Banking Regulation: Senior Managers and Certification Regime – timetable announced plus extension to include UK branches of foreign institutions

5 March 2015

A written statement by the Economic Secretary on 3 March 2015 announced the timetable for the introduction of the Senior Managers and Certification Regime (SM&CR) under the Financial Services (Banking Reform) Act 2013. The Government also announced that following a period of consultation it had decided to extend the SM&CR to UK branches of foreign institutions.

The SM&CR aims to strengthen the accountability of bank senior management and to raise standards of individual conduct in the banking sector and will come into operation on 7 March 2016.

The basic elements of the SM&CR are:

  • A requirement for banks to allocate a range of responsibilities to senior managers and to regularly vet their fitness and propriety.  The aim is to focus accountability on a narrower range of senior individuals than the current regime.  Senior managers will face more onerous regulation by, for example, signing up to a Statement of Responsibilities and then being required to take active steps to prevent breaches of those responsibilities.  A failure to take active steps could result in regulatory action under the new “Presumption of Responsibility”.
  • Under the SM&CR regime the regulators (the Financial Conduct Authority (FCA) or the Prudential Regulatory Authority (PRA)) will not be required to show direct knowledge or wrongdoing by the Senior Manager but there will be a presumption that the Senior Manager is responsible for any breaches or failures unless they can demonstrate that they took “reasonable steps” to prevent those breaches or failures in their area of responsibility.  This provision introduces a reversed burden of proof.  There is currently a consultation looking at guidance on what reasonable steps a Senior Manager would be expected to take.
  • The introduction of a “Certification Regime” which would require banks to assess themselves whether any employee who “could pose a risk of significant harm to the firm or any of its customers is “fit and proper” to perform their function.  This would transfer responsibility for such assessments from the FCA (as at present) to the firms themselves.
  • The introduction of a new set of Conduct Rules governing the behaviour of individuals in banking functions more generally.  These would have wider application than the current Approved Persons Regime (APER) and will cover the majority of employees in a bank.

The statement acknowledges that the SM&CR will be a “major reform with significant implications for the firms concerned (banks, building societies, credit unions and investment firms regulated by the PRA and for the individuals, particularly senior managers, who work in those firms.”  In order to facilitate the transition from APER, firms will be required to notify the regulators by 8 February 2016 of the approved persons who are to be Senior Managers under the SM&CR.

It was also announced that the PRA and FCA will shortly be consulting on additional rules to ensure that the SM&CR is applied in an “appropriate and proportionate way to foreign institutions operating through branches in the UK.”

The commencement order will also bring sections 36 to 38 of the Act into force from 7 March 2016 – this is the new criminal offences relating to decisions causing a financial institution to fail and means that the offence could apply to decisions taken by Senior Managers in UK banks, building societies and PRA-regulated investment firms (but not credit unions or any foreign institutions) on or after that date.

On 24 February, the FCA and PRA published a joint paper entitled “Approach to non-executive directors in banking and Solvency II firms & Application of the presumption of responsibility to Senior Managers in banking firm”. For more information please see our previous blog titled, 'Senior Managers Regime: Tougher regulation of senior bankers and non-executive directors (NEDs) confirmed' and an article written by Louise Hodges published in Economia on 26 February 2015 titled 'Why NEDs need protection'.

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