Keywords: senior managers, certification regimes

With the consultation on transitional arrangements for the introduction of the senior managers and certification regimes due to close on 27 February, it is a good time to take stock of the proposed new regulatory framework and assess the potential impact from an employment and HR perspective.

Senior Managers and Certification Regimes

In July 2014, the Prudential Regulatory Authority (PRA) and Financial Conduct Authority (FCA) set out their proposals for a new senior managers regime. They also proposed a certification regime for a wider category of staff and a new set of enforceable Conduct Rules that will replace the existing Statements of Principle and Code of Practice for Approved Persons (APER). The proposals apply to UK-incorporated banks, building societies, credit unions and PRA designated investment firms. The aim of the regulators is to enhance responsibility and accountability across the banking sector. The proposed rules mark a shift away from corporate responsibility towards individual accountability.

Senior Managers Regime - Key Points

  • For relevant firms, the concept of Significant Influence Functions (SIFs) will be replaced with Senior Management Functions (SMFs). A SMF is defined as, "A function that will require the person performing it to be responsible for managing one or more aspects of the relevant firm's affairs, so far as relating to regulated activities, and those aspects involve, or might involve, a risk of serious consequences for the authorised person, or for business or other interests in the UK.". Individuals performing a SMF specified by the PRA will require pre-approval by the PRA with the FCA's consent. Individuals performing a SMF specified by the FCA will require pre-approval by the FCA only. All of these individuals will be known as Senior Managers.
  • The PRA and FCA have set out a list of 18 SMFs based on existing SIF roles. These include the Chief Executive function, Chief Finance function, Executive Directors, Heads of key business areas, Head of Internal Audit and Non-Executive Directors.
  • As part of the SMF approval process, the relevant firm will be required to submit to the regulators a statement confirming which areas of the business a Senior Manager is responsible for. It will also be required to submit a revised statement whenever there is a significant change in the Senior Manager's responsibilities.
  • The statement of responsibilities will be designed to ensure that a named individual will be held accountable for the risks in their business. The idea is to ensure that the banks and regulators are able to hold the individual to account in the event that there is a failure within the relevant business.
  • There is also a requirement on the relevant firm to take reasonable steps to ensure that the appointed Senior Manager has been made aware of all necessary information and issues of regulatory concern to enable them to perform their role effectively.
  • Firms will be required to prepare, maintain and update a 'Responsibilities Map', which should be a single document that describes the firm's management and governance arrangements. Responsibilities Maps should also set out how responsibilities have been allocated, including whether they have been allocated to more than one person. The regulators also propose requiring an annual confirmation from the firms' Boards that there are no gaps in the allocation of responsibilities within the firm.
  • There will also be a requirement on firms to take reasonable steps to ensure that newly appointed Senior Managers are made aware of all information and risks of regulatory concern in order to perform their responsibilities effectively. This will mean putting in place handover arrangements and the Senior Manager preparing a 'handover certificate' setting out how they fulfilled their role and responsibilities.
  • The regulators will have new enforcement powers. If there is a regulatory breach within a particular business or area of the firm, the Senior Manager responsible for that business or area will be deemed to be guilty of misconduct unless they satisfy the regulators that they had taken reasonable steps to avoid the contravention occurring or continuing.

Certification Regime - Key Points

  • Relevant firms will be required to introduce self certification for all individuals in SMFs and other roles that are deemed to perform a significant harm function within the bank. This covers a wider category of staff than those who will be Senior Managers. Staff who are categorised as Material Risk Takers for the purposes of the rules on clawback of bonuses will fall within the Certified Persons regime.
  • The FCA also proposes to extend the regime to individuals previously carrying out SIF roles that are no longer covered by the new SMFs, individuals in customer facing roles which are subject to qualification requirements and anyone managing a Certified Person who does not already hold a SMF role.
  • Self certification will involve a relevant firm certifying on an annual basis a person's fitness and propriety to perform their role. Senior Managers will be held responsible for any failures in relation to Certified Persons.

Conduct Rules - Key Points

  • The proposed new set of Conduct Rules will apply to a very wide population of employees. The PRA proposes to apply Conduct Rules to all Senior Managers or those who fall within the PRA's Certification Regime. The FCA has proposed to apply Conduct Rules to all other employees within a relevant firm except for ancillary staff who perform a role that is not specific to financial services (for example, HR and facilities management).
  • The Conduct Rules are high level and draw on the existing APER framework. The rules include requiring individuals to act with integrity, due skill, care and attention, and pay due regard to the interests of customers. There is an additional tier of Conduct Rules that will apply only to Senior Managers and this includes taking reasonable steps to ensure that the business they are responsible for is controlled effectively, and overseeing the discharge of delegated responsibility effectively.
  • Breaches or suspected breaches of the Conduct Rules will need to be notified to the regulators. For Senior Managers, this will need to be done within seven business days. For all other employees, notification will need to be made on a quarterly basis to the FCA.


