The UK's Financial Conduct Authority has published a consultation paper that contains its proposals to amend the Decision Procedure and Penalties Manual (DEPP) that will govern the way in which it will enforce the “duty of responsibility.”

The FCA has invited firms to make submissions on the questions posed in Chapter 4 of the discussion paper by 9th January. The Prudential Regulation Authority has published an equivalent consultative paper.

The end of the presumption of responsibility

In October last year, the Government announced that a duty of responsibility would replace the previously suggested presumption of responsibility (not yet in force), which had proved to be controversial. The duty of responsibility came into force on 10th May. It applies to people who perform senior management functions at British banks, building societies, credit unions, PRA-licensed investment firms and incoming branches of overseas firms (senior managers).

The duty of responsibility

The duty of responsibility is set out in section s66A(5)(a) and (b) Financial Services and Markets Act 2000 (FSMA) which enables the FCA and the PRA to take enforcement action against senior managers whenever:

• there has been (or has continued to be) a contravention of a relevant requirement by the senior manager’s firm;
• at the time of the contravention, the senior manager was responsible for the management of any of the firm’s activities in relation to which the contravention occurred; and
• the senior manager did not take such steps as a person in his or her position could reasonably be expected to take to avoid the contravention occurring (or continuing).

Scope

The FCA is consulting interested parties about new guidance which, if all goes to plan, will set out:

• the circumstances in which it will apply the duty of responsibility
• a non-exhaustive list of considerations that may be relevant when it decides whether this-or-that senior manager was responsible for the management of any of a firm’s activities in relation to which a contravention of a relevant requirement by the firm occurred, and
• a non-exhaustive list of considerations the FCA will keep in mind when determining whether or not a senior manager took such steps as a person in his position could reasonably be expected to take to prevent the "firm contravention" from occurring (or continuing).

A proposal to "expect to have regard"

The FCA proposes that, when it decides under section 66A(5)(d) of the FSMA whether or not a senior manager has taken such steps as a person in his or her position could reasonably be expected to take to avoid the contravention of a relevant requirement by the firm occurring (or continuing), it should "expect to have regard" to the following (non-exhaustive) considerations.

• The job and responsibilities of the senior manager (for example, such steps as a senior manager in a non-executive job could reasonably be expected to take may differ, depending on the circumstances, from those reasonably expected of a senior manager who is an executive).
• Whether or not the senior manager exercised reasonable care when considering the information available to him.
• Whether or not the senior manager reached a reasonable conclusion on which to act.
• The nature, scale and complexity of the firm’s business.
• The knowledge that the senior manager had, or should have had, of regulatory concerns, if any, relating to his job and responsibilities
• Whether or not the senior manager (in cases where he was aware of, or should have been aware of, actual or suspected issues that might have involved breaches by his firm of relevant requirements relating to his job and responsibilities) took reasonable steps to ensure that the issues were dealt with in a timely and appropriate manner.
• Whether or not the senior manager acted in accordance with his statutory, common-law and other legal obligations, including, but not limited to, those set out in the Companies Act 2006, the FCA rulebook, and, if the firm is listed on the London Stock Exchange, the UK's Corporate Governance Code and related guidance.
• Whether or not the senior manager took reasonable steps to ensure that any delegation of his responsibilities (in cases where this was itself reasonable) was to an appropriate person with the necessary capacity, competence, knowledge, seniority and skill, and whether the senior manager took reasonable steps to oversee the discharge of the delegated responsibility effectively.
• Whether or not the senior manager took reasonable steps to ensure that the reporting lines, whether in the UK or overseas, in relation to the firm’s activities for which he was responsible, were clear to staff and operated effectively.
• Whether the senior manager took reasonable steps to satisfy himself, on reasonable grounds, that, for the activities for which he was responsible, the firm had appropriate policies and procedures for reviewing the competence, knowledge, skills and performance of each individual member of staff to assess his suitability to fulfil his duties.
• Whether the senior manager took reasonable steps to assess, on taking up each of his or her responsibilities, and monitor, where reasonable, the governance, operational and risk management arrangements in place for the firm’s activities for which he was responsible (including, where appropriate, corroborating, challenging and considering the wider implications of the information available to him), and whether he took reasonable steps to deal with any actual or suspected issues identified as a result in a timely and appropriate manner.
• Whether or not the senior manager took reasonable steps to ensure an orderly transition when another senior manager under his oversight or responsibility was replaced in the performance of that function by someone else.
• Whether the senior manager took reasonable steps to ensure an orderly transition when someone else was replacing him in the performance of his function.
• Whether the senior manager failed to take reasonable steps to understand and inform himself about the firm’s activities for which he was responsible, including, but not limited to, whether he:

