Senior Managers’ Regime update

Both the PRA and the FCA have published a number of policy papers updating the Senior Managers’ Regime (SMR), Certification Regime (CR) and Conduct Rules. The following is a summary.

PRA – Regulatory references

The PRA has published Policy Statement 27/16: Strengthening accountability in banking and insurance: PRA requirements on regulatory references (part II) (PS27/16). PS27/16 contains:

the final set of new and revised PRA rules on regulatory references (Appendix 1 for firms subject to the SMR and Appendix 2 for insurers);
a revised regulatory reference template (Appendix 3); and
revisions to Supervisory Statement 28/15: Strengthening individual accountability in banking (SS28/15) and Supervisory Statement 35/15: Strengthening individual accountability in insurance (SS35/15) setting out the PRA’s expectations of how full-scope regulatory reference firms should comply with the new rules in PS27/16 and PRA Policy Statement 5/16: Strengthening accountability in banking and insurance: Implementation of SM&CR and SIMR; and PRA requirements on regulatory references.

Interestingly, having taken into account feedback from an earlier consultation the new rules in PS27/16 extend:

the period for requesting references to the prior six years of employment; and
the scope of the requirement to request references to include Solvency II firms and large non-directive insurers where the candidate is being considered for a role as a key function holder.

The PRA also notes that chapter 6 of SS28/15 and chapter 5 of SS35/15 set out the steps which the PRA expects full-scope regulatory reference firms to take in respect of candidates who are or have previously been based overseas.

The rules in PS27/16 become effective on 7 March 2017. However, firms will be able to start utilising the revised regulatory reference template before this date and the PRA states that it may be good practice to do so.

FCA – Regulatory references

The FCA has published Policy Statement 16/22: Strengthening accountability in banking and insurance: regulatory references (PS16/22).

Section 2 of PS16/22 will be of interest to banks and insurers, as well as individual candidates for regulatory roles in the SMR and CR and the Senior Insurance Managers’ Regime (SIMR). The changes in section 3 of PS16/22 will be of interest to all FCA authorised firms. In general the FCA expects that appointed representatives of banks will be affected by the requirements in the same way as appointed representatives of non-banks.

In addition to setting out final rules the FCA sets out its response to some of the feedback that it received to its earlier consultation. Key points include:

the FCA thinks it is important for banks and insurers to seek references from all previous employers in the last six years, irrespective of the firm type or their regulated status;
references from non-financial services firms are likely to be general employment references;
the FCA notes the potential difficulty in obtaining references from overseas employers but highlights that the obligation on the requesting firm is to take reasonable steps to obtain a reference;
the FCA believes that it is the responsibility of each firm to judge what constitutes reasonable steps in the circumstances of a case. It has not prescribed what ‘reasonable steps’ means in the context of obtaining a reference as it is likely to vary, making any definition impractical to apply;
the FCA thinks it is appropriate for banks and insurers to request references when recruiting any individual to perform a pre-approved role or a significant harm function, including contingent workers or volunteers; and
ideally references should be obtained before an application for approval is submitted. However, the FCA understands that there will inevitably be circumstances where this may not be possible. In these circumstances, the final rules have been amended to allow references to be obtained no later than one month before the end of the application process. This applies unless requesting or providing a reference would require the recruiting firm or the employer giving the reference (or any other person) to make a public announcement. In these cases, there will be no time limit, and references can be obtained at any time during the application process.

The new FCA rules come into force on 7 March 2017.

Both the PRA’s and FCA’s Policy Statements on regulatory references should be read together. Annex 3 of PS16/22 contains a table that provides a summary of the combined FCA and PRA regulatory reference requirements.

PRA – Proposed amendments and optimisations

The PRA has published Consultation Paper 34/16: Strengthening accountability in banking and insurance: amendments and optimisations (CP34/16). In CP34/16 the PRA sets out certain proposals for implementing amendments to the SMR and CR including:

setting out the PRA’s expectations on the duty of responsibility;
applying certain Conduct Rules to those non-executive directors (NEDs) who are not senior managers under the SMR or SIMR; and
minor, technical changes to the PRA’s Statement of Policy on conditions, time limits and variations of approval.

The PRA states that its expectations have not changed materially as a result of the shift from the presumption of responsibility to the duty of responsibility but some necessary changes to SS28/15 are proposed to reflect the change in status from a presumption to a duty. A revised draft of SS28/15 can be found in Appendix 3 of CP34/16.

For firms subject to the SMR it is proposed that individual Conduct Rules 1 to 3 and Senior Manager Conduct Rule 4 apply to NEDs.

CP34/16 also sets out proposals that include:

creating a new PRA Senior Management Function, the Chief Operations function (SMF23), which covers the individual with overall responsibility for managing and ensuring the operational continuity and resilience of, the internal operations, systems and technology of a firm;
to complement the new SMF23, creating a new PRA prescribed responsibility for managing, and ensuring the operational continuity and resilience of, the internal operations, systems and technology of a firm;
inserting additional criteria to the definition of the Head of Key Business Area function to supplement the existing quantitative thresholds in rule 3.6 of the Senior Management Functions Part of the PRA Rulebook; and
clarifying the PRA’s expectations of Statements of Responsibilities and Management Responsibilities Maps.

