Do senior bank staff, including non-executive directors, have to be registered with your national regulatory authority?
On March 7 2016, the Senior Managers, Certification and Conduct Regime (SM&CR) came into force. The SM&CR applies to banks, building societies, credit unions and investment firms that are subject to dual regulation by the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) (together firms). It replaced the Approved Persons Regime for these firms.
The SM&CR comprises of:
- A Senior Managers Regime where individuals carrying out designated senior management functions (SMFs) within a firm are subject to pre-approval from the UK regulatory authorities, the PRA and FCA.
- A Certification Regime where the firm itself assesses the fitness and propriety of certain of its employees who could pose a risk of significant harm to the firm itself or its customers. This assessment has to be done at least once a year.
- High level conduct rules which articulate basic standards of good conduct. The PRA and FCA share four identical high level conduct rules that apply to Senior Managers1. The PRA and FCA also share three identical individual conduct rules2. From a PRA perspective these three individual conduct rules are applied to Senior Managers and those individuals within scope of the Certification Regime. The FCA applies these three individual conduct rules and two further individual conduct rules3 to a much wider population of staff, not just those within the Senior Managers Regime and Certification Regime4.
The SMFs (including their PRA or FCA designation) are: Chief Executive (SMF1) (PRA), Chief Finance (SMF2) (PRA), Executive Director (SMF3) (FCA), Chief Risk (SMF4) (PRA), Head of Internal Audit (SMF5) (PRA), Head of Key Business Area (SMF6) (PRA), Group Entity Senior Manager (SMF7) (PRA), Credit Union Senior Manager (credit unions only) (SMF8) (PRA), Chairman (SMF9) (PRA), Chair of the Risk Committee (SMF10) (PRA), Chair of the Audit Committee (SMF11) (PRA), Chair of the Remuneration Committee (SMF12) (PRA), Chair of the Nominations Committee (SMF13) (FCA), Senior Independent Director (SMF14) (PRA), Compliance Oversight (SMF16) (FCA), Money Laundering Reporting (SMF17) (FCA), Other Overall Responsibility (SMF18) (FCA), Head of Overseas Branch (incoming non-EEA branches only) (SMF19) (PRA), Senior EEA Branch Senior Manager (incoming EEA branches only) (SMF21), Other Local Responsibility (incoming non-EEA branches only) (SMF22) (FCA) and Chief Operations (SMF24) (PRA).
Between them the PRA and FCA have 30 ‘prescribed responsibilities’ that must be assigned to those individuals that carry out designated SMFs. Some of the prescribed responsibilities are designed to be assigned to executives, whilst others reflect certain roles that are typically carried out by non-executive directors who are within scope of the Senior Managers Regime (see below). Further information can be found in the FCA Handbook (Senior Management Arrangements, Systems and Controls sourcebook 4.7.7R) and PRA Rulebook (Allocation of Responsibilities Part 4.1).
In terms of non-executive directors, those needing regulatory pre-approval by virtue of carrying out a designated SMF are: Chairman (SMF9) (PRA), Chair of the Audit Committee (SMF10) (PRA), Chair of the Risk Committee (SMF11) (PRA), Chair of the Remuneration Committee (SMF12) (PRA), Chair of the Nominations Committee (SMF13) (FCA), and Senior Independent Director (SMF14) (PRA). Non-executive directors who do not perform a designated SMF are not subject to the Senior Managers Regime or Certification Regime but are subject to certain of the conduct rules5. The FCA describes these types of non-executive directors as ‘Standard NEDs’. The PRA describes them as ‘Notified NEDs’ on the basis that the firm must notify the PRA of the appointment6. The PRA does not require advance notification of planned appointments of Notified NEDs, but must be notified when the appointment is confirmed, for example when a letter of appointment is issued and accepted.
The PRA Rulebook provides that Notified NEDs must be contractually required by their firm to: (i) act with integrity; (ii) act with due skill, care and diligence; (iii) be open and co-operative with the FCA, PRA and other regulators; and (iv) disclose appropriately any information to the FCA or PRA which they would reasonably expect notice.
