Ashurst London

August 2014

Financial services briefing

New regulatory framework for

financial services individuals
Key messages:

Firms need to revisit their governance

arrangements in light of the new framework
changes to management responsibilities might
be needed.
Firms need to submit a statement of
responsibility when requesting regulatory
approval for individuals this will give the
regulators stronger evidence to take
enforcement action if a manager has failed in
his stated duties.
Firms need to establish and maintain a
Responsibilities Map setting out a firm's
management structure and governance
arrangements in a single document.
Firms need to annually certify that certain
employees who could cause significant harm to
the firm or its customers are fit and proper and
the firm will be on the hook and subject to
potential enforcement action if individuals turn
out to be unfit/improper.
The new Conduct Rules cover most of a firm's
staff, not just Approved Persons training on
what this means for those individuals should be
rolled out.

Following the Parliamentary Commission on Banking

Standards and the recent Financial Services (Banking
Reform) Act 2013 (BR Act), the Prudential Regulation
Authority (PRA) and Financial Conduct Authority (FCA)
are now proposing in their joint consultation paper
(FCA CP14/13 / PRA CP14/14 (CP14/13)) the following
regulatory framework for individuals:

Senior Managers Regime (SMR) these rules will

cover individuals who are subject to regulatory
approval and will require firms to allocate a range
of responsibilities to these individuals and to vet
their fitness and propriety in those roles. This
regime will cover a narrower group of people than
the current approved persons regime.

Certification Regime this will require relevant

firms to assess the fitness and propriety of certain
employees who could pose a risk of significant
harm to the firm or any of its customers. A large
majority of a firm's employees will be caught.
Conduct Rules referring to professional conduct
rather than conduct of business, these rules will
apply to those caught by both the Senior Managers
Regime and the Certification Regime and will cover
the majority of a firm's employees.

The purpose of the proposals is to enhance individual

accountability and clarify the specific responsibilities of
senior managers.

1. Scope
The proposals apply to all UK authorised banks,
building societies or investment firms who have
permission to deal as principal and undertake PRA
regulated activities.
The proposals will not apply to UK branches of
relevant firms that are headquartered overseas
(except in relation to an individual of an overseas
branch who must be nominated and approved by the
PRA as an "Overseas Branch Senior Manager").
There is still some uncertainty over the exact scope of
the rules: the regulators' rules for branches may
change depending on whether the Government goes
ahead with proposals suggested by George Osborne
in his 2014 Mansion House speech to extend the
regulatory regime to cover all banks that operate in
this country. This issue has been parked by the
regulators for the moment, pending confirmation of
the Government's proposals.

2. Senior Managers Regime

The BR Act replaced the significant influence function
regime with the concept of Senior Management
Functions (SMF). The SMF regime will require the
senior persons in a firm to be individually responsible
for managing one or more aspects of the firm's affairs,

AUSTRALIA BELGIUM CHINA FRANCE GERMANY HONG KONG SAR INDONESIA (ASSOCIATED OFFICE) ITALY JAPAN PAPUA NEW GUINEA
SAUDI ARABIA SINGAPORE SPAIN SWEDEN UNITED ARAB EMIRATES UNITED KINGDOM UNITED STATES OF AMERICA

