Getting to grips with the changes that have been brought in as a result of the Senior Managers and Certification Regime (SMCR) for all FCA regulated businesses is not easy.

In a series of six podcasts, we've brought together our employment and financial regulation experts to simplify this area and explain clearly what those working within legal, risk, compliance, HR and operations need to think about at each stage of the employment cycle when it comes to complying with the SMCR.

In this fourth episode, we cover the issues that might arise on termination of employment.



Ian Mason: Hello everyone. I'm Ian Mason. I'm a partner in Gowling WLG and I head up the financial services and regulatory team and this is a series of six podcasts that we're bringing to you in which members from Gowling WLG's employment and financial services regulation teams will be discussing the issues that arise from an SMCR (Senior Managers and Certification Regime) perspective at each stage in the employment cycle.

So, there have been some earlier podcasts and in terms of what we have covered so far we've looked at recruitment, issues during employment and taking a closer look at investigations and whistleblowing - certainly a hot topic at the moment. Today we are going to be moving on to look at the end of the cycle what issues could arise on termination in an SMCR context. To discuss this I'm joined by Emma Bufton a principal associate in our Employment, Labour and Equalities team and Sushil Kuner a principal associate in our Financial Services Regulation team.

So we're now looking at the end of the employment lifecycle, when an employee is exiting the business and the changes brought in by the SMCR threw up a number of issues and factors for firms to be considering at this stage, even more so if the employee in question is a Senior Manager and if the reason for the exit is related to a disciplinary matter involving breaches of Conduct Rules. I'd like to come on to look at that in a little more detail later in this podcast but if we can start things off a little more gently...

We've discussed in an earlier podcast what changes will need to be made to the employment documentation in light of the SMCR but I think it's worthwhile highlighting again what firms should be thinking about including to deal adequately with exiting. Emma, perhaps you could start off by touching on that.

Emma Bufton: Sure, so one of the changes I think firms should be making is to update the list of summary dismissal provisions and the reason for this is so that employees are clear that if they breach any one of the requirements brought in by the SCMR that this may well qualify as a summary dismissal offence.

So for Senior Managers, firms should be looking to add the following to the list of summary dismissal offences:

  • any material negligence or wilful default in the performance of a Senior Manager Function or prescribed responsibility;
  • a material breach of the Conduct Rules;
  • an updated regulatory reference being provided by a previous employer which then calls into question that individual's fitness and propriety; and
  • any failure to pass the firm's fitness and propriety assessment.

Save for the provision specific to Senior Manager Functions and prescribed responsibilities, the other offences should also be listed for certified persons and non-executive directors.

As well as making changes to what would qualify as a summary dismissal and I know Simon's covered this in an earlier podcast, employment documents should also include a contractual obligation on the Senior Manager to provide satisfactory handover notes and to co-operate with the firm in respect of any investigations that could relate to that individual's fitness and propriety.

Ian: So you mentioned there handover notes. Now this is a new requirement of the SMCR. Can you tell us more about that?

Emma: Yes, so the obligation with regards to handover applies to enhanced firms only, so not all solo FCA regulated firms are going to be covered under the SMCR. Broadly speaking what is required is for reasonable steps to be taken to ensure that a person holding a Senior Manager role has all the information and materials that they could reasonably expect to have in order to do their job effectively.

This should be documented formally by firms and they should have policies on their expectations with regards to handovers and ideally this document should be prepared and updated throughout the period that that Senior Manager is holding a particular Senior Manager Function. This allows for a more complete and accurate record of the risks and issues relevant to the Senior Manager Function the individual holds and crucially, it also acts as a contingency plan should the Senior Manager leave the firm unexpectedly.

It would also be prudent for firms to specify what they expect that handover to cover and that's for consistency and for completeness purposes. So some examples that they might want to think about including would be:

  • a judgment of the risks and any concerns a Senior Manager has;
  • how a Senior Manager discharges their duties and the reporting lines within the area that they are responsible for;
  • the level of resourcing and capabilities within that Senior Manager's team; and
  • also any regular interaction or scrutiny that has occurred within the business area.

Now whilst it is a requirement under the SMCR for enhanced firms to have these handover provisions in place, as a matter of good practice, not least for the contingency plan reasons I mentioned, it can be a good idea for other solo regulated firms to look at having some form of handover policy in place too.

Ian: So the handover document is going to be a really important part of the exit process for Senior Managers and of course you've already mentioned some key changes required to the employment documentation. On the topic of documentation, there is obviously going to be a lot of personal documentation about employees that firms will have on record. Does the SMCR impose any obligations in terms of retaining that documentation? I appreciate there may well be GDPR implications here too.

Emma: Yes you're right to raise GDPR and the Data Protection Act 2018. Firm's will need to have a lawful basis for processing personal data and they will need to be clear and transparent with employees about how they collect, store, retain and use their personal data but for the purposes of today's podcast and given the timing constraints I'm just going to leave it there in terms of flagging the GDPR points but it's certainly something that firms should be alive to and should have on their radars.

So looking then at the SMCR requirements on retention, there are certain information that must be retained for a period of time after the employee has left. So for instance, Statements of Responsibility, training records and regulatory correspondence and the amount of time that that data must be retained for is going to depend on that particular data in question.

