Scope of the new regime
The new senior managers’ regime applies to individuals performing a senior management function (SMF). An SMF is a function that requires the person performing it to be responsible for managing one or more aspects of the relevant firm’s affairs (so far as relating to regulated activities) and those aspects involve, or might involve, a risk of serious consequences for the relevant firm, or for business or other interests in the UK.
FSMA, as amended by the Act, states that, for definition purposes of an SMF, ‘managing’ can include taking decisions or participating in the taking of decisions on how a relevant firm’s affairs should be run. Therefore non-executive directors and directors in other group entities, that participate in the taking of decisions about the relevant firm, can be specified as SMFs.
The Act gives the regulators the power to decide which functions are SMFs, and introduces into FSMA several provisions designed to promote a clear allocation of responsibilities to senior managers and enhance their individual accountability. These include:
- a requirement that applications for approval as a senior manager of a relevant firm contain, or be accompanied by, a statement setting out the aspects of the affairs of which the person concerned will be responsible for managing, in performing the function. These ‘Statements of Responsibilities’ must be resubmitted whenever there is a ‘significant change’ in the senior manager’s responsibilities;
- new statutory powers for regulators to impose conditions and time limits on approvals of senior managers, both at the initial approval stage and subsequently through a variation of approval;
- potential accountability of senior managers in the event that a relevant firm contravenes a requirement in the area that the senior manager is responsible for. The senior manager could be held accountable if they are unable to satisfy the regulators that they have taken ‘reasonable steps’ to prevent or stop the contravention (the ‘Presumption of Responsibility’); and
- potential criminal liability under a new offence relating to a reckless decision causing a financial institution to fail
PRA approach to SMFs
In the consultation paper the PRA identifies the following functions that it considers meet the statutory definition of an SMF and which could directly affect a relevant firm’s safety and soundness:
|PRA Senior Management Functions for relevant firms except small credit unions|
|Chief Executive function||Chairman|
|Chief Finance function||Chair of the Risk Committee|
|Chief Risk function||Chair of the Audit Committee|
|Head of Internal Audit||Chair of the Remuneration Committee|
|Head of key business area||Senior Independent Director|
|Group Entity Senior Manager|
|PRA Senior Management Functions for small credit unions|
|Credit union Senior Manager|
Under the PRA senior management regime every relevant firm other than a small credit union will be required to have one or more persons performing a Chief Executive, Chief Finance and Chairman SMF.
Many of the SMFs will be familiar to authorised firms. However, the SMF of “Head of key business area” is new. The PRA states that this would be for individuals managing a business area or division so large, in relative terms to the size of the relevant firm, that it could jeopardise its safety and soundness, and so substantial in absolute terms that it warrants an SMF even though the senior manager performing it may report to the Chief Executive or another SMF.
The PRA acknowledges that individuals could perform more than one SMF. However, in such cases the relevant firm would need to apply for separate approvals for each even though these may be combined in a single application.
The PRA expects relevant firms to put forward for each SMF the most senior individual responsible for managing or overseeing that aspect of the relevant firm’s affairs although it does recognise that it may be possible for a relevant firm to have more than one individual approved to perform the same SMF. In such circumstances the PRA will expect each individual to be accountable for all responsibilities conferred by that SMF.
Parent companies and groups
In relation to senior managers based in a parent or group entity the PRA proposes to continue with the position under the approved persons’ regime. Under this regime an individual who is employed in the parent or other group entity of a relevant firm but who is deemed via an arrangement with the relevant firm to exercise significant influence over its affairs is subject to approval. The PRA also notes that there may also be situations where an individual based outside a relevant firm is performing a SMF directly on behalf of the firm. In such instances regulatory approval will be required. The PRA gives the example where a group holding company whose board includes a group remuneration committee which takes decisions on behalf of all group entities. In such circumstances the chair of the group remuneration committee would require approval as chair of the remuneration committee of the relevant firm.
The PRA proposes to make rules setting out a limited set of ‘Prescribed Responsibilities” that relevant firms (except small credit unions) will be required to allocate among their senior managers. These are set out below. It is worth noting that the PRA states that these are in addition to the “responsibilities inherent in the definition of each PRA SMF”.