including the regulated activities and those aspects

which involve a risk of a serious consequence for the
firm.
CP14/13 sets out the PRA's and FCA's proposals on
what will constitute SMFs in the SMR and how these
functions should be allocated between senior
managers. A summary of the SMR proposals is set out
in diagram 1 below.
2.1
PRA's approach:
The PRA's proposed rules define every SMF by
reference to the fundamental characteristic of that role.
In addition, the PRA proposes a limited set of
"Prescribed Responsibilities". Firms must ensure that
the Prescribed Responsibilities are allocated among
senior managers. Practically, the PRA has said that it
expects firms to allocate most Prescribed
Responsibilities to the SMF with which the
responsibility is most closely associated.
2.2
FCA's approach:
Under the BR Act, the FCA can specify certain
functions as SMFs. In addition to specifying a function
as a SMF, the BR Act has widened the FCA's powers to
specify functions as non-SMF Controlled Functions
under the old approved persons regime. However, the
FCA doesn't intend to exercise this power. This will
result in some roles ceasing to be controlled functions
(but many such roles will be covered by the
Certification Regime described below).
The FCA's proposed SMFs are set out in the diagram
below. Of note is the Significant Responsibility Senior
Manager which the FCA intends to cover senior
executives who are responsible for functions but are
not board members. The FCA has also specified 27
"Key Functions" that it thinks are likely to apply to the
most relevant firms.
The FCA wants firms to clarify who is responsible for
each Key Function. The FCA has set out its
responsibility framework, which is summarised in
diagram 1.
2.3
Dual regulated firms:
Where an individual will perform a SMF specified by
the FCA and a SMF specified by the PRA, the
regulators' existing rule (i.e. that separate FCA only
approval is not required for the FCA SMF) will continue
to apply. The PRA's and FCA's proposed rules are
intended to operate as a single cohesive regime. Every
individual on the board of a PRA or FCA firm should be
covered by the SMR.
Existing SIF approvals will be grandfathered to their
SMF equivalents.

2.4
Statements of responsibilities:
Firms must submit statements of responsibilities when
applying for approval of an individual to perform an
SMF or where there is a change in a senior manager's
responsibilities setting out what an individual's role will
entail with reference to SMFs. While some of the
evidential requirements for assessing senior managers
will change, the process for approval will remain the
same. There is likely to be some toing and froing
between the FCA and the firm/individual as the FCA is
likely to want to make the level of responsibilities clear
(e.g. the individual will ensure risks are managed)
while the firm/individual are likely to want to be less
prescriptive. But the reason for the change is clear
to enable FCA/PRA to take enforcement action more
easily where things go wrong on a manager's watch.
2.5
Responsibilities Map:
The regulators also want firms to prepare and
maintain a "Responsibilities Map", setting out in a
single document the firm's management structure and
governance arrangements. The Responsibilities Map
should also act as a gap analysis exercise. It is likely
that such a document would also feed into a firm's
resolution and recovery plan. Again, some toing and
froing is to be expected over how detailed this should
be.

3. Certification Regime
The BR Act has introduced the requirement for firms to
certify certain employees as being fit and proper to
perform what is known as "significant harm functions",
and referred to by the regulators as "Certification
Functions". Individuals performing certification
functions will not be subject to regulatory approval but
a firm will have to take reasonable care to make sure
that no employee performs such a function without
having been certified as fit and proper to do so.
Certification will be renewed annually.
3.1
PRA's approach:
The PRA proposes that the scope of its Certification
Regime should mirror that which is in place for
material risk takers for the rules on remuneration, i.e.
persons whose actions could have a material impact
on the risk profile of the firm.
The PRA proposes making general rules requiring all
persons within the PRA's SMR and Certification Regime
to have the personal characteristics, level of
competence and appropriate qualifications for the
sound and prudent management of the firm, separate
to those contained in the FCA's FIT Handbook
(although FIT will remain in place for insurers).

3.2
FCA's approach:
FCA follows the PRA's approach, however it will only
require employees to be certified if they perform their
function from an establishment in the UK or to clients
in the UK. There is also a wider category which the
FCA believes should be captured by the Certification
Regime which include:
a)

b)

c)

individuals who previously exercised

Significant Influence Functions but who are
not caught within the scope of the SMF;
individuals in customer-facing roles who are
subject to qualification requirements under
the FCA's rules; and
anyone who supervises a Certified Person.

The FCA believes that the guidance in the FIT

Handbook is sufficient and equally applicable for firms
to use when assessing the fitness and propriety of
Senior Managers and those within the Certification
Regime.

3.3
Dual regulated firms:
With similar factors to be taken into account by firms
when satisfying the PRA and FCA tests of fitness and
propriety, the regulators believe that firms will be able
to make a single assessment and issue a single
certificate to an employee.

4. Conduct Rules
The regulators propose making new rules that will
replace the existing Approved Persons Principles, to be
known as "Conduct Rules". Conduct Rules will be a
framework against which regulators will judge an
individual's actions as part of their general supervision
of the firm. Surprisingly, the regulators have taken
different approaches to the Conduct Rules. The PRA
has issued a supervisory statement containing much
less guidance on the Conduct Rules than the FCA.

