The extension of Senior Managers and Certification Regime (SM&CR) to all FSMA authorised firms introduces a new ‘Duty of Responsibility’ for Senior Managers who've never known anything like this.
The Duty of Responsibility enables the regulators (the PRA and FCA) to take action directly against a Senior Manager regarding a breach at a regulated firm if they can show that the Senior Manager failed to take ‘reasonable steps’ to prevent or stop the breach.
In what circumstances can regulators take enforcement action?
The Duty of Responsibility is contained in section 66A(5) of the Financial Services and Markets Act 2000 (FSMA). The statutory Duty of Responsibility has applied to Senior Managers of banking firms since May 2016. It applied to Senior Managers of dual regulated insurers with effect from 10 December 2018 and applies to the majority of FCA solo-regulated firms from 9 December 2019.
The Duty of Responsibility enables the regulators (FCA and PRA) to take enforcement action against a Senior Manager if a breach of a regulatory requirement takes place in a Senior Manager’s area of responsibility and the Senior Manager failed to take reasonable steps to prevent or stop the breach.
As detailed in the FSMA, in order to take enforcement action, the regulators must be able to show that a Senior Manager "did not take such steps as a person in the senior manager's position could reasonably be expected to take to avoid the contravention occurring (or continuing)".
The burden of proof lies with the regulators. The Senior Manager does not need to show that they took reasonable steps. It is for the regulator(s) to prove that they did not. However, while this may be the case, Senior Managers will want to understand what action they can take to demonstrate that reasonable steps have been taken.
What are ‘reasonable steps’?
The FCA has issued guidance which includes a non-exhaustive list of considerations that it will consider when determining whether or not a Senior Manager has taken ‘reasonable steps’. The guidance is contained in the FCA Handbook, in DEPP 6.2.9E.
Factors Considered Include:
- a Senior Manager’s role and responsibilities
- how long the Senior Manager had been in role
- whether there was an orderly handover when they took up the role
- whether they have implemented adequate and appropriate systems and controls
- the information available to them
- what they did with that information
- how tasks had been delegated and managed.
How can Senior Managers demonstrate they have taken reasonable steps?
The FCA’s Policy Statement, PS 18/16 sets out how the FCA will apply the Duty of Responsibility to insurers and FCA solo-regulated firms.
The PRA, in its Consultation CP14/17, proposed that its guidance for the application of the Duty of Responsibility to insurers would mirror its existing guidance for the application of the Duty of Responsibility to deposit-takers and PRA-designated investment firms. The PRA confirmed this approach in Supervisory Statement 28/15, which was issued alongside the FCA’s PS 18/16.
In PS18/16, the FCA comments that it may be in the interest of a Senior Manager (SM) to keep records of relevant steps they take in case questions are raised whether by their firm, its lawyers, auditors, insurers or customers, the FCA or another regulator.
The FCA Handbook Guidance is a useful starting point for Senior Managers when considering how to protect themselves.
Suggestions for Senior Managers Include:
- Keeping abreast of regulatory concerns and developments, particularly those that will impact their role and responsibilities.
- Understanding the impact of all relevant statutory, common law and other legal obligations that are relevant to their role and responsibilities.
- Ensuring that any delegation of their responsibilities is only made to an appropriate person with the necessary capacity, competence, knowledge, seniority and skill, and that steps are undertaken to oversee any delegated responsibility.
- Ensuring that the reporting lines in relation to the firm’s activities for which they are responsible are made clear to staff and operate effectively.
- Implementing appropriate policies and procedures to review the competence, knowledge, skills and performance of staff members to assess their suitability to fulfil their duties.
- Reviewing the governance, operational and risk management arrangements in place for the firm’s activities for which they were responsible, including, where appropriate, corroborating and challenging the information available to them.
- Understanding and informing themselves about the firm’s activities for which they are responsible, including:
- seeking an adequate explanation of issues within a business area, if they are not an expert in that area;
- maintaining an appropriate level of understanding about an issue or a responsibility that they have delegated to another individual(s);
- obtaining independent, expert opinion where appropriate;
- only permitting the expansion or restructuring of the business after having reasonably assessed the potential risks;
- monitoring highly profitable transactions, business practices, unusual transactions, or individuals who contribute significantly to the profitability of a business area or who have significant influence over the operation of a business area.
Interestingly the FCA says that it will review whether the SM took reasonable steps to ensure that, where they were involved in a collective decision affecting the firm’s activities for which they were responsible and it was reasonable for the decision to be taken collectively, that they informed themselves of the relevant matters before taking part in the decision and exercised reasonable care, skill and diligence in contributing to it.
This point may make SMs more cautious when asked for their input or conclusions on issues that appear to depart from their allocated role and responsibilities.
In addition to considering the above, it is important for both SMs and firms to ensure that their Statements of Responsibilities (SoR) are accurate and kept up to date. And where applicable, firms’ Management Responsibilities Maps should reflect the responsibilities set out in Senior Managers’ SoRs. The regulators will consider these documents when determining the extent of the SM’s responsibilities in a firm.
In March 2019 the FCA published Final Guidance FG19/2, to assist solo-regulated firms when preparing their SoRs and Responsibilities Maps.