An employment perspective: New Senior Managers & Certification Regime extension

The Senior Managers and Certification Regime (SM&CR) was extended to apply to all Financial Conduct Authority (FCA) solo-regulated businesses from 9 December 2019.

The new regime sets out how the FCA and Prudential Regulation Authority (PRA) will oversee certain people in businesses that are authorised by them and how responsibility for regulatory breaches will be assigned.  For an introduction into the regime, please see Rachelle’s article here.

Steps an employer should take - “Core Regime” guidance

Please note, this guidance applies to businesses that fall in the “Core Regime” only. If your business falls into the enhanced firm or limited scope firm rules, please contact our team for further guidance. In order to determine the categorisation of your business, see the FCA checker tool found in the guide here.

  1. Identify and allocate

Core firms will need to allocate the prescribed responsibilities for the firm’s obligations relating to the certification scheme and the conduct rules.

Core firms also need to identify:

  • Whether every approved person will automatically be converted or whether (Form K) will need to be submitted;
  • Employees who are performing certification functions and issue them with a certificate if they are fit and proper; and
  • Whether the correct people are in the correct approved functions.
  1. Carry out a review and/or implement changes to the following:

Core firms should review and implement relevant changes to the following:

Recruitment process  

The key points firms should consider at the pre-employment stage are:

  • Offer of employment

A key feature of the SM&CR is that firms must certify that appointed staff are fit and proper. Firms should ensure that any appointment to a senior management function or certification is conditional upon required standards and the firm being satisfied that they are fit and proper. The offer of employment should be expressed as being conditional upon the following requirements being sufficient:

  1. Screening/background checks

The regulator requires criminal records checks to be conducted for senior managers. They are not mandatory for certification regime staff, but firms may wish to perform them in any event. The firm may wish to carry out background and credit checks also on all staff.

  1. References

As part of the assessment of whether a person is fit and proper, firms must request a regulatory reference from past employers to cover the previous six years of employment for senior managers, certification function candidates and non-executive director (NEDs). If the firm is in a group and centralised systems or other means exist where information can be shared easily as part of the fit and proper assessment, the rules permit that references do not have to be requested. The onus is on the recruiting firm, within the group, to obtain the necessary information to satisfy their obligations to ensure that the individual is fit and proper.

In respect of those being appointed to senior manager roles which require the regulators’ approval, references should be applied for before the application is made to the regulator. For all other references it is advised that references are obtained no later than one month before the end of the application process, unless, providing or requesting the reference requires the recruiting firm or the employer giving the reference to make a public announcement.

Reference requests must be completed on a mandatory template accessed here, and must be updated where new significant information comes to light. The following minimum information must be requested by the firm when making a reference request:

  • Details of any certification function, controlled function (including being an SMF), notified NED or credit union NED role including any other roles held and a summary of what such roles involved in the preceding six years.
  • If a firm has concluded within the last six years that a candidate was in breach of the FCA conduct rules, the details of this and the facts that led the firm to that conclusion.
  • If a firm has concluded within the last six years that a candidate was not fit and proper to perform a function, the details and the facts that led the firm to that conclusion.
  • Details of disciplinary action and the outcome including the issuing of form warnings, suspension or dismissal and reduction or recovery of any of the person's remuneration.

If a firm must provide commercially sensitive information in the reference, an application for a waiver can be made.

Firms must disclose all relevant information six years from the date the reference request is made. There is no time limit for serious misconduct, serious misconduct must always be disclosed even if it occurred over six years ago. There is a requirement placed on firms to retain fit and proper information and the records of ex-employees conduct for a period of six years following their termination or resignation from a firm.

There is an explicit rule that firms must not enter into arrangements that conflict with the regulatory reference rules. Firms should also not enter into any arrangements or agreements that conflict with their disclosure obligations in respect of references.

  1. Certification status

Senior managers (but not individuals performing certification functions) need to be certified by the relevant regulator as fit and proper before they can be appointed to the role.

  1. Decision maker

Firms should decide who should review the background checks and references for candidates for senior management regime and certification regime roles. A senior manager will need to be accountable for the firm’s obligations in respect of regulatory references under their prescribed responsibilities

Training

Firms must consider the level and amount of training employees will need to understand and meet the new requirements imposed by the regime. Firms should focus on:

  1. The conduct rules – all employees should be aware and provided with training on their obligations under the conduct rules and the identities of those enforcing and determining breaches of the rules (responsibilities/SMFs need to be allocated and individuals aware of identities of those with responsibilities and SMFs). For staff who do not hold an SMF or certification function, firms have until 9 December 2020 to make them aware of how the rules apply to their role.  
  2. Assessments – employees responsible for carrying out fitness and propriety assessments may require training on how to do so.
  3. Performance – senior management employees and certification regime staff with managerial responsibilities should receive training on recognising under-performance and what actions can be taken in respect of it. 
  4. Whistleblowing – there should be a consideration of the arrangements and whether they could be more effective with a focus on the need to report wrong-doing anonymously and available methods for doing so. 