The Conduct Rules are:

First tier Individual Conduct Rules

Senior
Managers

Rule 1

You must act with integrity

Rule 2

You must act with due skill, care and diligence

Rule 3

You must be open and co-operative with the FCA, PRA

and other regulators

Certified
Staff

All other FS
employees

FCA only first tier additional Individual Conduct Rules

Rule 4
Rule 5

You must pay due regard to the interests of customers

and treat them fairly
You must observe proper standards of market conduct

FCA only

FCA only

FCA only

FCA only

FCA only

FCA only

Second tier Senior Manager Conduct Rules

SM1

You must take reasonable steps to ensure that the

business of the firm for which you are responsible is
controlled effectively

SM2

You must take reasonable steps to ensure that the

business of the firm for which you are responsible
complies with relevant requirements and standards of
the regulatory system

You must take reasonable steps to ensure that any

delegation of your responsibilities is to an appropriate
person and that you oversee the discharge of the
delegated responsibility effectively

You must disclose appropriately any information of

which the FCA or PRA would reasonably expect notice

SM3

SM4

4.1
PRA's approach:
The PRA proposes to apply Conduct Rules SM1-SM4 to
all individuals who are approved by the PRA or FCA as
Senior Managers or who fall within the PRA's

Certification Regime. The PRA will apply certain of the

Conduct Rules to Senior Managers only.

4.2
FCA's approach:
The FCA proposes applying their "Individual Conduct
Rules" to the large majority of those working in
relevant firms. The Conduct Rules 1-3 will apply to:
a)
b)
c)

all individuals approved by the FCA or PRA as

Senior Managers;
all individuals covered by the FCA or PRA's
Certification Regime; and
all other employees other than those ancillary
staff who are not financial services firm
specific, e.g. receptionists, property
managers, secretaries, IT staff.

4.3
Effect on firms:
Firms must make the individuals who are subject to
the Conduct Rules aware of them and train them in
how the rules apply to them. A training schedule
should be prepared as soon as possible for those
affected. Firms will also be under an obligation to
notify the regulators when they know or suspect a
person has breached a Conduct Rule or when they

take disciplinary action against a person as a result of

a breach of any Conduct Rule (such notification to be
within seven business days of the firm becoming
aware of the matter in the case of a Senior Manager).

Conclusion and action points

In practice, this will be a material project for relevant
firms. The new rules will affect a high percentage of a
firm's staff. Project teams should be established to
examine a firm's current arrangements, work out who
will fall under the proposed regimes and then put in
place the necessary changes to policies, regulatory
reporting and training, as well as assigning
responsibility for the production of reports, such as the
Responsibilities Map, described below. This is not the
first time that firms will have completed such an
exercise it's not quite Groundhog Day but almost!
project teams can look at the exercise undertaken in
2010 when new significant influence functions were
introduced as a starting point on how to manage this
regulatory change.

Contacts
Robert Moulton
Partner
T: +44 (0)20 7859 1029
rob.moulton@ashurst.com

James Perry
Partner
T: +44 (0)20 7859 1214
james.perry@ashurst.com

Jake Green
Senior Associate
T: +44 (0)20 7859 1034
jake.green@ashurst.com

Nicola Higgs
Senior Associate
T: +44 (0)20 7859 1033
nicola.higgs@ashurst.com

Lorraine Johnston
Professional Development Lawyer
T: +44 (0)20 7859 2579
lorraine.johnston@ashurst.com

Anne Mainwaring
Associate
T: +44 (0)20 7859 2719
anne.mainwaring@ashurst.com

Becky Critchley
Solicitor
T: +44 (0)20 7859 2341
becky.critchley@ashurst.com

Timothy Cant
Solicitor
T: +44 (0)20 7859 3394
timothy.cant@ashurst.com

Louise Dobbyn
Solicitor
T: +44 (0)20 7859 2570
louise.dobbyn@ashurst.com

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Ashurst LLP 2014 Ref: 36919335 13 August 2014