Summary

At our recent Funds First seminar we shared some technical and market issues and updates on the Senior Managers and Certification Regime (SMCR) and the FCA’s current cross-sector focus on culture. This briefing sets out some of the highlights of the issues discussed, which we hope will also be of interest to those who could not attend the seminar itself.

We hope to see you again later this year for the next in our series of Funds First seminars and/or at our breakfast surgery, “Decoding the SMCR for Asset Managers” on 16 October 2019 at 8.45am-10.00am. Email amelia.vaughan@bclplaw.com to register.

FCA’s cross-sector focus on culture

• Culture and governance is a cross-sectoral priority for the FCA. This covers various perspectives, including supporting cultural transformation within financial services; exploring the role of “purpose” in culture; appraising remuneration practices and performance management and extending the SMCR to all firms.
• Non-financial misconduct is increasingly of direct interest to the regulator.
• In the context of demonstrating a healthy culture, the FCA is exploring the topic of psychological safety and how to create a “speak up, listen up” culture in financial services. The whistleblower protections will remain in place, but could become less relevant where people are encouraged to vocalise issues and to challenge behaviour and responses in their organisation. It is the underlying culture that influences the way people think, act and make decisions and has a real impact on a firm’s long-term reputation and sustainability.

A recap on SMCR for fund managers

• From 9 December 2019 the SMCR will apply to all FSMA-authorised firms (replacing the existing approved persons regime), as well as to branches of non-UK firms with permission to carry out regulated activities in the UK. Firms will need to identify, and train, their new Senior Managers and Certification Staff in advance, and undertake other steps depending on their classification as Limited Scope, Core or Enhanced.
• From 9 December 2020 the Individual Conduct Rules will apply to all staff (except those carrying out a small number of purely administrative roles that are specified in the FCA’s rules): for example, to pay due regard to the interests of customers and treat them fairly and to be open and co-operative with regulators. In our view this is one of the most significant changes for the majority of people working at FCA-solo regulated firms, most of whom have never been accountable directly to the regulators for their personal conduct.
• Identifying which staff are carrying out Senior Management Functions, and which are Certified, may not always be obvious. For example, Certification Staff include those involved in a significant management function (current SF29) but who are not Senior Managers.

Regulatory references

In the seminar we examined, using a case study, the duty to provide and update regulatory references – looking at context, content and compliance issues.

• A firm employing a new Senior Manager or Certification Staff member must seek a regulatory reference going back 6 years, in a prescribed template format. The providing firm has to include any information that is relevant to the fitness and propriety of the candidate.
• We discussed a scenario when an employee leaves in the face of allegations of poor conduct but before a full disciplinary process can be completed, and therefore the firm may only be able to relay unverified information. The Banking Standards Board’s September 2019 guidance is helpful here: it provides that regulatory reference practices and policies should be fair, proportionate and consistent. Information that is considered unverified does not necessarily have to be disclosed.
• This is an evolving area and we expect market practice to develop so that firms can have more certainty as to what they should and should not include on their regulatory references.

Other aspects

The case study in the seminar highlighted some other issues around conduct-related incidents, a selection of which we would flag below.

• Firms should ensure that they are investigating conduct-related incidents in line with the relevant procedures. Decisions will need to be taken on whether the firm is dealing with a straight forward grievance or whether there is the need to investigate more widely in respect of whistleblower type allegations.  There may be a number of internal procedures running in parallel and Compliance, Legal and HR will need to ensure that they are keeping each other informed to ensure they are complying with their regulatory and employment obligations.
• Firms have to notify the FCA if they take disciplinary action (the definition of which includes the issuance of a formal written warning) against a person relating to any action, failure to act, or circumstance that amounts to a breach of any of the Conduct Rules. Notification has to be within seven business days for a Senior Manager, and annually for Certification and Conduct Rules Staff, unless the conduct is so significant that the FCA should be told sooner. Again, this is likely to require close interaction between HR and Compliance teams.
• A contemporaneous record should be kept where a decision is made not to notify: the firm will want a record that the issue was properly considered and how the decision not to notify was reached, both for reference and where there is a subsequent FCA investigation or information request.
• Fund managers will also need to consider the wider impact of their taking any disciplinary action: including on key person and side letter provisions (eg where disciplinary action relates to a key person), as well as any market announcements (eg in relation to a listed parent company) or notifications (eg under the Proceeds of Crime Act) that need to be made.