In December 2019, the Senior Managers and Certification Regime (SMCR) was extended across financial services. The regime has already been in force for banks since March 2016 and the extension in December means it now applies to a further 60,000 entities, including asset managers and hedge funds. The SMCR puts a considerable emphasis on individual accountability at the senior level of regulated entities and is likely to lead to a seismic change in culture across the City.
The SMCR was introduced in the wake of a series of failings in financial services, including Libor and FX rigging. The Bank of England concluded that it needed to increase accountability, embed good governance and improve culture across financial services. One of the key changes introduced by the SMCR was to make senior managers personally accountable for areas of the business. The SMCR also introduced conduct rules for virtually all staff working in financial services and, for the first time, required firms to certify staff – those who may pose risk or harm to clients - as being ‘fit and proper’ to perform their roles.
Increasing accountability for senior managers
A recurring theme in previous financial scandals (such as LIBOR and FX rigging) was a lack of accountability at management level at financial institutions. The SMCR is designed to stop that by requiring firms to designate functions or areas of business to ‘senior managers’ and by making those senior managers take personal responsibility for the areas or functions designated to them.
If there are any regulatory failings within an area of the firm, the applicable senior manager will be held responsible for them if they are unable to show that they took the steps that could reasonably have been expected to prevent the failing from happening.
The SMCR is designed to avoid senior managers side-stepping their responsibilities by unreasonably delegating activities to more junior members of staff and requires senior managers to ensure that those to whom they delegate functions are appropriately trained to undertake them.
Failings and the impact on senior managers
The SMCR does not make senior managers liable for the actions of their employers. However, the regime makes it easier for the FCA to determine where responsibility for failings lies. For a senior manager responsible for a business area that breaches regulatory requirements, the consequences can be significant. The FCA can take enforcement action against individuals ranging from public censure, to withdrawing their permission to act as a senior manager to fines, which can be substantial.
How can senior managers mitigate their exposure?
There are now insurance products available to protect against regulatory investigations for individuals. For example, businesses can obtain coverage for a senior manager’s legal fees in an investigation or litigation. Some senior managers even ask for indemnities from their employers, to protect themselves from the financial consequences of an FCA investigation. However, these insurance products or types of arrangements only go so far. FCA rules prevent third parties paying any fines it issues to individuals being paid by third parties and the financial fines can be for hundreds of thousands.
As well as considering insurance, proactive senior managers would be well advised to keep records of what they have done to ensure regulatory compliance within their areas of the bank, for example, by taking contemporaneous notes or email records.
Even the most diligent senior managers cannot oversee every single action done within their remit. They can however identify areas where they may be exposure or potential failings perhaps through inadequate funding and ensure that those to whom they delegate activities and their wider teams have the appropriate training to ensure regulatory compliance.
Under the SMCR firms must obtain and give regulatory references for both senior managers and certified staff. These references are based on a standard template and must go back at least six years. Any issue that may be relevant to the assessment of an individual’s fitness and propriety must be disclosed. This means that a negative regulatory reference may be career limiting. Senior managers may be more focused on their areas of responsibility but they are also vulnerable to negative regulatory references.
The ultimate decision about whether someone acting as a senior manager is able to perform their functions will rest with the FCA, rather than an individual employer. In distinction, certified persons have no right to interface with the FCA. In some cases, this may mean that senior managers are better protected than most under the SMCR, as this potentially provides them with the opportunity of separate discourse with the regulator, whereas for certified persons, there is no right of appeal against an employer’s findings of fact.
The impact of an extended of SMCR
The extension of SMCR is likely to have a significant impact on culture across financial services. We have already seen employees being forced to litigate even relatively low value litigation in order to get findings of fact which would set the record straight about their reputation and dispute an employers’ findings on a negative regulatory reference. This inevitably makes disputes involving potential misconduct much harder to settle and employees can effectively feel forced to litigate to clear their name.
The extended regime covers LLPs, hedge funds and asset managers, who are traditionally more likely to settle matters via arbitration and more averse to litigation. Given the raised stakes under SMCR, these entities may find that they are unable to avoid litigation.
Nick Wilcox is a partner and Rolleen McDonnell is a Senior Associate at specialist employment law firm Brahams Dutt Badrick French LLP.