The law as it applies to senior personnel working in financial services has been subject to a great deal of attention in previous years. The financial crisis of 2007-2008 raised a number of questions on the rules that the managing powers in banks and other financial institutions are obliged to follow. There has been a great deal of media attention on changes to the law as it applies to businesses and their employees in the financial services industry, with more to come.
In October this year, HM Treasury announced that the Senior Managers Regime (SMR) would be extended to apply to all firms that are authorised to work in financial services under the Financial Services and Markets Act. With the changes due to come into force in 2018, there will be a great deal of interest in the SMR, how it will apply and what the consequences of this development will mean.
Precisely what is the SMR?
The SMR is a regime designed to encourage individuals who have a significant decision-making role in financial services firms to take responsibility for their decisions. Simply put, where individuals take decisions that threaten the commercial viability of an organisation and risk its failure, they will face sanctions as a result.
What is being proposed under the SMR?
The SMR, when it is fully introduced, will take over the ‘Approved Persons Regime’ that currently applies to personnel working in the banking sector. Needless to say, any change to the rules governing activities in financial services, which is vital to the UK economy, will attract a great deal of attention. There are however certain key components of the SMR that warrant particular attention:
Accountability
When the SMR was originally introduced, it provided for a ‘presumption of responsibility’ on the part of senior managers in financial services. This resulted in a situation where a senior manager or director will be deemed guilty of misconduct where one of their staff members violated their responsibilities as an ‘authorised person’ to work in financial services. However, this has resulted in a great deal of unrest among many in the banking sector, who believed that there was no way to credibly defend against their being presumed guilty of misconduct. In its announcement of the extension of the SMR, HM Treasury also commented that the current situation is unworkable, and have agreed that the in cases of suspected misconduct, senior personnel will be presumed innocent until proven otherwise.
It should be noted however that senior individuals working in financial switches will still owe a statuary duty, in performing their duties, to take reasonable care to avoid violate the responsibilities that they owe to regulators.
Transparency of accountability
Firms that are governed by the FMCA will be obliged, under the new arrangements, to fully disclose the nature of their governance and accountability structures. Historically, there was a concern among many, both within and beyond the financial services industry, that it was difficult to determine precisely who was accountable to whom, and how this could be enforced. Under new arrangements, banks and other financial institutions will need to provide to the FCA a yearly ‘responsibility map’, outlining how the firm is run and who is responsible for its different activities.
Fitness for practice
Regulators have carefully considered the need to ensure that those who are authorised to work in financial services are capable of doing so, and will do so and take the requisite level of care and diligence required. This has resulted in the introduction of a ‘Certification Regime’, which will require firms working in financial services to actively review the ‘fitness for practice’ of their staff. Under these new arrangements, it is hoped that firms will take their role seriously, and ensure that only those who are truly capable of working effectively in financial services, in full compliance with regulatory requirements, do so. It is important to point out that the Certification Regime applies to those aspects of a firm’s business that present a significant risk either to its customers or to its continued viability, e.g. personnel involved in providing investment advice.
Who will be governed by the SMR?
For those working at senior levels in financial services, it is wise to take account of whether or not they will be governed by the SMR. As was mentioned earlier, the regime will apply to ‘senior managers’. In other words, the SMR will apply to individuals who hold a particular position or have a level of responsibility in a key or important area of the business. There will also be some applicability of the SMR to Non-Executive Directors, e.g. individuals who chair certain board committees such as the risk committee or remuneration committee. Furthermore, the SMR will also have some impact on the activities of overseas firms operating in the UK: an individual will be required to be deemed as the ‘Head’ of the UK Branch, and will owe responsibilities under the SMR.
What does this mean for financial services in the UK?
The regulatory landscape facing financial services in the UK is changing. The burden of policing activities within firms is increasingly being placed on businesses themselves, and they alone will be held responsible for failing to observe the rules that apply to them. Furthermore, individuals are under particular pressure to ensure that they do not expose the organisation to unnecessary risk. Taken together, these new changes mean that it will be more important than ever to have the assistance of specialist advisers when dealing with regulators, and other actors in the financial sector.
Lewis Nedas is a leading city law firm, providing comprehensive advice on all aspects of regulatory and financial law in the UK. Our teams are regularly involved in advising individual and corporate clients on the law that applies to them, assisting in their dealings with regulatory bodies and representing their interests in court room litigation.
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If you would like to know more about the work of our team, or to hear more about the impact of the SMR on financial services in the UK, contact our team today via our online contact form or give us a call on 020 3553 7916.