|PRA Prescribed Responsibilities|
|1. Performance by the firm of its obligations under the senior management regime, including implementation and oversight|
|2. Performance by the firm of its obligations under the Certification Rules|
|3. Compliance with the rules relating to the firm’s management responsibilities map|
|4. The induction, training and professional development of all persons performing senior management functions on behalf of the firm and all members of the firm’s management body|
|5. Ensuring and overseeing the integrity and independence of the internal audit function in accordance with SYSC 6.2 (Internal audit)|
|6. Ensuring and overseeing the integrity and independence of the compliance function in accordance with SYSC 6.1 (Compliance)|
|7. Ensuring and overseeing the integrity and independence of the risk function in accordance with SYSC 7.1.22 R (Risk control)|
|8. Ensuring and overseeing the integrity, independence and effectiveness of the firm’s policies and procedures on whistleblowing and for ensuring staff who raise concerns are protected from detrimental treatment|
|9. Allocation of all prescribed responsibilities|
|10. Leading the development of the firm’s culture and standards in relation to the carrying on of its business and the behaviours of its staff|
|11. Embedding the firm’s culture and standards in relation to the carrying on of its business and the behaviours of its staff in the day-to-day management of the firm|
|12. The development and maintenance of the firm’s business model|
|13. Management of the allocation and maintenance of capital, funding and liquidity|
|14. The firm’s treasury management functions|
|15. The production and integrity of the firm’s financial information and its regulatory reporting in respect of its regulated activities|
|16. The firm’s recovery plan and resolution pack and overseeing the internal processes regarding their governance|
|17. If the firm carries out proprietary trading, the firm’s proprietary trading activities|
|18. If the firm does not have an individual performing the Chief Risk function, overseeing and demonstrating that the risk management policies and procedures which the firm has adopted in accordance with SYSC 7.1.2 R to SYSC 7.1.5 R satisfy the requirements of those rules and are consistently effective in accordance with SYSC 4.1.1R|
19. If the firm outsources its internal audit function, taking reasonable steps to ensure that every person involved in the performance of the service is independent from the persons who perform external audit, including
- supervision and management of the work of outsourced internal auditors and
- management of potential conflicts of interest between the provision of external audit and internal audit services
20. If the firm does not have a person who performs the Senior Independent Director function,
- carrying out oversight of the person who performs the Chairman function; and
- oversight of the adequacy and quality of the resources available to the office of that person to enable the role to be fulfilled within the firm
FCA approach to SMFs
The FCA proposes to create additional SMFs so that:
- all board members are covered, i.e. executive and non-executive directors not otherwise specified by the PRA;
- certain functions currently classed as ‘required functions’ under APER, namely money laundering reporting and compliance oversight functions;
- the chair of the nominations committee, where a relevant firm is required under existing requirements to have a nominations committee or chooses to do; and
- individuals in a role which is not specified as an SMF by either the FCA or the PRA, but who have ‘overall responsibility’ for one or more key functions, or identified risks, listed by the FCA in its rules (these will be known as Significant Responsibility SMFs).
The FCA states that the roles of executive director and non-executive director, money laundering reporting and compliance oversight SMFs are broadly similar as currently defined in the FCA Handbook.
The FCA states that the test that should be applied when determining whether an individual performs a Significant Responsibility SMF is whether the board has delegated to them overall responsibility for a particular function and they are primarily responsible for reporting to the board in respect of that function. To provide assistance, the FCA has provided a list of key functions for which it thinks are likely to apply to most relevant firms (set out below). It is important to stress that firms will not necessarily be expected to appoint a single individual as an SMF for each function in the list.
|Key functions (excludes control functions)|
|1. Establishing and operating systems and controls in relation to financial crime|
|2. Safekeeping and administration of assets of clients|
|3. Payment services|
|5. Investment management|
|6. Financial or investment advice|
|7. Mortgage advice|
|8. Corporate investments|
|9. Wholesale sales|
|10. Retail sales|
|11. First line quality assurance of sales|
|12. Trading for clients|
|13. Investment research|
|14. Origination/syndication and underwriting|
|15. Retail lending decisions|
|16. Wholesale lending decisions|
|17. Design and manufacturing of products intended for wholesale customers|
|18. Design and manufacture of products intended for retail customers|
|19. Production and distribution of marketing materials and communications|
|20. Customer service|
|21. Customer complaints handling|
|22. Collection and recovering amounts owed to a firm by its customers/Dealing with customers in arrears|
|23. Middle office|
|24. The firm’s information technology|
|25. Business continuity|
|26. Human resources|
|27. Incentive schemes for the firm’s staff|
Like the PRA senior manager regime the FCA states that individuals seeking to perform more than one FCA SMF will be required to seek separate approval for each. However, the FCA states that the exception to this is the Significant Responsibility SMF “which is only required where the person performing a key function or functions is not already approved as an SMF by the FCA or PRA.”
The combined scope of the PRA and FCA senior manager regimes captures all board members of relevant firms. For larger and more complex firms, the FCA expects that executive committee members or equivalent (i.e. the layer below the board), would also be within the scope of its regime. A table setting out the PRA and FCA SMFs is set out in the Annex to this briefing.
The FCA and PRA propose to issue rules and guidance requiring relevant firms to prepare, maintain and update a ‘Responsibilities Map’ (i.e. a single document that describes the relevant firm’s management and governance arrangements).
Such maps should also set out how responsibilities have been allocated, including whether they have been allocated to more than one person. It is proposed that the firm’s board provide annual confirmation that there are no gaps in the allocation of responsibilities.
Another new requirement that the regulators propose relates to handover arrangements. Relevant firms are to take reasonable steps to ensure that a newly appointed senior manager be made aware of all necessary materials / information and risks of regulatory concern in order to perform their responsibilities effectively.
Which regulator to apply to?
Individuals performing an SMF specified by the PRA will require pre-approval by the PRA with the FCA’s consent, whereas individuals performing an SMF specified by the FCA will only require pre-approval by the FCA.