* failed to see to it that reporting was adequate or seek an adequate "explanation of issues" in this-or-that business area, whether from people within that business area or not, if he was not an expert in that area;
* failed to "maintain an appropriate level of understanding" about an issue or a responsibility that he delegated to someone else;
* failed to obtain independent, expert opinion (where appropriate) from inside or outside the firm (as appropriate);
* permitted the expansion or restructuring of the business without reasonably assessing the potential risks; or
* inadequately monitored highly profitable transactions, business practices, unusual transactions, or individuals who contributed significantly to the profitability of a business area or who had significant influence over the operation of a business area.

• Whether or not the senior manager took reasonable steps to ensure that, if he was involved in a collective decision affecting the firm’s activities for which he was responsible, and it was reasonable for the decision to be taken collectively, he informed himself of the relevant matters before taking part in the decision, and exercised reasonable care, skill and diligence in contributing to it.
• Whether or not the senior manager took reasonable steps to follow the firm’s procedures, where this was itself appropriate.
• How long the senior manager had been in the job with his responsibilities and whether there was an orderly transition and handover when he took up the reins.
• Whether the senior manager took reasonable steps to implement (either personally or through a compliance department or other departments) adequate and appropriate systems and controls to comply with the relevant requirements and standards of the regulatory system for the activities of the firm.

The FCA’s guidance itself provides further useful clarification.

• Findings of the Regulatory Decisions Committee, a court or a tribunal to which a senior manager was neither privy nor party will not be binding on the senior manager,
• There will be no threshold for the application of the duty of responsibility. The FCA will take its decisions on a case-by-case basis.
• Standards will not be applied retrospectively or with the benefit of hindsight.
• Senior managers may be held responsible for the management of activities that fall outside their prescribed responsibilities. The FCA will not take statements of responsibility at face value and will look behind them to check that the senior manager in question discharged his management responsibilities fully.
• The regulator will make allowance for the fact that the steps that a senior manager in a non-executive job might be expected to take may differ from those of an executive.
• Any senior managers is accountable for his personal contributions to collective decisions and his implementation of those decisions insofar as they concern activities for which he is responsible.
• The FCA will not state in its guidance that it will take into account whether a senior manager has taken reasonable steps to manage competing priorities, when deciding whether or not that senior manager had taken such steps as a person in his position could reasonably be expected to take to avoid the firm’s contravention occurring because, the FCA:

* does not believe that it would be helpful to do so, as it does not clarify the steps reasonably expected of senior managers when doing so, and
* wants to avoid giving the impression that it will let any senior manager off the hook for 'conduct' failures because he is too busy.

Regulatory discretion is the key

The proposed guidance indicates that the FCA intends to afford itself latitude when considering whether the duty of responsibility has been breached in any given case. It also indicates that the FCA intends to look behind statements of responsibility and firms' "management responsibilities maps" when determining the extent of senior managers’ responsibilities. The draft guidelines therefore show that it is important for both firms and senior managers to ensure that senior managers’ responsibilities are accurately recorded before enforcement investigation commences and that orderly handovers of responsibilities can be evidenced when scrutinised.

* Richard Sims can be reached on +44 20 7825 3924 or at Richard.Sims@simmons-simmons.com; Thomas Makin can be reached on +44 20 7825 4029 or at Thomas.Makin@simmons-simmons.com