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08 Mar 2017

Claire Cross discusses the FCA’s Senior Manager Regime in Thomson Reuters Regulatory Intelligence

Reasonable Steps

The Senior Manager Regime, or SMR, is governed by the Senior Manager Conduct Rules, SC1-4, which can be found in COCON 2.2 of the FCA’s Handbook.  All four rules require Senior Managers to take reasonable steps to prevent contraventions from occurring in the areas they are responsible for.  SC1 and 2 require Senior Managers to take reasonable steps to ensure that the business of the firm that they are responsible for is controlled effectively and in compliance with the regulatory system.  SC3 requires the taking of reasonable steps in respect of the delegation and discharge of responsibilities, while SC4 requires the appropriate disclosure of any information that the FCA or PRA would reasonably expect notice.

Originally it had been proposed that there should be a “presumption of responsibility” which would have placed a burden of proof on Senior Managers to prove to the regulator that the steps they had taken were reasonable.  Fortunately for the industry (although less fortunately for Enforcement whose job would have been made much easier by this presumption) a retreat was beaten and the burden of proof instead placed on the regulator to prove that a Senior Manager has failed to take reasonable steps.  Guidance as to what constitutes reasonable steps can be found in COCON 4.2. The guidance is exactly that; guidance.  It does not provide a definitive list of what is and what isn’t sufficient to amount to reasonable steps.  It is not hard to predict that this will provide fertile ground for disagreement, and ultimately litigation, between the FCA/PRA and Senior Management.

The Potential Effect on FCA Enforcement

When the SMR was being initiated there was much talk as to how much easier Enforcement’s job would be.  Using firm produced Management Responsibilities Maps and the individual Statements of Responsibilities would, it was said, save investigators vast amounts of time in determining who was responsible for what – less of a partially eaten bread crumb trail to follow, more of a neon sign proclaiming “It’s Me!” However, it has now been recognised that this was a naïve view – knowing who was responsible on paper is not the end of the matter, arguably it is just the start – and even the FCA itself has accepted that the SMR is likely to create a different dynamic within its Enforcement Division.  Unlike in firm cases and the “we’ll pay to make it go away” attitude, where those under investigation tend to settle and pay fines in order to get the matter over and done with, individuals have always been a more difficult proposition for the FCA, being far less likely than firms to “take their medicine”.

In the case of Senior Managers, it is highly unlikely that they will just lay down and accept the FCA’s findings should they find themselves caught in their net – nor should they. They have a hugeamount at risk –  financially crippling fines and the strong possibility of losing their long and hard worked for livelihoods – and will undoubtedly want to fight tooth and nail to prevent any adverse findings being made. This will in turn effect the FCA’s preferred modus operandi for quick wins and result in an increase in the amount of time and resource dedicated to cases.

In addition, potential negative effects are also likely to extend beyond investigations into Senior Managers and will ultimately permeate into firm investigations.  In a speech given by Mark Steward in late January 2017, the Director of Enforcement spoke about his concern that firms are likely to be reluctant to just roll over and pay up in cases where resolution against the firm will not also resolve cases against Senior Managers.  He additionally stated that the SMR is also likely to cause the FCA problems in the amount of weight that they are able to attach to internal investigation reports prepared by firms, believing that therein lies an inherent conflict of interest as “the reports have been commissioned by and prepared for senior management who may well be part of the problem.”

Concerns for Senior Managers

However, coming at these problems from the other side of the fence, it will undoubtedly cause grave concern and worry to Senior Managers that their firm may take “the buck stops here” attitude, resulting in them either being cut loose, or offered up on a plate in an internal report, to divert attention from wider firm issues or to allow quick resolution for the firm.

There is also the worry that firms may take the opposite attitude to that enunciated by Mark Steward, and may be keen to settle with the regulator to allow business to continue, with little or no thought as to how a particular finding agreed to in the Settlement process could affect the Senior Manager of the relevant area.  It would be an unenviable position for any Senior Manger to find themselves facing Enforcement action under the SMR when their firm has already in effect agreed wrong doing relating to the allegations in Settlement proceedings.

The Future

In conclusion, although the potential issues that may arise from SMR action are purely a matter of conjecture at present,  as the first anniversary of the regime looms on the horizon it can surely only be a  short matter of time before hypothetical becomes actual and FCA Enforcement announce their first investigation.   Perhaps the biggest issue of all is who will be the subject of it?

This article was originally published in Thomson Reuters.

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