The U.K. Financial Conduct Authority (“FCA”) has announced a new senior managers and certification regime, which will apply to senior managers of U.K. banks and buildings societies from March 2016. The changes to the FCA’s approved persons regime implement the recommendations of the U.K. Parliament’s Banking Standards Commission, which was set up to find ways to improve the culture and the conduct of individuals within the financial services industry, following the financial crisis and a number of high profile cases, including Payment Protection Insurance misselling and the alleged manipulation of LIBOR and foreign exchange rates.
The new rules, which will also apply to senior managers of investment firms that are designated by the Prudential Regulation Authority (“PRA”), impose certification requirements that will require banks and other firms within scope to annually assess and certify the “fitness and propriety” of staff within senior roles, whose conduct could cause harm to the institution or its customers or the integrity of financial markets. Chief executives, chief financial officers, heads of risk and internal audit will all fall within scope.
Martin Wheatley, the FCA’s chief executive, explained the rationale behind the regulators’ focus on senior management, stating “how a firm conducts its business and treats its customers must be at the heart of how it operates and this has to start at the top”. He went on to emphasize that it is important that regulators “have the tools at their disposal to hold individuals to account.”
The most controversial aspect of the revised regulation is the introduction of a “presumption of responsibility” rule. This requires senior managers of a regulated firm found guilty of misconduct to demonstrate that they “took such steps as a person in their position could reasonably be expected to take” to avoid the misconduct from happening. The rule effectively reverses the burden of proof required of U.K. regulators and forces senior managers to demonstrate that they took all reasonable steps to prevent the contravention from occurring.
As to what satisfies the “reasonable steps” test, the FCA has issued draft guidance which provides a non-exhaustive list of factors the FCA would be expected to consider. These include the role and responsibilities of the senior manager and whether he or she “acted in accordance with their statutory, common law and equitable obligations,” including those in the Companies Act and the U.K. Corporate Governance Code, if applicable. It will be interesting to see how the FCA interprets and applies these factors in practice.
Near final rules were published on 16 March 2015.
The FCA and PRA also issued a joint consultation paper on applying the revised regime to U.K. branches of foreign banks.
The FCA and PRA are expected publish further guidance during the course of the year, with final rules expected in spring/summer.