FCA Business Plan 2019-20: a reflection of recent enforcement action
The aim of the SMCR regime is, of course, to improve conduct and accountability in financial services with FCA approval required before senior managers take on new roles and those individuals having to agree statements of responsibilities outlining what they are accountable for. Firms will also be required to certify annually that individuals in significant functions (“Certified Persons”) are fit and proper.
We believe the following three trends which have emerged under the new regime are worth highlighting for firms soon to be caught by the SMCR rules.
Perhaps the biggest change the SMCR heralds for regulated firms has been the shift in focus of the fitness and propriety test. The onus is now on firms to assess and certify whether an individual is fit and proper, rather than the regulators being sole arbiter. Firms are required, prior to the commencement of employment and annually thereafter, to review whether those subject to the Certification Regime meet the FIT requirements and certify them accordingly. Fitness and propriety for those falling within the Senior Managers Regime is still determined by the regulators.
In our experience, firms are adopting a cautious approach and are taking a tough stance in respect of individuals with blemishes against them (regardless of how minor) or those caught up in conduct investigations, even when those individuals have been exonerated. We know of some individuals who, notwithstanding the fact that they have cleared their name, still lost their jobs having been tarnished by association with the investigation process (in some cases, years after the event).
A trend of the Certification Regime seems to be that firms are seeking to prove to the regulators that when it comes to dealing with conduct issues, no matter how slight, they are taking a hard line. Whilst doing so clearly protects the employer from regulatory risk, it takes little account of fairness to the individual just as, in negotiating Decision Notices with the FCA for example, employers may make concessions on the facts which do not properly reflect the reality (or extent) of the conduct issues in question. Both can have a devastating impact on individuals’ careers.
In the past, departing employees who were caught up in disciplinary proceedings could try to negotiate a reference with their employer which would, to the extent possible, minimise the damage to their career resulting from their exit. Firms still had to ensure that the reference was true, accurate and not misleading, but there was scope for agreement about what the reference would say, based on the employer’s knowledge at the time of preparing it. If the firm deviated from the agreed reference without justification, and the employee suffered loss as a result, they could well be entitled to claim damages for breach of contract.
However, with the advent of the new Regulatory References regime, we have seen firms adopting a significantly more cautious approach.
Firms are now reluctant to engage with departing employees in respect of agreed references, in some cases only giving an indication of what a reference would say if given. Most firms will be clear that they are subject to regulatory obligations to provide accurate references which include disclosing relevant facts, and that this significantly limits their ability to negotiate the terms of a reference.
This is creating practical problems for employees. Even if an individual has nothing to hide, things said in a defensive way in their regulatory reference can be hugely problematic. Individuals often have very little leverage to seek to negotiate a better worded reference which nonetheless includes all the critical information, but explains matters in a more neutral or nuanced way. Problems can arise, for example, when an individual is certified as fit and proper, but their reference includes additional information for a prospective employer to consider when deciding, for itself, whether the individual does indeed satisfy the FIT requirements.
We have had situations where we have been able to agree the approach to be adopted when a regulatory reference is required, in an attempt to limit the damage to an individual where they have been implicated or involved in disciplinary proceedings. However, this is not always possible.
Prior to the introduction of the SMCR some questioned whether there would be sufficiently qualified and willing individuals to perform Senior Manager roles, given the increased regulation, obligation, and risk (not to mention regulatory and media scrutiny) involved under the new regime. There were concerns about firms potentially suffering a recruitment crisis for top talent if individuals of the right calibre did not want to take on Senior Manager roles with limited incentive for bearing such significant risk, particularly as compensation can be deferred over many years and is subject to malus and clawback.
(Malus and clawback rules apply to material risk takers and those performing senior management functions, meaning that individuals can be deprived of or required to pay back variable remuneration for a minimum period of seven years from the date of award, or ten years in the case of senior managers, in certain circumstances. Material risk takers are those whose professional activities have a material impact on the risk profile of their firms.)
In our experience there has been a drain of talent. We know some individuals who, whilst certain that there had been no wrongdoing on their part or as a function of anything which they themselves had done, nonetheless have decided to leave their lucrative, successful careers within financial services, rather than risk more of their life-times’ earnings being subject to potential malus and clawback as they continued in post.
Yet alongside this, we also know of individuals who have expressed concerns about how decisions are being made and recorded now. Some are finding that, at meetings where decisions needs to be made, senior managers, each accompanied by their own lawyer, are restricting themselves to matters set out in their statement of responsibilities rather than risk being found to have accepted wider responsibility. This means that decisions are taken by way of a roll-call around the table confirming that each senior manager approved the decision so far as each of their own respective responsibilities are concerned. This “decision by committee” (or rather “decision by lawyer”) means that the everyday conduct of business becomes increasingly unwieldy and bureaucratic. Such a trend may be something we see more firms struggling with over the next few years, as the SMCR takes root across the wider regulated financial services industry.
Any regulated firms soon falling under the SMCR for the first time should be planning ahead now to ensure they are ready to meet their new obligations. However they would also be wise to be mindful of the above described “unintended” consequences in case they can plan ahead how to mitigate them.
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