On 23 February 2015, the PRA and FCA published a consultation paper on whistleblowing requirements, which they propose should be applied to banks, building societies, credit unions and PRA designated investment firms. The consultation closes on 22 May 2015. In summary, the key proposals are:

Include a passage in new employment contracts and settlement agreements clarifying that nothing prevents an employee from making a protected disclosure.

Put in place certain measures that will reassure employees that they can raise concerns and be listened to. For example, tracking what happens to an internal whistleblower to determine whether they are subsequently disadvantaged.

Appointing a 'whistleblowers' champion' who would have responsibility for ensuring and overseeing the integrity, independence and effectiveness of the firm's policies, and for ensuring staff who raise concerns are protected from detrimental treatment.

We will be publishing a further legal update, which will look at the whistleblowing proposals in detail.

Transitional arrangements

The ongoing consultation on transitional arrangements sets out the existing roles that will be eligible to be grandfathered to the new regime. This means that an individual who has been authorised under the current Approved Persons Regime and who is not substantively changing their role will not need to apply for fresh approval for the appropriate SMF. The consultation includes a draft template SOR form (click here) and a Form L for notifications of a breach of the Conduct Rules (in relation to PRA certification employees) (click here). The template SOR form sets out lists of prescribed responsibilities and key functions with boxes that can be ticked by the applicant. It does provide the opportunity for the applicant to attach additional information, which will most likely be needed to provide a comprehensive picture of the responsibilities allocated to that person.

It is not yet known when exactly the finalised rules for the Senior Managers and Certification Regimes will be published but the intention is for the new regulatory framework to come into force sometime this year.

Employment implications

The proposed new regulatory framework will provide a raft of new challenges for employers.

  • With the requirement for a SOR and a big shift towards individual responsibility, banks may well find it harder to attract and retain Senior Managers. The SOR will be a critical document from the perspective of both the employer and Senior Manager. For the employer, it would want to ensure that the SOR is detailed and as comprehensive as possible to ensure there are no gaps and that the applicable Senior Manager can be held responsible in the event there is a failure. For the Senior Manager, he/she is likely to want to minimise the areas for which they would be held responsible. There is going to be a divergence of interests and the SOR will effectively become a legal document given its importance.
  • SORs are likely to be subject to lengthy negotiations. It is likely that Senior Managers will want to obtain independent legal advice before agreeing to a SOR and may look to the employer to cover this cost. In fact, there are merits in recommending that Senior Managers obtain legal advice before agreeing to a SOR. This would limit any arguments that a Senior Manager was pressured into agreeing a SOR which he or she did not fully appreciate.
  • Senior Managers might find it beneficial to keep detailed records of decision making within their business area, particularly where other employees have shared in the decision making process. This could end up fuelling a practice of 'finger pointing' where stakes are high and careers could be on the line.
  • Exits could become more protracted. Senior Managers who are pushed out could threaten to provide unhelpful handover certificates unless their demands for severance are met. Anything in the handover certificate that might ring alarm bells could have an adverse impact on hiring a replacement for the departing Senior Manager. The departing Senior Manager could therefore try and use this as leverage for obtaining a higher exit package.
  • Banks could see an increase in whistleblowing allegations and claims from Senior Managers who are exited or who are more likely to 'blow the whistle' to try and minimise culpability and extract exit packages.
  • The new regime and Conduct Rules will undoubtedly require changes to employment contracts and policies. For example, it would be sensible to amend contracts to ensure that there is a contractual requirement to comply with the Conduct Rules and requirements associated with completing SORs and handover certificates. An employer might want to ensure it has a contractual basis for dismissing with immediate effect where these requirements are not met. In addition, criteria for forfeiture and/or clawback of variable pay may need to be re-thought so that there is a link with the SOR and completion of satisfactory handover certificates.
  • The requirement to notify the regulators of any breaches or suspected breaches of the Conduct Rules by Senior Managers within seven business days is likely to result in speedy investigations to determine responsibility and whether disciplinary action should be taken.

What should you do next?

Preparation will be key to ensuring that affected staff fully understand their roles and responsibilities within the new regulatory framework.

  • Work should start on designing a responsibilities map and responsibilities should be apportioned for each Senior Manager. Reporting lines should be clearly set out.
  • HR and Compliance should review their management information systems and ensure they have the capability to capture all of the relevant information.
  • There will undoubtedly need to be a cultural change within the firm and training will need to be rolled out to ensure the new Conduct Rules are firmly embedded within its culture.
  • Now would be a good time to start to review existing contracts and policies, and identify what changes would be required and how to introduce these changes.
  • It would be a good idea to design a template statement of responsibilities that could be attached to the SOR form that has been published in the recent consultation.
  • Consider what support (both internal and external) will be offered to those employees who will be caught by the new regime.

Originally published 25 February 2015

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