Insight

Senior Managers Regime: are you taking reasonable steps?

By David Biggin

Oct 26, 2015

With the Senior Managers Regime, UK regulators are putting pressure on those at the top of financial institutions in the wake of several scandals. That’s because, despite convictions for misconduct by traders, many senior managers will avoid criminal charges for failing to have proper controls in place. The new regulations will hold senior managers to account by introducing criminal liability.

The new regime, devised by the Prudential Regulation Authority (PRA) and Financial Conduct Authority’s (FCA), comes into effect on 7 March 2016. Together, the Senior Managers Regime, Certification Regime and Conduct Rules will impact most staff in UK banks, improving individual accountability for management and conduct in financial services. According to the PRA’s Deputy Governor, Andrew Bailey, the “new accountability regime will hold all senior managers, including non-executive directors, to a clear standard of behaviour and we will take action where they fail to meet this.”

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The regimes will require changes across more than just the senior managers. Alongside specific responsibilities prescribed to senior managers, new fit and proper requirements apply to those in-scope for the Certification Regime too. That means there must be changes to processes and controls across HR and compliance to ensure firms continue to meet the regulatory requirements. The Conduct Rules will also apply to most individuals in financial services organisations.

For senior managers, the requirement to accept personal accountability raises the stakes. The Treasury’s recent move to replace the ‘presumption of responsibility’ with a statutory ‘duty of responsibility’ has removed the controversial reverse burden of proof, but still allows the regulator to take enforcement action if they can prove a senior manager didn’t take reasonable steps to prevent a breach.

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Providing a framework for reasonable steps

Senior managers can show they’re taking reasonable steps with a simple framework. This includes reviewing delegation, governance and controls, and culture.

Delegation

All senior managers will need to delegate some responsibilities. In the first instance, managers should clearly document any delegation in job descriptions, objectives or mandates. They should also record acknowledgement of the delegation – whether it’s confirmation of a job mandate or objectives, or less formal, such as acknowledgement by email.

When delegating tasks, the conduct rules for senior managers specifically say they should ensure that any delegation is to an appropriate person – this means ensuring that the person is capable and qualified to take responsibility for that task.

The senior manager can’t absolve themselves of their prescribed responsibility through the documentation of delegation alone. The senior manager also needs to oversee the discharge of their responsibilities, including governance and controls over the day-to-day management of the obligation.

Governance and controls

Once delegated, the senior manager should put processes and controls in place to ensure the employee continues to undertake the delegated responsibility. These could include, but are not limited to:

  • regular meetings with the delegated employee
  • regular reporting, on a weekly, monthly or quarterly basis
  • convening a committee to discuss the responsibility area, identify risks and issues, and agree actions to mitigate and resolve them.

Culture

While culture is less easy to define, this is where many organisations will fail to embed the changes brought about by the new regime. Culture needs careful consideration, as the inclusion of prescribed responsibilities relating to culture mean it’s now the responsibility of specific senior managers.

Where senior managers consider responsibilities as compliance exercises, they often de-prioritise or overlook them. Senior managers should actively discourage the attitude of compliance for compliance’s sake and ensure everyone takes the responsibility to comply seriously. Creating this culture means:

  • identifying where a culture of risk management and compliance should be a priority, such as all front office staff
  • providing senior leaders with the support they need to embed cultural change, such as briefings and training materials
  • conducting a regular culture survey to monitor changes and show that a culture of risk management and compliance has been implemented.

The FCA’s former CEO, Martin Wheatley, said in a speech that “the industry has nothing to fear from higher standards.” While the new regime puts senior managers in the spotlight and holds them accountable, by putting a proper framework in place to document delegation, evidence governance and controls, and foster a culture of compliance, there really will be nothing to fear from the new standards of accountability in financial services.

About the authors

David Biggin PA financial services expert David helps financial services companies to understand the impact of regulation and to assure its implementation

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