The SM&CR operates alongside the statutory and fiduciary duties of directors under UK company law including section 172(1) of the Companies Act 2006. Firms that are listed are also subject to the Financial Reporting Council’s UK Corporate Governance Code on a comply or explain basis.
In terms of a UK branch of an overseas firm there are four designated SMFs requiring regulatory pre-approval: Head of Overseas Branch (SMF19) (PRA), EEA Branch Senior Manager (SMF21) (FCA), Executive Director (SMF3) (FCA) and Other Local Responsibility (SMF22) (FCA).
The PRA has not designated SMFs for UK branches of EEA firms on the basis that prudential supervision is the responsibility of the firm’s home EEA national regulator.
The FCA’s EEA Branch Senior Manager SMF applies to UK branches of EEA banks only. This designated SMF applies to individuals who have significant responsibility for one or more significant business units of the branch that carry on any of the following activities: (i) designated investment business other than dealing in investments as principal; (ii) processing confirmations, payments, settlements, insurance claims, client money and similar matters, in so far as this relates to investment business; or (iii) accepting deposits from banking customers and activities substantially connected with that activity, to the extent to which it does not fall within (i) and (ii).
The Head of Overseas Branch SMF applies to UK branches of non-EEA firms. All UK branches of non-EEA firms must have at least one individual pre-approved by the PRA as the Head of Overseas Branch. This individual should have the highest degree of individual decision making authority in the UK branch over activities and areas subject to UK regulation.
The FCA’s Other Local Responsibility SMF applies to UK branches of non-EEA firms and captures individuals that have local responsibility for any of the activities, business areas or management functions of the UK branch, but are not approved to perform any other SMF in relation to that branch. Examples of how the Other Local Responsibility SMF applies can be found in the FCA Handbook (Supervision manual 10C.8). The FCA’s Executive Director SMF applies to UK branches of non-EEA firms and applies to individuals acting in the capacity of a director (other than a non-executive director) in relation to the UK branch. Further information can be found in the FCA Handbook (Supervision manual 10C.5).
If your national regulatory authority requires registration of senior bank staff what are the requirements?
Where a firm wishes to appoint an individual to carry out a PRA designated SMF, it should apply to the PRA. Where an individual is to carry out an FCA designated SMF, the application should be made to the FCA. In both cases the application for Senior Manager status is a detailed process and firms should consult the appropriate page on the regulator’s website (PRA - here and FCA - here). In particular, firms should undertake sufficient due diligence to satisfy themselves on the appropriateness of the individual before submitting the application and provide evidence to support this.
The PRA and FCA may approve an individual only where it is satisfied that he/she is fit and proper to perform the designated SMF applied for. When considering fitness and propriety, the regulators take into account the individual’s:
- Personal characteristics (including being of good repute and integrity)
- Level of competence, knowledge and experience
- Qualifications and training
Further information on fitness and propriety assessments can be found in the Fitness and Propriety sourcebooks located in the PRA Rulebook and FCA Handbook.
When an application is made for regulatory approval of a Senior Manager it must be accompanied with a statement of responsibility that sets out the areas of regulated activity that the Senior Manager will be responsible for. Firms must also have in place an up-to-date management responsibilities map that describes its management and governance arrangements. A copy of this must be provided with the application. Where an individual is taking over an existing designated SMF the firm must also provide a summary of any handover material.
A firm must also take reasonable steps to seek references from the individual’s previous employers in the last six years, irrespective of the firm type or their regulated status. Ideally, references should be obtained before an application is submitted. However, the regulators understand that there may be circumstances where this may not be possible. In these circumstances references may be obtained no later than one month before the end of the application process. This applies unless requesting or providing a reference would require the recruiting firm or the employer giving the reference (or any other person) to make a public announcement. In these cases, there is no time limit, and references can be obtained at any time during the application process.
As part of the assessment process the regulators may wish to interview the individual. This is particularly the case for the most senior roles in firms. Where both the PRA and the FCA wish to interview a candidate they will, so far as possible, seek to coordinate a single joint interview. Both regulators will, however, reserve the right to conduct solo interviews where this is most appropriate.
Both regulators have a statutory obligation to issue a decision within three months of an application being received.
Is there legislation specific to the banking sector that provides for penalties to be levied against senior staff for mis-managing a bank?