The rationale behind the proposed SMF23 is to recognise the importance of operations, systems and technology on the safety and soundness of firms and financial stability, and the corresponding need to ensure appropriate accountability for these areas at the most senior levels in firms. The PRA states that individuals likely to be in scope of the proposed SMF23 commonly hold the job title of Chief Operating Officer but may also hold job titles such as Chief Administrative Officer or Head of Operations and Technology. Where relevant, the SMF23 will also apply to incoming third-country branches. However, the PRA also states that not every individual with these job titles will necessarily come into scope and it will be determined by their specific responsibilities. The PRA adds that the majority of individuals likely to be covered by the proposed SMF23 in large firms may already be subject to the SMR falling under the FCA’s Other Overall Responsibility function (SMF18) or, if based in an incoming third country branch, Other Local Responsibility function (SMF22).

The deadline for comments on CP34/16 is 9 January 2017.

FCA – Guidance on the duty of responsibility

The FCA has published Consultation Paper 16/26: Guidance on the duty of responsibility (CP16/26).

In CP16/26 the FCA consults on proposals to amend the Decision Procedure and Penalties Manual (DEPP) that will give guidance on how it will enforce the duty of responsibility. The guidance includes a non-exhaustive list of considerations the FCA will keep in mind when determining whether or not a senior manager took such steps as a person in their position could reasonably be expected to take to avoid the firm contravention occurring (or continuing).

The deadline for comments on CP16/26 is 9 January 2017.

FCA – Non-executive directors

The FCA has published Consultation Paper 16/27: Applying conduct rules to all non-executive directors in the banking and insurance sectors (CP16/27).

In CP16/27 the FCA consults on proposals to extend its Code of Conduct sourcebook (COCON) to ‘standard NEDs’ in banks, building societies, credit unions and dual regulated investment firms and Solvency II firms. By ‘standard NEDs’ the FCA refers to those NEDs who are not subject to the SMR or SIMR.

The FCA is proposing:

that standard NEDs be subject to the five FCA Individual Conduct Rules set out in COCON and to Senior Manager Conduct Rule 4;
that Senior Manager Conduct Rules 1, 2 and 3 will not apply to standard NEDs unless, as well as being a standard NED, he/she also fall into one of the other categories of ‘senior conduct rules staff’ as defined in the FCA Glossary;
to introduce additional guidance to Individual Conduct Rule 2 (the requirement to act with due skill, care and diligence) to clarify that this rule applies to a director (whether executive or non-executive) when acting as a member of the board or other governing body or of its committees;
to extend the application of the guidance in COCON 1 Annex 1 on the role and responsibilities of NEDs to insurance firms; and
amend the conduct breach report (Form H).

The deadline for comments on CP16/27 is 9 January 2017.

FCA – Overall responsibility and the legal function

The FCA has published Discussion Paper 16/4: Overall responsibility and the legal function (DP16/4).

In January 2016 the FCA published a statement on its website regarding the concerns that had been raised as regards Senior Management Function 18 – Other Overall Responsibilities (SMF18) and its application to the legal function. In its statement, the FCA clarified that, although the legal function was included in SMF18, any firm that had made a decision in good faith on the basis of the published rules and the regulator’s other communications about whether or not the person in charge of the legal function needed to be approved, would not need to change their approach in the interim.

The purpose of DP16/4 is to clarify how and why the legal function is currently captured under the SMR, and to consider whether the legal function should continue to be part of the SMR going forward.

The deadline for comments on DP16/4 is 9 January 2017.

PRA – Variable remuneration

The PRA has published Policy Statement 26/16: Buy-outs of variable remuneration (PS26/16).

PS26/16 is relevant to banks, building societies and PRA-designated investment firms, including UK branches of non-EEA headquartered firms, and should be read alongside the Remuneration Part of the PRA Rulebook.

PS26/16 contains final rules amending the Remuneration Part of the PRA Rulebook intended to ensure that the practice of buy-outs does not blunt the beneficial incentive effects of the existing rules on malus and clawback, or allow employees to avoid the proper consequences of their actions.

The PRA states that the final rules do not differ materially from those that were consulted on. In particular the regulator states that the requirement for the previous employer to provide employees with a remuneration statement is likely to reduce costs on firms by removing the need to trace all previous employers and determine the amounts of the buy-out award pertaining to each, shifting the responsibility to employees and former employers who should already have access to this information. The PRA is of the opinion that the impact of the rules as made is not significantly different from the impact of the proposed rules on mutual or other deposit takers.

The PRA will apply the new rules to buy-out contracts concluded on or after 1 January 2017.

PRA – The PRA’s expectations on remuneration

The PRA has published Consultation Paper 33/16: The PRA’s expectations on remuneration (CP33/16). CP33/16 is relevant to all Capital Requirements Regulation (CRR) firms and third-country CRR firms in relation to their activities carried on from an establishment in the UK.

In CP33/16 the PRA proposes to create a unified supervisory statement on remuneration. The single supervisory statement will draw together the PRA’s existing supervisory statements on proportionality, the application of malus and other elements of remuneration in relation to the Remuneration Part of the PRA Rulebook and set out additional expectations of firms.

