Global Regulation, Local Solutions Emerging Themes 2020 - Page 10



SUPERVISION
EMERGING THEMES 2020
CONCLUSION
ACCOUNTABILITY FOR ALL STAFF
The biggest change to individual accountability
in the UK as a result of SMCR is the extension of
personal regulatory accountability to all staff of
regulated firms, save for “ancillary staff” (whose
work is purely administrative).
The Conduct Rules under SMCR apply to
all staff other than administrators, making
the majority of financial services workers
(“Conduct Rules Staff”) directly accountable
to the regulators for the first time. For banks,
a handful of PRA-authorised investment firms
and insurance companies, this is already the
case. For firms regulated only by the FCA, the
Conduct Rules were extended to their senior
managers and certification staff in December
2019, and will apply to all of their Conduct Rules
Staff from December 2020.
Under SMCR, any disciplinary action
taken by a firm in relation to conduct
that would amount to a breach of a
Conduct Rule must be reported by
the firm to the regulators
Under SMCR, any disciplinary action taken
by a firm in relation to conduct that would
amount to a breach of a Conduct Rule must
be reported by the firm to the regulators. The
frequency of reporting varies according to
the level of seniority of the individual who has
been in breach, but the consequence is the
same – a permanent regulatory black mark
without a “sell-by” date, that is almost certain
to route any future application by the person for
approval to perform a controlled function into
the dreaded “non-routine applications” subdivision (heralding longer timeframes, difficult
questions asked and the risk of an embarrassing
invitation from the regulator to one’s employer
to withdraw the application for approval). It is
also a matter which the firm would be obliged
to include on any regulatory reference, which
could also damage the individual’s future
employability.
There have long been regulatory obligations
to report any significant regulatory breach by
a firm or its senior management – Principle 11
requires that anything of which the regulators
would reasonably expect notice should be
notified promptly to them.
The Conduct Rules breach reporting
regime is less intuitive to implement
in practice than the Principle 11
requirement, because there is no
significance threshold attached to
the new obligation to report
The Conduct Rules breach reporting regime
is less intuitive to implement in practice than
the Principle 11 requirement, because there is
no significance threshold attached to the new
obligation to report – any misconduct for which
a person has been disciplined (with the lowest
threshold being the issuance of a formal written
warning) is notifiable to the extent that it relates
to conduct which would amount to a breach of
a Conduct Rule.
Senior managers
and certification
staff
DEC
2019
WHAT WOULD AMOUNT TO A BREACH OF
A CONDUCT RULE, AND WHO DECIDES?
Given the serious potential consequences for
an individual’s career, ensuring consistency in
identifying reportable Conduct Rule breaches
is both fundamentally important from a fairness
perspective (and therefore for employment law
risk), and very difficult to achieve in practice.
The Senior Management Function holder
who holds the Prescribed Responsibility for
implementation of the Conduct Rules regime
is ultimately accountable for achieving this.
How can it be achieved? In our view, it is
important for consistency purposes that
anonymised records are kept of why particular
disciplinary incidents have been deemed
reportable as Conduct Rule breaches, and
others have not. We have also seen some good
practice where firms’ senior management meet
to agree, in principle, what types of misconduct
they would generally consider to breach a
Conduct Rule, and which they would not.
Given the serious potential
consequences for an individual’s
career, ensuring consistency in
identifying reportable Conduct Rule
breaches is fundamentally important
from a fairness perspective
DEC
2020
It is still early days for the Conduct
Rule breach reporting regime, so
one would hope that there is still a
fairly forgiving approach by the
regulators to firms who don’t get
it right all of the time. As SMCR
beds in though, the FCA has higher
expectations of firms, including
that firms should use the process
of embedding SMCR as a “lever”
to drive cultural improvements
e.g. by stamping out “non-financial
misconduct” – see Catherine
McGrath and Adam Turner’s article
at page 16 – which the FCA now
says is “as important” to tackle
as “financial” misconduct
(e.g. market abuse).
In this context, in the coming year it
will become increasingly important
for firms to be able to show that
there are strong systems and
controls in place for the effective
identification and timely reporting
of disciplinary incidents that
amount to breaches of the Conduct
Rules, even where such breaches
are not sufficiently serious to be
deemed “significant”.
All Conduct
Rules Staff
POLLY JAMES
Partner,
London
10/
JOSEPH NINAN
Associate,
London
/11

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