Tighter regulation means a change in culture, writes James Cran
Reckless or unscrupulous conduct in the financial services sector has been under the spotlight since the 2008 financial crisis and there are a number of individuals who are currently unhappy guests of Her Majesty, with speculation that more should prepare to pack their toothbrushes.
The new Senior Managers Regime (SMR), in force from March 2016, aims to avoid a repeat of recent scandals and crises. Senior managers in, initially, the banking sector (and across the wider financial services sector from 2018) could be held responsible for the actions of someone else or a systems failure, rather than for something they have actually done. Having detailed knowledge and control of complex organisations is not easy and there could ultimately be individual criminal liability if a financial institution fails.
Under the new rules, key decision-makers in the financial services industry will undergo robust and ongoing assessment of their fitness and propriety and firms will be required to assess and certify the fitness and propriety of employees capable of causing significant harm to the firm or any of its customers, and those that could risk the integrity of financial markets.
Conduct risk is an issue which has been front and centre for every financial institution over the last few years. It’s not just the large banks under the regulatory spotlight. The regime will extend to all Financial Services and Markets Act authorised persons by 2018. This will cast the accountability net much wider to cover firms operating within other sectors, including building societies, credit unions and certain investment firms.
Financial organisations facing up to the accountability regime have two audiences they have to satisfy, the first being the regulator. It is one thing to tick all the boxes by having the correct policies in place, but an arguably bigger challenge is in demonstrating that a cultural change has been affected and will become embedded within the business.
Of course the regulator wants to see that conditions are being met in terms of strict legal compliance, but it also wants to be persuaded that the mood within an organisation has changed. Businesses which take a half-hearted approach to this evolution towards maintaining higher standards are more likely to come under harsh scrutiny compared with those which fully embrace the new regime and who can show the regulator that they “get it”.
The second demanding audience is an organisation’s own staff. While there has always been the possibility of criminal liability and prosecution where individuals have fallen short of expected standards, the SMR places this responsibility even more starkly at the door of senior management.
Senior staff who have weathered the banking crisis of the last seven years or so may be battle-hardened, but one issue which could arise is in succession planning. More junior colleagues may well ask why they should place themselves in the firing line should things go wrong and may be reluctant to take on promoted posts which carry more onerous personal responsibilities.
One route to addressing this potential problem could be through introducing a mentoring system alongside a thorough training programme. This would prepare staff for assuming particular responsibilities and show that the company has checks and balances in place.
Culture, conduct and behaviour lie at the heart of the new regime, yet across numerous consultation documents, supervisory statements and policy statements, neither the FCA nor the PRA has given much guidance on the direct (let alone the indirect) impact from an employment law perspective.
We have been working alongside clients’ in-house legal, compliance and HR teams to ensure that their implementation project plans include a strategic review of employment documentation and HR policies/procedures to ensure compliance with the new regime and alignment with regulatory and governance best practice more generally.
Now is the time to ensure all procedures and safety checks are in place and, allied to training programmes, this puts businesses in the best position to convince even the most discerning of audiences.
• James Cran is legal director, employment, with Pinsent Masons LLP www.pinsentmasons.com