Sponsor Introducing: Eleanor Rowswell, Farrers
Expert: Mark Somers, Somers Partnership
Facilitator: Mark Miles, Scorpio Partnership
With effect from 7 March 2016 the Senior Managers and Certification Regime will replace the approved persons regime for banks. Those senior managers are defined as the most senior individuals within the bank. There will also be Certified Persons who the firm must certify as fit and proper.
The Conduct rules are enforceable against an even wider population. The new regime will come into effect for all other financial services firms in 2018.
- Senior Managers will include anyone holding any of seventeen regulator specified Senior Manager Functions.
- Prescribed responsibilities within an organisation will need to be allocated between the Senior Managers. In this context, each individual senior manager will need to agree a ‘Statement of Responsibilities’ (SOR) which will be submitted to the regulator for approval.
The SOR may well be the subject of negotiation between the bank and the individual SM as this document is realistically one of the first things that the regulator will look at if there is a regulatory failing. Additionally, under the new regime for regulatory references, banks will have to take reasonable steps to collect references (for the past 6 years) before any hiring or promotion using a mandatory template.
Senior managers are under a new “duty to take such steps as a person in the senior manager’s position could reasonably be expected to take to avoid the contravention [ie any regulatory breach] occurring (or continuing)”. In this context, that is a new enforcement mechanism. This new regime is not as draconian as initially proposed where there was an automatic presumption of responsibility or guilt unless the senior manager could show that they had taken reasonable steps to prevent the breach, but the aim is still to lead to greater exposure to regulatory enforcement action against Senior Managers.
In addition, Senior Managers will be subject to deferral periods for variable compensation of 7 years (no vesting for 3 years and pro rata thereafter - as opposed to deferral of five years for other material risk takers) and also potential clawback for up to 10 years (as opposed to 7 years).
From this, one question the roundtable discussed was why would anyone facing this degree of additional scrutiny choose to take on a Senior Manager function? There is indeed a risk that some good people decline a job as they don’t want to have the associated level of risk.
This emphasises the importance for banks to reassure its more senior people that they will be adequately supported in line with regulatory requirements, ie adequate resource, training and accurate reporting to the regulator of the areas for which the senior manager is responsible. But ultimately, it is possible that these measures create some conflicts of interest between firms and employees: will it from time to time require firms to recommend that Senior Managers take external advice?
It is hoped that greater scrutiny should also make “bad workers” more identifiable, and push average standards up, with more robust record keeping and justification.
Senior Managers are also subject to four additional Conduct Rules including SM3 – ‘You must take reasonable steps to ensure that any delegation of your responsibility is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively’. This will make the rigorous recruitment checks absolutely key. Indeed, banks will try to reduce the risk by focusing on the best people for the organisation.
Other recruitment considerations highlighted:
The extent to which banks have been able to reassure those taking on senior manager responsibilities by offering indemnities and insurance (to the extent permitted by law) (ie to cover legal costs only, but not regulatory fines). Historically this has often been left to the discretion of the bank (which would usually pay the individual’s legal fees when facing regulatory action), but with increased publicity and enforcement this is much more likely to become an issue for negotiation upfront.
One of the leaders of this session also focused on the importance of the recruitment approach for this level of positions, and how SMR can be helpful in recruitment. If it is implemented thoughtfully and commercially, it should lead to higher quality recruitment into the organisation.
But it is also important to differentiate between ‘hiring’ and ‘recruiting’. Hiring is simply choosing someone who is out of work (or about to become redundant) and giving them a job. Recruiting on the other hand is the proactive headhunting of an individual from one organisation into a specific role in a wealth management organisation using a rigorous market research, candidate attraction and candidate selection process.
Clearly wealth management organisations who rely on hiring normally not only miss out on attracting the Rain Makers (see below) who will protect and enhance their wealth, but also expose themselves to an alarmingly high proportion of Well Poisoners (see below).
There are indeed three types of employees in the wealth management sector:
- Rain Makers, they ‘make the grass grow’. And are supremely competent and amount to perhaps only one in ten professionals in the sector.
- Lawn Mowers, 80% of the professionals to be found in the sector. The better ones are competent, know how to turn on the sprinklers and enjoy the security and status of their position and wish to maintain the status quo.
- Well Poisoners – 10% of the employees in the sector. They can destroy value for their employers and clients. They are characterised by job hopping and in a globalised sector with almost 100% employment, poor performers and fraudsters can sometimes move from one employer in an offshore location to another without having to undergo the scrutiny of a rigorous background check or recruitment.
Some additional anecdotal comments / reflections on the approach of prospective Senior Managers that were discussed:
- Senior Managers are on the whole unhappy with the impact of the regime but are supportive of the reversal of the presumption of responsibility;
- Attendees also discussed the potential impact of this new scheme across the different organisations further down the line once the regime is extended to all financial services firms, particularly for the smallest firms. At this stage, recruitment at smaller banks seems to be where the greatest challenges lie. Those individuals taking on senior positions at smaller banks are likely to be able to take on similarly remunerated positions at larger banks without the responsibility of being a Senior Manager and/or with a greater degree of support from compliance;
- More than ever Senior Managers will be requesting greater resource and recruitment in business areas for which they are responsible, citing regulatory risk as the reason. If such requests are refused by Boards on the basis of priority of resource, then there is now a much greater likelihood of reports being made direct to the regulator to the express duty in SM4 of the Conduct Rules to disclose appropriately any information of which the FCA or PRA would reasonably expect notice.
- Disbursement of responsibilities will be much clearer, and all organisations will have to define who is responsible for what.
- The scope of the responsibilities may in some situations be a balancing exercise, as what is not the responsibility of one person will be the responsibility of someone else, but the principle is that someone is accountable for all prescribed responsibilities
- Will this new regulation be a big change for organisations? If the organisation’s governance is already robust, it shouldn’t be a drastic change. However, it should serve to make structures even more robust and transparent.
- Greater emphasis will be needed at the recruitment phase to ensure appropriate checks are in place to assess and prove the person’s suitability.