Proposals announced to change the Senior Managers’ and Certification Regimes

Publication October 2015


Introduction

On 14 October 2015, HM Treasury announced proposals to change the Senior Managers’ and Certification Regimes (SMCR) introduced by the Financial Services (Banking Reform) Act 2013. The proposals are set out in a policy paper dated 15 October 2015.1 The detail is currently contained in a draft Bill which was laid before Parliament on 14 October 2015 (the Bank of England and Financial Services Bill (HL Bill 65) (Bill)).2

The key proposals include:

  • extending the SMCR that will apply to banks and other deposit-takers from 7 March 2016 to all financial services institutions from 2018;
  • removing the ‘reversal of the burden of proof’ under the Senior Managers’ regime;
  • introducing the ability for the FCA / PRA to make Conduct Rules applicable for all non-executive directors (NEDs); and
  • removing the requirement for breaches of conduct rules to be notified to the regulators.

Extension of regime

The proposals announced are to extend the SMCR to all authorised persons in a proportionate manner. This means that it will apply to authorised asset managers through to consumer credit firms. It is intended that the new regime will replace the Approved Persons regime. In its announcement, the Government has proposed that this new regime might be implemented during 2018. The detail for how the regime might be tailored for this diverse range of financial institutions will follow.

Removal of the presumption of responsibility and the reversal of the burden of proof

The Financial Services (Banking Reform) Act 2013 introduced new offences for misconduct (s 66A and 66B of the Financial Services and Markets Act 2000 (FSMA)) for senior managers of banks and other deposit-takers. The misconduct offence could be triggered, amongst other triggers, by a person being a senior manager (as defined under the SMCR), a contravention occurring in a particular area, and the senior manager being responsible for that area (as stated in their Statement of Responsibilities). This was termed the ‘presumption of responsibility’.

Simultaneously, a statutory provision was included (s 66A(6) and s 66B(6) of FSMA) which stated that in order to rebut this presumption of responsibility, a senior manager would need to prove to the relevant regulator that they had taken all reasonable steps to prevent the contravention from occurring or continuing.

The culmination of the two aspects above meant that it was for senior managers to prove that they were not guilty of the offence, rather than the burden being placed on the relevant regulator to prove this.

Proposed change

In the draft Bill, subsection (6) of each of s 66A and 66B of FSMA are proposed to be deleted. The effect of this (if it passes in this form) would be that it is not for the senior manager to need to prove to the appropriate regulator that they took all reasonable steps to avoid triggering the offence.

In addition, the proposals are to include in the test for triggering the misconduct offence, not only that the person was a senior manager, a contravention occurred in a particular area, the senior manager was responsible for that area (as stated in their Statement of Responsibilities) but also that a new trigger element, namely that the senior manager had not taken reasonable steps to prevent the contravention occurring or continuing. The current draft wording in the Bill is:

“the senior manager did not take such steps as a person in the senior manager’s position could reasonably be expected to take to avoid the contravention occurring (or continuing).”

The culmination of these two proposed changes would mean that: (1) a senior manager is not presumed to be responsible; and (2) the appropriate regulator would need to prove that the senior manager failed to take reasonable steps in order for the offence to be triggered.

This amendment is proposed to come into force on 7 March 2016.

Extending Conduct Rules to all NEDs

Currently only NEDs who are also senior managers (as they hold a particular oversight senior manager function) are required to comply with the PRA and FCA conduct rules. A breach of these rules allows the PRA and FCA to investigate the person for misconduct. The current regime did not require that the conduct rules would apply to NEDs who were not also senior managers – so-called unauthorised non-executive directors.

The Bill proposes to amend s 64A and s 64B of FSMA (the part of FSMA that allows the PRA and FCA to make conduct rules) to also include ‘directors of authorised persons’ as persons within the scope of the regulators’ conduct rule making powers.

This would allow the PRA / FCA to make conduct rules that apply to all NEDs whether they are senior managers or unauthorised NEDs. There is no clear timing on when this aspect is proposed to come into force.  

Reporting breaches of Conduct Rules

The SMCR requires firms to report all known or suspected breaches of the conduct rules by any employees to the relevant regulator. As the FCA’s conduct regime applies to almost every employee in a firm (excluding a limited sub-set of support staff), the Government has announced that this may be too costly and disproportionate for firms.

As such, the Bill proposes to delete this requirement in its entirety. This amendment is proposed to come into force on 7th March 2016. Instead the announcement states that the appropriate regulator may instead make rules in their Handbooks to detail what they wish to be notified of and when.

The Bill also proposes to clarify what constitutes an ‘insolvency’ of a bank or other deposit-taker (which relates to the criminal offence of causing an institution to fail).



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