Blog
The King’s Speech – roadmap for employment law reform
Nikola Southern
The Senior Managers and Certification Regime (SMCR) has been in force since March 2016 with the overall aim of improving accountability for individuals working in financial services. Initially it applied to firms regulated by both the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) but in December 2019 it was extended to firms regulated only by the FCA. There are three elements to the SMCR: the Senior Managers’ Regime (SMR), the certification regime and the Conduct Rules.
The SMR applies to all individuals exercising a senior management function (SMF), for example, an Executive Director function (SMF3) and Chief Finance function (SMF2). In many cases, non-executive directors will also be covered.
Mid-level employees who are employed in position where they pose a risk of significant harm to the firm or any of its customers (FCA regulated firms), or are significant risk takers (PRA regulated firms) are subject to the Certification Regime, under which it is the responsibility of their firm to certify that they are fit and proper on an on-going (annual) basis.
The Conduct Rules (set out in the Code of Conduct sourcebook within the FCA Handbook) apply to a wide range of individuals working in financial services. As well as senior managers, the Conduct Rules also apply to all standard non-executive directors of FCA-regulated firms and not just to senior managers and certified staff. They also apply to all other employees at FCA-regulated firms and insurers, except ancillary staff such as receptionists, security guards and cleaners.
The FCA and PRA require firms to map out the roles of their senior managers and to allocate responsibilities to them so as to make them individually accountable.
Both individuals and firms in the financial services sector are significantly affected by the regime and all involved need a thorough understanding of it.
INDIVIDUALS
Individuals holding senior management functions must be allocated prescribed responsibilities by their firms (those responsibilities inherent in the definition of the SMF and other prescribed responsibilities identified as such by the FCA and PRA). Senior managers need to examine carefully the scope of the responsibilities allocated to them by the firm (set out in a “statement of responsibilities”) and to refuse to accept anything that is outside their actual responsibility or expertise. Senior managers are under a statutory duty to take reasonable steps to prevent regulatory breaches in their areas of responsibility and also face criminal liability if they recklessly make a decision (or fail to prevent a decision) that leads to the failure of their financial institution. Clarity over their areas of responsibility is key.
An assessment of an individual by their firm under the Certification Regime that they are not fit and proper could have very serious implications for them from an employment and regulatory perspective.
The regulatory reference regime applies whenever an individual applies for a regulated role: the employer is required to take up references from any regulated employer who has employed that individual during the previous six years. The reference follows a template prescribed by the FCA and requires the former employer to respond to a number of questions, including whether they consider the individual to be fit and proper, whether they took certain disciplinary action against the individual and whether there is any other information relevant to an assessment of whether they are fit and proper. A negative response to any of these questions can have serious implications for the individual’s career in regulated financial services.
FINANCIAL ORGANISATIONS
Firms should consider the allocation of responsibilities amongst senior managers and assess the areas of responsibility falling within the certification process.
It is important that firms fairly assess the responsibilities of their employees and that the exact extent of their remit is acknowledged and clearly defined so that an individual is not allocated responsibilities outside the scope of their duties, either in their individual statement of responsibility or the firm’s overall responsibilities map.
Together these documents should make clear who is responsible for what, and ensure individual accountability.
The FCA monitors how firms implement the SMCR regime and this ultimately impacts on their regulatory risk in future. Support functions such as HR and IT departments, as well as Compliance and Risk must address legal and operational issues, including ensuring that appropriate policies and training are in place.
Firms need to identify individuals within the scope of the regime and ensure their employment documentation, governance structure and resources are appropriate.
How we can help
With a financial services team drawn from our regulatory, corporate commercial and finance, employment and partnership and criminal departments, we are able to assess holistically the needs of our clients.
We have worked with a number of regulated firms on regulatory issues and are familiar with working with the FCA. We are able to assist with the drafting of relevant documents, including individual statements of responsibility and the firm's overall responsibilities map. We are here to help with training needs and the amendment of policy materials.
For individuals, we can advise on how to negotiate the ambit of their responsibilities, what the regime requires in terms of the discharge of their duties and conduct and what they can do to protect themselves, particularly if they have grounds for concern about their personal position and potential exposure.
We regularly deal with financial regulators and act for clients in cases involving disciplinary and enforcement action, Conduct Rule breaches and regulatory references.
James Alleyne
Partner
Jill Lorimer
Partner
Richard Foss
Partner and Head of Department
Andreas White
Partner
Nicolas Rollason (Français)
Partner and Head of Department
Nicolas Rollason
Partner and Head of Department
Ilda de Sousa
Partner
Julie Matheson
Partner
Gemma Tombs
Legal Director
Julia Bateman
Senior Practice Development Lawyer
Anna Holmes
Senior Associate
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