UK: Latest FCA Rules And Guidance: SMCR, Remuneration And Whistleblowing

Last Updated: 12 May 2017
Article by Celyn Armstrong, Ryan Carthew, Virginia K. Allen and Katharine Harle

On 3 May the FCA published a series of policy statements tidying up aspects of the senior managers and certification regime (SMCR) for banks and insurers as well as finalising rules on remuneration and on whistleblowing in branches of overseas firms.  With the roll-out of the SMCR to all regulated firms expected by 2018 the SMCR papers may be of interest to regulated firms more widely, especially as it is stated that the "duty of responsibility" will apply to senior managers in all types of firms.  We summarise the key points from each paper below. 

PS17/8: final rules on applying conduct rules to all non-executive directors (NEDs) subject to the SMCR and SIMR:

"Standard" NEDs are, broadly, those in banks and insurers who do not hold a Senior Management Function or Senior Insurance Management Function, and who have no responsibility for implementing the decisions or policies of the board.  Their regulatory treatment has proved to be one of the trickier aspects of the SMCR and SIMR, and the regulators' positions have changed several times since the first consultation paper in July 2014.  The policy statement extends most of the conduct rules to standard NEDs, who will have to comply with the five conduct rules applicable to all employees, as well as the senior managers' obligation to disclose appropriately any information of which the FCA or PRA would reasonably expect notice.  They will not, however, have to comply with the senior manager conduct rules on effective control, business area regulatory compliance and appropriate delegation. The FCA paper also refers to a related PRA policy statement, which has not yet been published. 

Whilst firms and their NEDs will be reasonably comfortable with the end result, the FCA has introduced some uncertainty with the requirement to apply conduct rule breach reporting rules to standard NEDs where the firm has taken action "equivalent" to disciplinary action against an employee.  Though it is not very clear what the FCA has in mind here, in practice such action is likely to be rare.

Firms will need to make sure that they have given appropriate, role-tailored training to their Standard NEDs before the rules come into force on 3 July 2017.  They will also need to consider whether and how to amend their conduct rule breach reporting procedures to ensure that any "equivalent to disciplinary" action against Standard NEDs is considered for possible reporting.

PS17/9: final guidance on the SMCR "duty of responsibility":

The duty of responsibility replaced the controversial presumption of responsibility before the latter was ever brought into force. It imposes a requirement on senior managers to take reasonable steps to avoid regulatory breaches in their business areas – and arguably adds little to the existing senior manager conduct rules, which include an obligation to take reasonable steps to ensure that the relevant business area complies with the requirements and standards of the regulatory system. Nevertheless, the FCA has finalised its guidance on the duty of responsibility, which is unsurprisingly similar, though not identical, to the guidance on the senior manager conduct rules.  The guidance is helpful in that it gives a reasonably concise summary of how the FCA expects senior managers to run their businesses.  So there are references to FCA favourites like dealing with possible breaches in a timely way, overseeing delegated responsibilities properly, and assessing and monitoring their area's governance, operational and risk management arrangements.  Whilst little of this is novel, it amounts to a checklist that senior managers might find it helpful to run through.

Notably, the FCA will have regard to whether a senior manager took reasonable steps to ensure an orderly transition when they were replaced in the performance of their function by someone else. The FCA justifies this by referring to related conduct rule guidance – though this guidance actually applies to the manager of the senior manager who is being replaced.  The FCA has previously only applied the obligation to the firm or line manager rather than the mover/leaver themselves, and senior managers may find it difficult to comply where their relationship with their employer has broken down (though this risk is limited by the fact that the obligation is to take "reasonable steps"). Many firms now require their senior managers to maintain a detailed governance and management framework. As well as being good regulatory practice, if kept up to date this can form the bulk of a handover document, avoiding the need to put one together from scratch in what may be difficult circumstances.

PS17/7: final rules on whistleblowing in UK branches of foreign banks:

In October 2015 both regulators introduced new rules for UK-incorporated banks and insurers requiring particular internal whistleblowing procedures, including setting up a whistleblowing channel open to all, informing employees about the regulators' whistleblowing services and making a senior individual into a "Whistleblower's Champion".

In relation to UK branches of overseas banks (Overseas Branches) these requirements do not have the force of rules but are considered "good practice guidance". In September 2016 (in CP16/25) the FCA consulted on how whistleblowing requirements might apply to Overseas Branches.

Overseas Branches should be relieved that the FCA's final rules take a very light-touch approach and only require Overseas Branches to tell their UK-based employees about the FCA and PRA whistleblowing services. The only change to the original proposals is a new piece of guidance (at SYSC 18.3.6A) clarifying that reporting something to the FCA or PRA does not override any obligations to report matters to their home state regulators.  

In line with what was originally consulted upon, the final rules also require Overseas Branches to tell staff that they may make use of sister or parent company whistleblowing arrangements where the Branch has a sister or parent company which is subject to the full whistleblowing requirements. However, for many firms this may not be applicable.

Overseas Branches will need to ensure their internal documents comply with the new measures in time for the implementation deadline of 7 September. For Branches considering whether to adopt a full whistleblowing policy they may wish to consider and discuss with their advisers the points made in CP16/25, in particular the potential for conflict with home state laws and difficulties in providing genuine anonymity if the number of employees at the Branch is low.

PS17/10: final rules and guidance on remuneration for CRD IV firms:

These final rules and guidance (which took effect from 3 May) affect firms subject to SYSC 19A, 19C and 19D but also those within their group. The amendments to the Handbook and FCA guidance notes (FG 17/6, 17/7 and 17/8) are made to align the FCA position with the EBA Guidelines on proportionality published in December 2015 (which have been in force from 1 January 2017). In addition new guidance is issued in the form of remuneration FAQs (FG17/5). 

Subsidiaries without their own Remuneration Committee should consider the new guidance at question 4 of the FAQs which sets out the test for "significance" and clarifies that this must be assessed on a standalone basis. 

In relation to long-term incentive plans (LTIPs) the guidance is amended to clarify that it is not sufficient to just assess individual performance at the point of grant with malus adjustment prior to vesting. Firms may need to review how their LTIPs work in practice and ensure that individual performance (as well as that of the firm and business unit) is considered both at the point of grant of an award and in the period prior to vesting, notwithstanding that malus adjustments may also be applied.

Limited licence and limited activity firms will welcome the amendments to paragraph 4.6 of the SYSC 19A and 19D guidance returning it to its former state such that they may disapply fixed/variable ratios under the proportionality rule in appropriate circumstances.

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