Innocent until proven guilty?19th November 2015
Senior Managers and Certification Regime
Just months before it is due to come into force on 7 March 2016, the Treasury has announced changes to the new senior managers and certification regime. The controversial “reversal of burden of proof” which was originally proposed shall no longer apply and the duty to establish misconduct by a senior manager will rest with the regulators, as it currently does under the Approved Persons Regime it replaces.
It is intended that the new regime, which emerges from the 2013 parliamentary commission on banking standards established in the wake of the 2012 Libor scandal, will embed a culture of individual accountability in the financial services industry.
The regime will eventually apply to around 60,000 firms, with implementation for banks, building societies, credit unions and some investment firms commencing in March 2016 and expanding in 2018 to cover other financial firms (including fund managers, insurers, mortgage brokers and consumer credit firms).
Notwithstanding the latest announcement, individual senior managers will still face a high bar to discharge personal culpability before the regulators and their employers under the new regime. In the event of a regulatory breach, the responsible senior manager individual will need to be able to demonstrate they had taken reasonable steps to prevent the breach from occurring or continuing.
Both relevant employers and senior managers will need to ensure they are ready for implementation of the regime. Crucially, employers will need to agree a Statement of Responsibilities (SOR) with each relevant senior manager. The contents of the SOR shall require careful consideration and negotiation, as it will define the scope of senior managers’ personal liability both to the regulator and to their employer and determine whether a regulatory breach is the fault of a senior manager. Senior managers who are found liable under the regime may be subject to sanctions by the regulators, financial penalties, public censure and the possibility of a ban from ever holding a regulated role again.
Instinctively a senior manager might therefore be inclined to prefer their SOR as brief as possible, while their employer will probably want it to be detailed and inclusive to ensure there are no gaps in responsibility. However, it is in the best interests of both parties to focus instead on ensuring their SOR accurately reflects the remit of their role, and is drafted to clarify exactly what is (and what isn’t) ultimately their responsibility.
As well as careful negotiation of a SOR, there may be a need to renegotiate their terms of employment in advance of implementation of the new regime to re-define obligations and consequences. Employers are likely to want to contractually oblige senior managers to comply with the conduct rules and provide satisfactory handover certificates and will want to have the contractual right to dismiss with immediate effect if a senior manager fails to fulfill these obligations. Likewise, senior managers will need to ensure they have the tools necessary to fulfill their obligations under the regime, including adequate training on the conduct rules and sufficient handover when taking on additional responsibilities.
Given how critical they are under the new regime, both employers and senior managers should take independent legal advice on crafting and negotiating a SOR and employment terms, and they should be kept under regular review to ensure compliance and they accurately reflect any subsequent changes to the senior manager’s duties and the business.
The new senior managers and certification regime combined with a tough remuneration regime allowing long term clawback of rewards and new rules on whistleblowing in the financial services sector coming into force next year mean that senior managers should prepare now to ensure they are ready to face the new landscape.