Documentation

a. Employment contracts

Amendments need to be made to new and existing contracts to address changes. Firms will need to consider how and when changes should be introduced and what should be offered as consideration to make the changes effective. It is advised that firms focus on the following when undertaking a review of all contracts:

  • Conduct and standards – an amended clause or two in respect of the fit and proper standard and maintaining the conduct rules should be considered. An amendment is likely to be better in the form of a warranty requiring a candidate to confirm that they have not been investigated or disciplined previously for any breach of the conduct rules or the fit and proper requirement.
  • References –whether satisfactory references should be required an ongoing basis should be reviewed and a clause inserted if that is the preference.
  • Duties – with senior managers a clause which refers specifically to the individual’s obligations should be included. Consideration should also be given to whether a clause on the delegation of SMFs should be included.
  • Disciplinary – the right to suspend due to poor-performance may want to be inserted in the disciplinary clause if this is the preference.
  • Termination – express termination rights should be included in any amended contract in respect of an individual’s failure to comply with any rules or requirements in respect of their role.

b. Policies and procedures

There will need to be specific focus on the following policies and procedures:  

Performance

Changes to such policies may need to be made to minimise risk. For example, if an employee is under-performing, they could pose a risk to the requirement of senior managers to fulfil their statement of responsibilities.

Disciplinary

Changes to disciplinary policies will need to be made to satisfy the requirements of the new regime. There should be consideration of:

  1. Sanctions - is it clear what they will be if an employee fails to meet the requirements for fitness and propriety and the conduct rules?
  2. Regulatory notification – is it specified at what point the regulator will be notified that an employee is subject to disciplinary action?
  3. Expiration of warnings – is there clarification on expired warnings and why they need to remain on an employee’s personnel file to comply with reference requirements?

Whistleblowing

Whistleblowing policies will need to be reviewed in light of new regulator whistleblowing rules with the following being addressed:

  1. Identification of the whistleblowing champion and their responsibilities;
  2. How reportable concerns may be raised anonymously; and
  3. The regulator whistleblowing services and how they can be accessed.

References

There are regulatory rules on references. A review as to whether a specific policy should be implemented to address the requirements on regulatory references should be taken by all businesses.

Certification process

A process will need to be developed to collect and collate data in respect of the fitness and propriety of all employees in certification roles. Firms have until 9 December 2020 to carry out the assessments and issue certifications in respect of these employees.

In terms of ongoing certification requirements, under the new regime firms must issue an annual certificate to employees if they are satisfied that they meet the appropriate standards of fitness and propriety, and the regulators expect firms to undertake this re-certification process at least annually.

Termination of employment

An employer should consider the following issues on termination of employment of a senior manager or a certified employee:

  1. Allocation of senior manager responsibilities and SMFs;
  2. Handover of responsibilities and the communication of key information to others taking over the role; and
  3. Notification to the regulator if termination is linked to misconduct.

Sanctions for non-compliance

It is important that the above action steps are considered by core firms to ensure compliance with the new regime and prevent any potential sanctions. The FCA and PRA have the power to impose criminal and civil sanctions.

If the firm fails to comply with the rules, senior managers can receive custodial sentences for the breach. For example, if they are found guilty of a criminal offence under section 36 of the Banking Reform Act they could receive on summary conviction in England and Wales imprisonment for a term not exceeding 12 months or a fine or both, and on conviction on indictment, to imprisonment for a term not exceeding seven years or a fine, or both.

Civil sanctions

The range of civil sanctions the FCA and PRA can enforce include the following:

  • Public censures;
  • Withdrawal of permission to hold SMFs;
  • Fines;
  • A prohibition order (if they consider the individual is not fit and proper) and;
  • A prohibition order and any other civil sanction.

If you have any questions or would like further information on the employment implications, please do not hesitate to contact Claire Knowles or the employment team. 

Claire Knowles - Partner

Mark Alaszewski - Associate

Rebecca Mahon - Solicitor

Amelia Wheatstone - Solicitor 

Adam McGlynn - Trainee Solicitor