UK: UK Regulators Refine The Scope Of The Senior Managers Regime And Clarify How The ‘Presumption Of Responsibility’ Will Be Applied

Last Updated: 27 February 2015
Article by Nikki Lovejoy and Rebecca Walsh

Most Read Contributor in UK, August 2017

The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) have confirmed how the new Senior Managers Regime (SMR) and Senior Insurance Managers Regime (SIMR) will apply to Non-Executive Directors (NEDs) in banks and insurers respectively. This follows the responses received to the Consultation on Strengthening accountability in banking: a new regulatory framework for individuals –CP14/14 published in July 2014, which expressed concern about the proposed approach to NEDs under the SMR.

The regulators have confirmed that under the revised approach, only the following NEDs in relevant authorised banks, building societies and insurers will be subject to pre-approval and inclusion in the SMR:

  • Chairman;
  • Chair of the Risk Committee;
  • Chair of the Audit Committee;
  • Chair of the Remuneration Committee;
  • Chair of the Nomination Committee; and
  • Senior Independent Director

The regime will not apply to those NEDs who do not perform any of these roles. The revised proposals appear in line with the regulators' objective of focussing the SMR and SIMR on a narrower set of individuals; those with the greatest potential to harm the firm's safety and soundness, its consumers and the markets in which it operates.

However, concerns from firms remain around the degree to which this may deter NEDs from taking up posts chairing Committees; discouraged by the need for pre-approval and high potential personal liability, when other NEDs may not face similar consequences if things go wrong.

Applying fitness and propriety standards and the new Conduct Rules

Firms will, however, be required to apply the same fitness and propriety standards to all NEDs. The PRA will amend its rules and Supervisory Statement on Fitness and Propriety (including those relating to criminal record checks and regulatory references) to cover all NEDs.

Likewise, firms are also required to ensure that NEDs outside the scope of SMR (and therefore not directly bound by the Conduct Rules) observe Conduct Rules 10-3 and SM4. The regulators have also noted that the Statements of Responsibility (SoRs) for NEDs are expected to be less extensive than those of executive senior managers.

The PRA has also indicated that a notification requirement for fitness and propriety similar to the one proposed for key function holders in Solvency II firms may also be appropriate for NEDs in MiFID and CRR firms. This is the first indication that we have seen from the regulators that elements of new regimes may eventually extend to a broader population of investment firms.

Application of the Presumption of Responsibility                     

In addition, the PRA has set out how it intends to apply the Presumption of Responsibility to senior managers at banks, building societies and designated investment firms if they do not take reasonable steps to prevent or stop breaches of regulatory requirements in their areas of responsibility.

The PRA has included examples of the considerations that it may take into account in forming a view as to whether reasonable steps were taken by the senior manager, such as what the senior manager actually knew, or ought to have known and  the expertise that the senior manager possessed or should have possessed. Also included are example steps that a senior manager might take in order to avoid a contravention occurring or continuing, such as pre-emptive actions, including a business review and implementing policies and procedures. Finally, the PRA has also included in the draft Supervisory Statement indications of the types of evidence that it might seek to obtain, including Board and Committee minutes; Statements of Responsibilities and Responsibilities maps; and internal materials such as emails, phone records.

Next steps

The FCA and PRA plan to publish the following documents over the coming months:

  • A consultation on the application of the individual accountability regimes to incoming branches of non-EEA firms.
  • A feedback statement and, in the PRA's case, some final rules, relating to some of the proposals in the July 2014 CP.
  • For Solvency II firms, a consultation on consequential amendments to the PRA Rulebook and FCA Handbook, forms, further governance issues and transitional arrangements.
  • For non-directive insurers, a consultation on individual accountability.

The regulators also intend to publish final policy statements and rules for both firms and individuals later in the spring.

Although yesterday's consultation narrows the reach of the SMR somewhat, it leaves those NEDs performing key Board and Board Committee functions firmly within scope, reflecting Andrew Bailey's view that such NEDs should be subject to "a more exacting regime" and leaving many questions in relation to the proposed SMR unanswered. Equally, it remains to be seen whether any part of the SMR regime will be extended to cover a broader range of  firms, as the regulators have signalled for the first time yesterday.

Although the regulators' intention to recognise that NEDs do not manage a firm's business in the same way as other Executive Directors is a key and very welcome safeguard, all eyes will be on how they achieve this in practice.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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