Charities and internal investigations
With the advent of the Senior Managers and Certification Regimes soon upon us, the Financial Conduct Authority (FCA) has issued a policy statement that sets out the final rules for the application of the new accountability framework for individuals working in the UK branches of overseas banks (incoming branches). Accordingly the position in relation to the application of the Senior Managers Regime (SMR), Certification Regime (CR) and Conduct Rules to incoming branches and their staff is now clear.
Senior Managers and Certification Regimes
From 7 March 2016 the SMR and CR, as well as new Conduct Rules, will be in force. The overall aim of this package of reforms is to strengthen the personal accountability of individuals working in banking and financial services. The UK’s Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) will require firms to map out the roles of their senior managers performing senior management functions, and to demarcate their areas of responsibilities, in order to ensure they are individually accountable. Senior Managers must take reasonable steps to prevent regulatory breaches in their areas of responsibility – the new so-called “duty of responsibility”.
The CR will apply to employees who could pose a risk of significant harm to a firm or its customers. Instead of needing advance regulatory approval to carry out their roles, those affected by the CR will be subject to certification by their employer that they are fit and proper for their roles on an on-going basis. Together with related reforms in relation to regulatory references, this will serve to increase the importance of internal investigations and disciplinary procedures for the careers in financial services of those caught by the CR.
Pursuant to the new conduct rules, an even wider population of individuals working in financial services will be subject to high level duties, breach of which may also have serious implications for individuals from a regulatory and career perspective.
See here for more information on the new regulatory landscape.
This latest Policy Statement sets out final rules for the new accountability framework for individuals working in the UK branches of overseas banks. It follows the FCA’s Feedback Statement in August 2015 which set out near-final rules for the Senior Managers Regime, Certification Regime and Conduct Rules for incoming branches. The secondary legislation that was required to formally extend the regime to incoming branches came into force on 9 November. The PRA also published feedback last August (including some final and some near-final rules), with final rules for incoming branches due to be published separately.
The FCA has confirmed that the final rules are largely based on the regime for UK banks, building societies, credit unions and PRA investment firms (UK relevant firms) and that it has tailored these rules to reflect the differences between incoming branches and UK relevant firms. The differing powers that the FCA has over these different types of firms are also considered.
Who is affected?
This Policy Statement sets out that the regime will affect incoming branches of non-UK firms that have permission to accept deposits or deal in investments as principal (where that activity is PRA regulated) in the UK. As well as the incoming branches themselves, the regime will also affect most individuals working in those branches, including their existing Approved Persons. The new rules may also affect some individuals who work for the firm, but are not based in the UK, if they are managing the affairs of the incoming branch. The FCA sets out that the Policy Statement will also be of interest to the Home State Supervisors of incoming branches.
The new rules – territoriality application to non-EEA branches
Given that following the publication of the draft rules respondents had not raised any new issues regarding the SMR for incoming branches, only minor technical amendments have been included in the final rules. However, the FCA received additional feedback on the Certification Regime and Conduct Rules – particularly on territoriality and the need for a proportionate application of the CR and Conduct Rules to individuals based overseas – and therefore changes have been made to the final rules in this regard.
The FCA accepts that the territorial scope of the Certification Regime and Conduct Rules (for individuals below Senior Manager level) potentially has a wide scope, and has recognised that as the near final rules stood, there was the scope for the new regime to apply to large numbers of employees without a suitably clear link to the UK branch of an overseas bank. With that in mind the FCA has proposed an interim measure - in preparation for March 2016. The rules for non-EEA branches have been amended to remove the test of ‘dealing with a UK client’ (as set out in the near final rules) with the test of ‘based in the UK’ retained. This brings non-EEA branches in line with EEA branches and narrows the population caught under the Certification Regime and Conduct Rules making the territorial scope clear ahead of the introduction of the regime.
The FCA confirms that it does plan to revisit territoriality to ensure that the regime adequately captures those individuals who could affect the FCA’s objectives (including whether it is necessary to extend the branches’ certification rules to include some individuals based outside the UK).
In the Policy Statement, the FCA also clarifies that in respect of EEA branches of overseas firms which undertake deposit taking under a services passport and undertake other (non-deposit taking/dealing) activities from their UK branch, such firms would still be caught by the definition of ‘relevant authorised person’ and so would come under the Senior Managers Regime. Accordingly such firms will become subject to the FCA’s SMR and Certification Regime.
What do you need to do next?
For those incoming branches who fall within this new regime there are a number of key milestones in the build up to and commencement of this new regime.
8 February 2016:
Deadline to submit grandfathering notifications for existing approved persons who will be performing senior management functions under the new regime.
7 March 2016:
The Senior Managers and Certification Regimes come into effect. All individuals subject to either regime will have to comply with the new Conduct Rules.
7 March 2017:
Application of the Conduct Rules to all other relevant staff.
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