Senior managers and certification regime: D-day has arrived

Robbie Sinclair

After years of deliberation and preparation, the new Financial Conduct Authority and Prudential Regulation Authority senior managers and certification regime comes into force today. Many firms will see this date as marking the end of what has been a long consultation and implementation process, but 7 March 2016 is just the start. The regulators have passed the baton to firms to regulate their own certified population and code staff, which will make the next 12 months challenging as the new regime beds down.

The role of HR  and in-house employment lawyers, will be crucial to the successful implementation of this regime, particularly in relation to assessing fitness and propriety, applying the code consistently to staff, regulatory references and whistleblowing.

This blog focuses in the HR aspects to consider, for a more regulatory focus please visit Allen & Overy’s Investigations Insight

Senior managers – applying the conduct rules

Consistency will be key when a firm applies the conduct rules to employees’ conduct. In-house lawyers, together with HR and compliance will play an important role in ensuring this consistency. There are three areas of focus to ensure consistency:

DocumentsSenior managers
  • Appropriate and easy-to-follow guidelines that set out objective standards for employees to meet;
  • A stringent HR framework that requires HR to confirm that the conduct rules have been considered; and
  • Adequate documentation of any decisions.
Training

The individuals monitoring the consistency of treatment, who are likely to be HR, in-house lawyers, and compliance should be provided with bespoke training to ensure that the guidelines (and objective standards) are understood and can be applied. In addition to set training, HR will need to work closely with their in-house legal team to ensure that information is kept up-to-date, and any new guidance from the regulators is incorporated into documentation, training and other relevant procedures and practices.

Oversight

Consistency will need to be monitored, and an oversight committee may be established for this purpose. The key point will be to link up the firm’s HR processes (for example, the disciplinary, grievance, performance improvement and whistleblowing processes) and the identification of potential regulatory breaches of the new rules.

Assessing fitness and propriety

The FCA and the PRA have made no significant changes to their definition of “fitness and propriety”. The three core elements remain:

  • Honesty and integrity;
  • Competence and capability; and
  • Financial soundness.

However, the vague concept of personal characteristics has also been added to the regulators’ criteria.

This new factor, along with the fact that firms will be responsible for assessing the fitness and propriety of their senior managers and certified persons (SMCPs), has led to many firms taking a more holistic view of what constitutes fitness and propriety. For example, firms may need to consider issues that would not historically have attracted the regulators’ interest:

  • Bullying and harassment. While it may be appropriate for a manager to be firm in giving directions, if the manager creates an intimidating environment, where nobody can speak up, this could become a personal characteristic that affects the manager’s fitness and propriety.
  • Illness. Physical and mental illnesses, depending on circumstance and severity, could affect a manager’s fitness and propriety. It goes without saying that these matters would need to be treated sensitively.

regulatory-referenceRegulatory references

In January 2016, the FCA and the PRA announced that they had postponed their proposals for new and more detailed regulatory references. The regulators will revisit these proposals over summer 2016, but in the meantime, firms will be expected to request regulatory references using the regulators’ existing rules, which simply require an individual’s former employer to disclose all relevant information.

From 7 March 2016, firms must satisfy themselves that their SMCPs remain fit and proper. It will be important therefore that all the right questions are asked of former employers so that a proper assessment of fitness and propriety can be carried out. In addition, firms may wish to obtain self-attestations from their SMCPs as to the matters that would otherwise have been included in a new regulatory reference.

Whistleblowing

As part of the new regime, the regulators are introducing new wide-ranging requirements relating to whistleblowing. It is important to note that, at present, these new requirements only apply to UK entities, although they represent best practice for branches. Broadly, the new requirements include:whistleblower

Whistleblowers’ champion

While the new rules on whistleblowing come into effect on 7 September 2016, firms must have a whistleblowers’ champion in place by 7 March 2016. This individual should be a non-executive director senior manager who will need to report to the board on whistleblowing statistics on at least an annual basis.

Definition of a reportable concern

Employees currently have protection under the Public Interest Disclosure Act 1998 (PIDA), which is mirrored in most firms’ whistleblowing policies. The current legislation only relates to specific disclosures, such as a legal obligation not being met, and requires any disclosure to be in the public interest. The new requirements widen reportable concerns to include:

  • Regulatory breaches;
  • Breaches of the firm’s policies and procedures; and
  • Harm to the firm’s reputation or financial wellbeing.

In addition, the new guidelines provide that the firm’s handbook, or similar written material, should make whistleblowers aware that they are legally entitled to approach regulators directly if they choose to do so, whether or not they have first raised the concern internally. Employees will not be automatically protected under the Employment Rights Act 1996 for disclosures of wider reportable concerns which fall outside of PIDA.

The regulators are, therefore, seeking to create an environment where employees can speak up more freely and firms will want to ensure that this environment is created. This is reinforced by senior manager conduct rule 4 which provides a specific duty to inform the regulator of anything of which they would reasonably expect notice.

For firms to adapt to these new requirements policies including the grievance and whistleblowing policies will need to be updated. They may also want to provide training on the updated policies to their employees and contractors . This should include educating them on the regulators’ roles as a conduit for disclosure.

In addition, where evidence is found of a whistleblower being treated detrimentally, firms should raise questions about the fitness and propriety of the persons who are treating the whistleblower detrimentally.

Looking ahead

Many firms are engaged in stress testing exercises, designed to test their controls relating to the new regime in the event that some of the risks and challenges crystallise in practice. This sort of exercise may help to prepare firms for how they will interact with the new regime in practice. We are also expecting some further guidance and publications from the FCA and the PRA in due course.

 

This blog post is based on a longer article which appeared in the March issue of PLC Magazine, available here.
Comments published on Employment Talk do not necessarily reflect the views of Allen & Overy.

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