The Act impacts two types of firm:
- UK deposit takers; and
- UK investment firms that deal as principal and who are authorised by the Prudential Regulation Authority (PRA)
The scope could be extended by HM Treasury to include non-UK deposit takers and investment firms.
Although the scope is limited, there is potential for a number of the changes to be implemented more widely either overtly, through changes to current rules, or simply through the way that current requirements for Approved Persons (APER) are enforced.
At the top of the organisation, the Act introduces a new group of Controlled Functions –Senior Management Functions. These will replace the current Significant Influence Functions (SIFs) for relevant firms, but may extend further as it includes those who “make decisions” or “participate in decision-making”. Senior Management Functions will be subject to the current regulatory pre-approval process but there will also be a positive duty placed on firms to conduct an annual internal assessment to assess the individual’s qualifications, competence and training as well as their “personal characteristics”. This very much reflects the sentiment of the Parliamentary Commission.
Beneath the Senior Management layer, the Act identifies a new group of senior individuals in Specified or Significant Harm roles. These are senior individuals whose role poses a “significant risk of harm” to the firm or its customers. The group could potentially stretch from senior traders to heads of IT. This layer has to-date operated below the regulatory radar in terms of personal responsibility. These will not be Controlled Functions so there will be no regulatory approval requirement. There will, however, be a requirement for firms to provide these individuals with an annual certificate stating that they are fit and proper to conduct their role based on the same criteria as for the Senior Management Functions, including the new “personal characteristics” assessment.
Senior Management Responsibility
There are significant changes here that have hit the headlines. Firstly, firms must provide those in Senior Management Functions with written Statements of Responsibility, forming a ‘contract’ between the firm, the individual and the regulator. The aim here is to help the regulator to build a case against an individual by increasing transparency and certainty in terms of responsibility and removing the “accountability firewall” observed by the Parliamentary Commission. We have already seen this approach in action in the increasing use of Attestations by the regulators. Secondly, there is the reversal of the burden of proof in cases brought against those in Senior Management Functions. This is likely to increase the number of cases brought and the likelihood of them being successful. Thirdly, the Act introduces the new criminal offence of “reckless mismanagement”. Again this is very much in line with the recommendations of the Parliamentary Commission. It focuses the mind, but it is subject to a number of caveats and is unlikely to apply other than in extremis and will be difficult to prove to the criminal standard of proof.
Rules of Conduct
The Act also gives the regulators the power to introduce new Rules of Conduct for the two new groups of managers discussed above as well as a wider group of employees. These new powers are likely to lead to an extension of the scope of APER and/or a rewrite of APER. It’s a matter of ‘watch this space’. Relevant firms will be under an obligation to ensure that relevant individuals fully understand how the Rules of Conduct apply to them with a specific requirement to provide “suitable training”. They will also be required to report breaches of the Rules of Conduct and any form of disciplinary action taken against a relevant individual to the regulator.
The next stage is the secondary legislation which is due in May 2014. If its contents are as highly contested as the primary legislation, then there is likely to be a lively debate. We then await the publication of the regulators’ Consultation Papers. Although these are unlikely to be published before late 2014, we already have a good insight into the likely approach in their response to the Parliamentary Commission’s recommendations. Implementation of the new rules will probably come in late 2015.
Preparing for the Changes
We know the direction of travel, so firms can start preparing now. Set out below are some suggested actions:
Step 1: Communicate the changes to all relevant parties within the firm. They will impact a broad range of people from the Board to the recruitment team.
Step 2: Follow the secondary legislation and the Consultation Process closely and be prepared to engagein the Consultation process. The ‘devil will be in the detail’.
Step 3: Now is the ideal time to undertake a review of corporate governance arrangements and job descriptions. Are they up to date, accurate and coherent i.e. are there any overlaps or gaps? It is also the ideal time to look at your recruitment and training practices in order to identify what you don’t do now that you will have to do in the future.
Step 4: Consideration of the resourcing implications. There are considerable new monitoring, reporting and record-keeping requirements in the Act. Certification, training, annual assessments and maintenance of up to date Statements of Responsibility and job descriptions will all require additional resource.
To learn more about the proposed changes you can view a webcast in which Trevor Norwood & Liz Hornby from Eukleia’s Faculty discuss the UK Financial Services (Banking Reform) Act 2013. You can access the video through this link.
To learn more about how Eukleia can help in preparing your senior managers please contact our Business Development team on +44 (0) 20 7220 4050 or email firstname.lastname@example.org