MIFID II SM & CR

Wealth Management & Private Banking

13 June 2019

RegulationWealth Management & Private BankingWealth Management and Private Banking

This directive is designed to change the culture within financial services, to make people individually accountable. This is a step change for firms in accordance with the FCA.

  • Senior people within firms know what they are responsible for, but job descriptions are a bit vague. The aim of this is to raise the standards and improve the culture throughout the industry. Within the top tier of management, those key decision makers are in the spotlight. This is about making sure that responsibility equates to authority.
  • Apparently the FCA has a few live investigations that are ongoing right now.

Within a partnership, interpretation of the directive makes matters difficult. The FCA is not expecting governance changes within firms, but exactly how does this work within a partnership structure. For example, material decisions are made by the partnership, but how can executive decisions and those of the corporate partnership be made?

There is a challenge when you have a US shareholder (100% owner), how can you have significant power over your UK based senior management. It seems that ‘nitty gritty’ decisions are now outside of the control of people who are ‘on the ground’ and trying to better the business and are those that have to live with decisions made by their owner entities.

  • There is plenty of useful guidance in the handbook but there are multiple instances where the parent and local entity management situation you describe here is in contrast.
  • If in doubt, the thing to remember here is ‘reasonable steps’ – by demonstrating that you have thought about the situation and or scenario and you can demonstrate (it has to have been written down) that you have taken reasonable steps to address the issue then you should be fine.
  • The FCA has a range of enforcement tools and there is no backdating being done for situations of the past.

Regarding the certification regime, the firm itself has to approve the certification for the controlled function – therefore the FCA is reducing the number of folks they have to approve.

  • Are non-certified staff outside of the regime? Clearly there are tax implications to consider here also.
  • Relying on significant influence doesn’t meet all requirements under the regime.

Fitness and Propriety test – the criteria to assess this is clear and well set out by the FCA. There is however further guidance in the banking standards board.

  • You can’t disguise misconduct by sacking someone. There is a regulatory reference issue. However, it does seem that it is easier for banks to fire people, than to go through a performance improvement programme (PIP). Settlement is the easier, and often cheaper, road to go down. There is a huge amount of varied risk associated here.
  • Feedback is that a register/directory of who holds what controlled function is really quite useful.
  • The application of all conduct rules will apply to all firm members (from receptionist to CEO).

All in all, a combined implementation team for SM & CR is the key. Get out in front of any issues early on!

Expert: Grania Baird & Katie Brookes of Farrer & Co

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