By Dan Smith
In 2013, the Parliamentary Commission on Banking Standards (PCBS) published a report concluding that senior management in the banking sector “benefited from an accountability firewall between themselves and individual misconduct”. The PCBS recommended a new regime be created to improve senior management responsibility.
The Financial Services (Banking Reform) Act 2013 created the legislative framework for the new regime, which includes the Senior Managers’ Regime (SMR), to replace the existing Approved Persons Regime (alongside a Certification Regime for other staff and certain changes to the Conduct Rules). The SMR will require relevant firms to notify the PRA and FCA of approved persons by 8 February 2016, and will come into force on 7 March 2016.
In July 2015 the FCA published final rules on individual accountability in the banking sector. Guidance on the presumption of responsibility and on enforcement-related matters is expected in Autumn 2015. However, firms to whom the SMR will apply should consider now how best to prepare.
To whom will the SMR apply?
The SMR applies to those individuals performing “senior management functions” within a relevant firm. The SMR will apply to UK branches of foreign banks, and the FCA has published “near final” rules on how it will apply the SMR to incoming branches.
What requirements will the SMR introduce?
The SMR will introduce a number of requirements including, in summary:
- Firms must at all times have a comprehensive and up-to-date Management Responsibilities Map, describing the institution’s management and governance arrangements for all relevant entities within its group.
- Firms will need to ensure that staff holding 17 specified “Senior Management Functions” are pre-approved by the regulators, and that 30 specified “Prescribed Responsibilities” are assigned to individuals who hold Senior Management Functions.
- A Statement of Responsibilities setting out “aspects of the affairs of the authorised persons concerned which it is intended that the person will be responsible for managing in performing the function” must accompany an application to the FCA for approval of a senior manager role, and a revised statement must be provided if a senior manager’s responsibilities significantly change.
What liabilities will the SMR create?
The SMR will force firms to allocate responsibility to specific individuals for a wide range of management functions. This is intended to increase the prospect of enforcement action against those individuals for failings in relation to those functions. It may also increase the prospect of civil claims arising from such failings, on the basis that responsibility may be more easily identified, and potentially more easily attributed to a corporate entity. In addition, the SMR will create the following risks for senior managers:
- A “presumption of responsibility” for senior managers for contravention of regulatory requirements in a senior manager’s area(s) of responsibility unless it can be demonstrated that the senior manager took all “all reasonable steps” to ensure that those requirements were not breached.
- Potential criminal liability under a new offence if a senior manager makes or fails to make a decision which causes a financial institution to fail and their conduct falls “far below” what could reasonably be expected of a person in that position.
- New statutory powers for the PRA and FCA to impose conditions and time limits on the approval of a senior manager.
What steps should firms take now?
7 March 2016. However, financial institutions will have until 8 February 2016 to notify the PRA and FCA of the names of the senior managers under the new regime.
When does the SMR come into force?
To the extent they have not already done so, firms should consider now the extent to which the SMR will apply to them and their senior managers, and consider the allocation of responsibility for managing its affairs, in good time to obtain necessary approvals, and to notify the FCA by February 2016.
 as defined in Annex B to the SMR
 under Section 36 Financial Services (Banking Reform) Act 2013