On 21 December 2015, the European Banking Authority (EBA) published Guidelines on Sound Remuneration Policies (EBA Guidelines). Both the PRA and the FCA have notified the EBA that they will comply with all aspects of the EBA Guidelines except for the provision that the limit of awarding variable remuneration to 100% of fixed remuneration, or 200% with shareholder approval (the bonus cap) must be applied to all firms subject to the CRD IV.

In CP33/16 the PRA states that in respect of the EBA Guidelines, provisions have been carried over to the proposed unified supervisory statement to the extent necessary. Accordingly there are areas of previous statements that have not been carried over where either further comment is not required or the position has been updated by the EBA Guidelines.

All firms are required to comply with the EBA Guidelines from 1 January 2017. Firms should note that the PRA has notified the EBA of compliance with all aspects of the EBA Guidelines except the provision requiring that the bonus cap must be applied to all firms. In this respect the PRA’s existing proportionality approach, as carried over in the draft unified supervisory statement, will continue to apply.

The deadline for comments on CP33/16 is 28 November 2016.

Until the unified supervisory statement is finalised firms remain subject to expectations in the existing statements:

Legacy Supervisory Statement 8/13: Remuneration standards: the application of proportionality;
Supervisory Statement 2/13: PRA expectations regarding the application of malus to variable remuneration and
Supervisory Statement 27/15: Remuneration.

FCA – Remuneration in CRD IV firms

The FCA has published Consultation Paper 16/28: Remuneration in CRD IV firms (CP16/28).

CP16/28 affects all firms that fall within scope of the CRD IV, namely banks, building societies, investment firms and overseas firms, who are required to comply with the FCA’s Remuneration Code under SYSC 19A or SYSC 19D.

In CP16/28 the FCA sets out proposals to help firms understand the rules that apply to their remuneration policies and practices, as well as bringing some of its provisions into line with the EBA Guidelines. In addition, the FCA proposes new non-Handbook guidance that is designed to address some of the questions firms most frequently ask the regulator about how it implements provisions under the EBA Guidelines, as well as more general provisions in the FCA Handbook.

The deadline for comments on CP16/28 is 28 November 2016.

PRA – Whistleblowing

The PRA has published Consultation Paper 35/16: Whistleblowing in UK branches (CP35/16).

In CP35/16 the PRA proposes amendments to its rules to require UK branches of non-EEA deposit-takers and both EEA and none-EEA insurers, including reinsurers, to inform workers about the PRA’s and FCA’s whistleblowing services, and how to use them. The PRA also proposes requirements for non-EEA banking groups with both UK branches and subsidiaries. The proposals in CP35/16 do not apply to UK branches of EEA deposit-takers.

The deadline for comments on CP35/16 is 9 January 2017.

The PRA expects the final rules to come into force in September 2017.

FCA – Whistleblowing

The FCA has published Consultation Paper 16/25: Whistleblowing in UK branches of overseas banks (CP16/25). In CP16/25 the FCA consults on its approach to applying whistleblowing requirements to UK branches of overseas banks. It does not apply to UK branches of overseas insurers.

The FCA’s proposals include:

that UK branches of overseas banks tell their UK-based employees about the FCA and PRA whistleblowing services;
where a branch of an overseas bank sits alongside a UK-incorporated bank that is subject to the FCA’s whistleblowing rules, the UK-based staff of that branch should be informed of the subsidiary’s whistleblowing arrangements; and
UK branches of overseas banks will not be required to implement any other of the FCA’s rules relating to whistleblowing. However, the rules do represent good practice guidance for these firms, as they do for all firms the FCA regulates.

The deadline for comments on CP16/25 is 9 January 2017.

FCA – Supervisory review

The FCA has published a number of Feedback Statements that set out the findings of its in-depth supervisory review of the Statements of Responsibilities and Responsibilities Maps supplied with grandfathering notifications for firms. The FCA has identified some issues where it believes that some firms are not meeting its rules and guidance.

PRA papers:

View PRA Policy Statement 27/16: Strengthening accountability in banking and insurance: PRA requirements on regulatory references (part II), 28 September 2016

View PRA Consultation Paper 34/16: Strengthening accountability in banking and insurance: amendments and optimisations, 28 September 2016

View PRA Policy Statement 26/16: Buy-outs of variable remuneration, 28 September 2016

View PRA Consultation Paper 33/16: The PRA’s expectations on remuneration, 28 September 2016

FCA papers:

View Policy Statement 16/22: Strengthening accountability in banking and insurance: regulatory references, 28 September 2016

View Consultation Paper 16/26: Guidance on the duty of responsibility, 28 September 2016

View Consultation Paper 16/27: Applying conduct rules to all non-executive directors in the banking and insurance sectors, 28 September 2016

View Discussion Paper 16/4: Overall responsibility and the legal function, 28 September 2016

View Consultation Paper 16/28: Remuneration in CRD IV firms, 28 September 2016

View Consultation Paper 16/25: Whistleblowing in UK branches of overseas banks, 28 September 2016