Whilst we're on that topic of records, do make sure that after the employee leaves that any documentation that mentions that particular employee is updated. So for instance, if there are any Responsibility Maps that need to be updated.

Ian: Right so let's focus our attention a little more on the regulator. Presumably, if FCA approval is needed to appoint a Senior Manager into a Senior Manager Function they are going to want to know about any departing Senior Manager? Is that right Sushil and will they want to know about other departing employees too? I'm thinking here about any employees who may have been dismissed for disciplinary reasons.

Sushil Kuner: Yes, well the basic position for any non-fault situation involving a Senior Manager ceasing to perform an FCA designated Senior Management Function, is that the firm must notify the FCA of this within ten business days of the cessation date.

Unless the Senior Manager in question is moving to another Senior Management Function within the same firm or group, the notification to the FCA will be by way of a Form C which requires a reason to be given for the cessation of role. If the Senior Manager is moving to another Senior Management Function within the same firm or group then the relevant form will be a Form E.

However there are situations where notification by way of Form C needs to be made earlier. In particular, notification must be submitted as soon as practicable after a firm becomes aware, or has information which reasonably suggests, that it will submit a qualified Form C for an FCA approved Senior Manager.

So what is a Qualified Form C I hear you ask! Well the Form C will be qualified if the information it contains:

  1. relates to the fact that the firm has dismissed or suspended the Senior Manager from its employment; or
  2. relates to the resignation by the Senior Manager while under investigation by the firm, the FCA or any other regulatory body. Now I think Simon Stephen covered this in a bit more detail in podcast 4.

The Form C will also be qualified where it otherwise reasonably suggests that it may affect the FCA's assessment of the Senior Manager's propriety or include about the Senior Manager under statutory provisions relating to grounds for withdrawal of approval and disciplinary action.

Practically, what this means is that where any of those circumstances exist, firms may be required to submit a qualified Form C in advance of the actual cessation date.

Firms should note that they have an obligation to supply the FCA with complete and accurate information required by Form C, irrespective of any agreement settled by the Advisory, Conciliation and Arbitration Service or any other agreement or settlement agreement entered into by the firm and the employee. A firm should not enter into any such arrangements that could conflict with its obligations under the SMCR.

Ian: Thanks Sushil. What about those employees who are dismissed for breaches of the Conduct Rules?

Sushil: Well if an employee has been dismissed for breaches of the FCA's Conduct Rules, which I spoke about in detail in podcast 2, unless the breach or individual's misconduct was serious enough to warrant a notification to the FCA under Principal 11, then the details around this termination will only need to be included in the firm's annual notification of breaches of conduct rules by staff.

Although conduct rules breaches can be serious, you can imagine situations where they are not so serious to warrant an immediate notification to the FCA under Principle 11, but do nevertheless result in termination of employment. For example, frequent errors on the part of claims or arrears handlers who may be on personal development plans, which do not lead to harm as a result of Quality Assurance measures in place. However, these competency reasons will go to the individual's Fitness and Propriety and may need to be included in any regulatory reference.

Ian: No doubt dismissals for a conduct related reason are going to have an impact on the employee's regulatory reference and I can see that this could become quite contentious. Emma do you agree?

Emma: I certainly do, yes. So the onus is on the firm completing the reference to provide as complete a picture of the employee's conduct record as possible and this is all part of shifting responsibility for verifying individuals' fitness and propriety from the regulator to firms and the record must include details of any disciplinary action which includes the issuing of a formal warning, suspension or dismissal or the reduction/recovery of such a person's remuneration.

Now difficulties often arise if the employee sees the writing on the wall and chooses to leave before or part way through a disciplinary investigation. What does that then mean for the regulatory reference? Well this goes back to one of the main reasons for the SMCR and introducing regulatory reference being to prevent bad apples from rolling. So firms can't wiggle out of completing investigations just because an employee has left. The process will need to be finalised as far as possible with the employee given the opportunity to comment and for the outcome to be recorded in the reference too, again with the employee having had the opportunity to comment.

In reality, what this means is that allegations of misconduct are likely to be bitterly fought by employees as an adverse regulatory reference could have career ending consequences.

Don't forget also, and I know we mentioned this in our first podcast, that references need to be updated if firms discover any wrongdoing after the employee has left. It's worth mentioning as well, which builds on the comments Sushil made earlier about Form Cs, that the rules are clear that firms cannot agree settlement agreements or COT3s with employees limiting what would otherwise be said in a regulatory reference and such an arrangement like that would be void.

Ian: well thank you both very much. That's been very interesting and informative but I think that's all we've got time for on this podcast but do keep a look out for our further podcasts in this series. Thank you for your attention and have a good day.

Missed the previous episodes? Listen to 'The employment lifecycle through a SMCR lens: episode 1', in which we start at the beginning of the employment cycle, exploring all things recruitment and The employment lifecycle through a SMCR lens: episode 2 - issues arising during employment where we look at issues arising during employment and The employment lifecycle through a SMCR lens: episode 3 - whistleblowing where we discuss the topical area of whistleblowing.

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