The UK's Parliamentary Committee for Banking Standards issued a groundbreaking report in June 2013 which laid the foundations of the Financial Services (Banking Reform) Act 2013. This became the legal basis for the Senior Managers and Certification Regime, which has created some unexpected problems at banks.

The Senior Managers and Certification Regime, as it is now called, came into force on 7 March 2016 for banks, building societies, credit unions and dual-regulated (i.e. regulated by the Financial Conduct Authority and the Prudential Regulation Authority) investment firms and was extended in full to insurers in December last year.

The flight of the thoughtful and the risk-averse

People who have been involved in the implementation of the SM&CR at banks have told me that the new regime has spooked many people and prompted them to go elsewhere. This is especially true of non-executive directors, who find it easier than anyone else to move to other sectors.

This problem may lessen now that the SM&CR is going to cover all parts of the financial sector equally (insurers last December, everyone else this December). Nevertheless, it is sad to see this happening as it is obviously the opposite of what the committee wanted.

Slower business-as-usual decision-making

I hear from people who have recently left banks that senior managers feel very nervous about using their judgement in case someone criticises them later for getting things wrong. This is causing problems; when people refuse to act decisively, everything grinds to a halt. I suspect that this one may be fixable by clearer regulatory guidelines that describe the things that the Senior Management Function (SMF) conduct rules require of people.

The stifling of innovation in the British FinTech industry

My firm works with plenty of FinTechs and these firms are often quite startled by the idea of the accountability regime outside the regulatory sandbox when I explain it to them. This leads them to wonder whether the UK is the right place for them to be starting up.

Operational unfairness

Examples of unfairness are still emerging as the SM&CR settles in. One such example is the fact that the regime favours SMF people over certification staff when it comes to investigations. If a person is under investigation by a regulator (or even internally) and he performs an SMF, he can continue in his job while the investigation is in progress. However, in the case of certification staff, each firm is required to certify each person as "fit and proper" every year if it is to keep him on. Because of this, firms feel that they cannot leave certification staff in their jobs for long periods of time while investigations are outstanding. This seems perverse - SMFs are at the top of the hierarchy and yet they receive more protection during investigations than their less fortunate colleagues.

Abuse of the regulatory reference process

Former employers are using the regulatory reference process to raise points about a former employee when there is no proper reason for doing so. They can use it to blackball people unfairly – this is shocking because regulatory references are vital for future employability nowadays.

Disproportionate standards

The Code of Conduct or COCON is part of the FCA rulebook. In the FCA 'guidance' that interprets Individual Conduct Rule 2 (you must act with due skill, care and diligence), the FCA has imported the standards of behaviour that previously applied only to senior managers to anybody who has any managerial responsibility at all.

The guidance says: “The following is a non-exhaustive list of examples of conduct by a manager that would be in breach of rule 2.
(1) Failing to take reasonable steps to ensure that the business of the firm for which the manager has responsibility:
(a) is controlled effectively;
(b) complies with the relevant requirements and standards of the regulatory system applicable to that area of the business; and
(c) is conducted in such a way to ensure that any delegation of responsibilities is to an appropriate person and is overseen effectively.”

This mirrors the wording of the senior manager conduct rules that are not supposed to apply to non-SMFs – but yet the same standards are imposed in guidance in the rulebook.

It seems disproportionate to impose standards of conduct that were clearly built for senior managers upon more junior staff members.  It remains to be seen to what extent the FCA will seek to enforce these standards in practice.

Whistleblowers

Many informants are making disclosures, according to statistics recently published by the FCA on its Disclosure Log. The regulator has already received 1,000 disclosures on its "whistleblower hotline." This will be only the tip of the iceberg, as many people tend to tell their tales internally first.

I spend a great deal of time working with my firm's employment team on investigations that started with an informant "blowing the whistle" and it is evident that these informants are growing in number, with some reports appearing to be defensive in nature rather than properly grounded. Many tipsters seem to be SMFs themselves. Of course, there are many genuine reasons that senior people might have for "blowing whistles" rather than deal with problems in the usual manner. I do, however, question whether the picture we are seeing today is what the committee really wanted to achieve. It is possible that more and more people are feeling the need to point fingers at others and then sit back to let others resolve their problems instead of really taking responsibility for things.

Knowingly concerned

The new regime has expanded the “knowingly concerned” liability to be found in APER, the part of the rulebook that deals with approved persons. The idea is that if a firm breaks a regulatory rule and an individual is aware of the facts that give rise to that breach, the FCA can fine him for being knowingly concerned in the breach, even if he did not know that those facts amounted to a breach and he had not been dishonest.

APER applies to persons approved by the FCA who belong to firms that are not SM&CR firms. Under APER, a member of staff can (or, at banks, could) only be held to be knowingly concerned if he is an approved person.

Under ss66A and 66B Financial Services and Markets Act 2000, as amended for the SM&CR, absolutely anybody who satisfies the wide definition of “employee” in s64A can be disciplined by the FCA or the Prudential Regulation Authority for being knowingly concerned in a breach by the firm. This includes ancillary staff who are not subject to the conduct rules. My firm scoured Hansard while this new law was being passed to see why Parliament wanted to extend it in this way, but found no clues. This makes me wonder whether the extension was done deliberately or by mistake.

The volume of work for regulatory enforcement teams

Does the FCA have enough resources to pursue people at so many different levels of organisations for the same conduct? Recent statistics suggested that the FCA is conducting almost 600 'enforcement' investigations at the moment. The burden is a heavy one and is slowing progress down. I am seeing this for myself through the experience of my own clients, who are suffering from the delays. It would be unfair to the people on the receiving end of the enforcement process if it were to grind to a halt but this, I fear, might indeed be another unintended consequence of the SM&CR.

* Polly James can be reached +44 (0) 20 3400 3158 or at polly.james@bclplaw.com