Financial Conduct Authority confirms approach to improving responsibility and accountability in the banking sector

Published: 16/03/2015     Last Modified: 16/03/2015

The Financial Conduct Authority (FCA) has today confirmed its approach to improving individual responsibility and accountability in the banking sector by publishing feedback which:

  • sets out how the FCA will implement the Senior Managers Regime (SMR); and
  • provides further information on the FCA’s plans for the Certification Regime (CR) and new Conduct Rules.

The policies announced today are significant and will make it easier for firms and regulators to hold individuals to account.

Following strong demand from firms, the FCA is also today consulting on further, more detailed guidance on how the FCA will apply the Presumption of Responsibility. Additionally, we have published a separate consultation, jointly with the Prudential Regulation Authority (PRA), on the accountability regime for incoming branches of foreign banks.

Martin Wheatley, Financial Conduct Authority CEO commented:

“How a firm conducts its business and treats its customers must be at the heart of how it operates and this has to start at the top. Today’s policy measures are an important step in ensuring that regulators have the tools at their disposal to hold individuals to account and  they build on the cultural change we are beginning to see in the boardrooms of firms across the country.”

In June 2013, the Parliamentary Commission for Banking Standards (PCBS) published its report “Changing Banking for Good”, setting out recommendations for legislative and other action to improve professional standards and culture in the UK banking industry. This was followed by legislation in the Banking Reform Act 2013 (the Act) to replace the Approved Persons Regime (APR) for banks, building societies, credit unions and PRA-designated investment firms with a new regulatory framework for individuals.

The new framework comprises two regimes, a ‘Senior Managers Regime’ and a ‘Certification Regime’, which aim to encourage individuals to take greater responsibility for their actions and make it easier for both firms and the regulators to hold individuals to account. In July 2014, the FCA and the PRA, consulted on how they would implement the new regimes. In order to give firms as much time as possible to prepare for the changes, the FCA is publishing a set of near-final rules on the new SMR, together with a steer on the policy intentions for the whole regime, including the Certification Regime and the application of the Conduct Rules.

  • Senior Managers Regime - The SMR seeks to promote a clear allocation of responsibilities to key decision-makers and strengthen their individual accountability through a robust initial and ongoing assessment of their fitness and propriety (by firms as well as by regulators) and strengthened powers of approval and enforcement for the regulators. Following a detailed consultation across industry and with stakeholders, it was decided the regime would not apply to those NEDs who do not perform delegated responsibilities.
  • Certification Regime - will require relevant firms to assess and certify at least annually the fitness and propriety of employees deemed capable of causing significant harm to the firm or any of its customers or those that could risk the integrity of financial markets. Responses to the consultation expressed concern about the loss of pre-approval of certain individuals currently caught under the Approved Persons Regime. Overall, the FCA believes that it is an important feature of the new regime that firms should take full responsibility themselves for the fitness and propriety of their staff who will be covered by the new Certification Regime. It was a clear intention of Parliament that the SMR should be narrower than the current Approved Persons Regime, allowing regulators to focus resources on supervising the most senior staff in firms.

The new regimes are also underpinned by a new set of Conduct Rules, applying to most staff within relevant firms[1].

In response to feedback, the FCA is consulting on further, more detailed guidance, on the Presumption of Responsibility. Under the Presumption of Responsibility, when a relevant/authorised firm contravenes a relevant requirement then the Senior Manager with responsibility for the management of any of the firm’s activities in relation to which the contravention occurred is guilty of misconduct, unless they satisfy the relevant regulator that they took such steps as a person in their position could reasonably be expected to take to avoid the contravention occurring (or continuing). The proposed guidance sets out the circumstances in which the FCA would seek to apply the presumption of responsibility; how the FCA would apply it and the steps that a Senior Manager should take in order to rebut the presumption of responsibility.

The FCA and PRA are also consulting on proposals to extend the new accountability regimes to incoming branches of non-UK institutions. On 3 March 2015, the Treasury announced in a Written Ministerial Statement to Parliament that it would apply the new accountability regimes to UK branches of overseas banks. The WMS noted that the regulators’ rules will ‘help ensure that the [SMR and Certification Regime] is applied in an appropriate and proportionate way to foreign institution operating through branches in the UK’.

The FCA has also published guidance consultation on ‘Risks to customers from performance management at firms’ relevant to all firms that deal with retail consumers.

The culture of a firm is important in ensuring customers are at the heart of how a business is run. A key driver of culture is how people are rewarded and the behaviours that are valued and recognised by the firm. They way in which staff are incentivised and their performance is managed plays a key role in this. The FCA has previously reported on the risks from financial incentives, recognising the positive progress we have seen and the significant changes made to firms’ financial incentive structures as a result. The FCA has also highlighted the importance of ensuring that this progress is not undermined by other performance management practices. Following an increase in whistleblowing to the FCA and evidence of instances of poor practice, the FCA is issuing a forward looking report and consulting on guidance to help firms manage the risk of mis-selling from performance management.

The FCA expects all firms who deal with retail consumers to read the report and take action to ensure they are managing this risk.

References  

1. In finalising the rules we will seek to make sure that we achieve our aim of applying the Conduct Rules to all employees except for staff carrying out purely ancillary functions (i.e. staff carrying out a role which would be fundamentally the same in a non-financial services firm).

 

Notes to editors

  1. Martin Wheatley is today speaking at Bloomberg on the issue of accountability.
  2. CP15/9: Strengthening accountability in banking: a new regulatory framework for individuals – Feedback on FCA CP14/13 / PRA CP14/14 and consultation on additional guidance. This also includes a ‘Road Map’ to the new regime.
  3. CP15/10: Strengthening accountability in banking: UK branches of foreign banks
  4. Guidance consultation and thematic report – Risks to customers from performance management at firms

    Finalisation of rules and guidance
    • Publication in CP15/9 of FCA feedback and near-final rules on the new accountability regime for banks and other relevant firms, and consultation on new guidance for the SMR –  March 2015
    • Publication in CP15/10 of FCA/PRA consultation on the accountability regime for foreign branches – March 2015
    • Publication of PRA Policy Statement on accountability – late March 2015
    • Publication of FCA and PRA final rules on accountability (including feedback on FCA the FCA/PRA consultation on forms, consequential and transitional aspects, CP14/31) – Spring/Summer 2015
    • If required, publication of FCA Consultation Paper on expansion of the Certification Regime in regard to wholesale activities – Summer 2015 (followed by a Policy Statement by end 2015)
    • Publication of FCA Policy Statement on foreign branches (subject to Parliament extending the regime to foreign branches)

      Preparing for implementation
    • As part of the publication of the final rules, we will give information on how the transitional period will be managed in terms of important matters such as how to submit forms.
    • Final deadline for firms to submit their grandfathering notifications (including their Responsibilities Map and Statements of Responsibilities) – 8 February 2016
    • New rules come into effect – 7 March 2016
    • FCA’s Register will show new Senior Managers (in banks and other relevant firms) from 7 March 2016
    • Firms’ deadline for first issuing certificates for individuals under the Certification Regime – 7 March 2017
  5. PCBS report: Changing Banking for Good. Volume 1 and Volume 2
  6. On the 1 April 2013 the Financial Conduct Authority (FCA) became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
  7. The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
  8. Find out more information about the FCA.

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