduct.
The industry breathed a huge sigh of relief when this U-turn was announced. Not only would senior managers have been operating in a state of near-permanent paranoia, it could also have made firms overly cautious and unwieldy as they understandably focused on covering their backs at every turn, thus stifling innovation across the financial services sector.
The principle of a firm understanding exactly what its activities are and who is responsible cannot really be argued with. Any well run firm of any size should be doing that.
However, when a firm starts to map out responsibilities formally in this way it does start to focus the mind of the individuals involved. If it appears you are responsible for an area of your firm’s activities you are likely to want to make sure you have sufficient visibility and decision-making power to discharge your responsibilities correctly and avoid the serious personal sanctions under the Senior Managers and Certification Regime.
The “evil” it is designed to address is a perceived lack of personal accountability at senior management level, particularly in larger and more complex organisations. It is certainly true that during the financial crisis there were relatively few personal sanctions imposed on senior management. The regulators want that to change.
In a speech made in December, outgoing FCA chief executive Tracy McDermott outlined what it expected the regime to achieve: broadly, cultural change within regulated firms. As far as the regulator is concerned it is not just about having a framework that allows it to take enforcement action after the event. Rather, by focusing firms’ minds on what is expected of them and senior managers, the FCA expects them to make clearer and better decisions on an ongoing basis.
The FCA continues to seek the silver bullet – a framework of regulation that strikes the right balance between stymieing firms and leaving them “free to fly” with the best interests of clients in mind and the knowledge there will be no hiding place if they fail. This way it will be easier for the regulator to hold them to account but achieving it is no easy task.
It may be this cultural change sought by the FCA will have the most impact when the Senior Managers and Certification Regime is rolled out across the wider sector. For smaller firms it is difficult to see how much will change day-to-day. Such firms already think the FCA finds it easier to pursue individuals in firms like theirs than in the larger ones.
For larger and more complex organisations the practicalities of mapping out activities and individual responsibilities is likely to cause some short-term pain. However, if cultural change is achieved, then a stronger financial services sector should emerge. All firms should view that as a price worth paying.
Alan Hughes is partner at Foot Anstey LLP