Under the Financial Services and Markets Act 2000 (FSMA) the PRA and FCA are given various disciplinary powers that can be used against Senior Managers. Such disciplinary action may include a fine, a suspension of regulatory approval, imposing restrictions or issuing a public statement relating to the misconduct. Where the regulators believe that an individual is no longer fit and proper to perform their designated SMF, regulatory approval may be withdrawn and the individual may be prohibited from holding Senior Manager status in the future.
When determining the extent of the Senior Manager’s responsibilities for the purposes of enforcement action, the regulators will have regard to the statement of responsibility and the firm’s management responsibilities map.
A statutory duty of responsibility for Senior Managers came into force on May 10 2016. Under the duty of responsibility, the PRA and FCA can take action against a Senior Manager if he/she is responsible for the management of any activities in their firm in relation to which there is a contravention of a regulatory requirement, and they do not take such steps as a person in their position could reasonably be expected to take to avoid the contravention occurring (or continuing).
The duty of responsibility requires the regulators to prove a contravention of a regulatory requirement by the firm, and that the Senior Manager was responsible for the management of any activities in their firm in relation to which the firm’s contravention occurred. The burden of proof lies with the regulators to show that the Senior Manager did not take such steps as a person in their position could reasonably be expected to have taken to avoid the firm’s contravention occurring.
Further guidance on the duty of responsibility can be found in the FCA’s Decision Procedure and Penalties Manual.
Senior Managers (but not those of UK branches) may be prosecuted by the PRA or FCA in certain prescribed circumstances for taking a decision that causes their firm to fail. For the offence to have been committed, the Senior Manager must, at the time the decision was taken, have been aware of a risk that its implementation could cause the failure of the firm. In addition, the Senior Manager’s conduct in relation to the taking of the decision must fall far below what could be reasonably expected of a person in the Senior Manager’s position.
Section 64C FSMA places a statutory requirement on firms to notify the regulators of disciplinary action relating to a breach of the conduct rules against Senior Managers and other employees in scope of the conduct rules (including those within the Certification Regime). Section 64C of FSMA defines disciplinary action as the: (i) issuing of a formal written warning; (ii) suspension or dismissal of the person; and/or (iii) reduction or recovery of any of the person’s remuneration. The PRA and FCA may take disciplinary action against individuals whose conduct falls short of the standards set out in the conduct rules. When considering whether to take enforcement action against an individual, the regulators will take account of their position and responsibilities.
What is the maximum amount the regulator can fine an individual?
The FCA and PRA can impose a financial penalty of such amount as they consider appropriate (section 66 FSMA).
Is there legislation in place that requires banks to have in place remuneration policies and practices that are consistent with effective risk management?
The Financial Stability Board Principles and Standards for Sound Compensation Practices has been implemented in the UK through the FCA Remuneration Code (the Code). The Code has been amended and updated to take account of the introduction of European requirements, and responsibility for its application is shared between the PRA and FCA. The Code applies to banks, building societies and investment firms subject to the Capital Adequacy Directive. The Code aims to ensure that firms’ remuneration practices are consistent with effective risk management. The Code applies primarily to “Code Staff” which includes Senior Managers and those members of staff who are identified as material risk takers.
It is also worth noting that in 2015 the PRA and FCA introduced rules which included changes to deferral and clawback of variable remuneration (e.g. bonuses). These changes sought to further align risk and individual reward in the UK banking sector and encourage more effective risk management. Among the changes were extending deferral (the period during which variable remuneration is withheld following the end of the accrual period) to seven years for Senior Managers. The PRA and FCA clawback rules (where staff members return part or all of variable remuneration that has already been paid) were also strengthened by a requirement for a possible three additional years for Senior Managers (10 years in total) at the end of the seven year period where a bank or regulatory authorities have commenced inquiries into potential material failures.
Is there any legislation planned in your jurisdiction that will strengthen the accountability of senior bank staff?
However, in September 2016 the FCA reported the findings of its in-depth supervisory review of statements of responsibility and responsibilities maps that had been supplied when firms had transitioned to the SM&CR. Further information can be found here.
The FCA is also currently focused on extending the SM&CR to all other UK financial services firms. Further information can be found here.