Day 1: The Senior Managers and Certification Regime goes live

The day has finally arrived. The new FCA and PRA Senior Managers and Certification Regime goes live today. Many firms will see today as marking the end of what has been a long consultation and implementation process. But today is just the start. Following the implementation of the new regime, in-house lawyers and compliance officers at financial institutions will face a range of risks and challenges relating to the new regime and will need to be prepared for how to manage them in practice.

Set out below are a series of issues that may arise in relation to the new regime from an investigations perspective. For an overview of potential employment issues, please visit Allen & Overy’s Employment Talk Blog.

#1: The Conduct Rules

In-house lawyers and compliance officers will be in a unique position with regards to the new Conduct Rules which form the cornerstone of the new regime. In-house lawyers and compliance officers themselves will be subject to the conduct rules from either today or, failing that, 7 March 2017. However, they will also be responsible for applying the conduct rules to colleagues, especially in the context of litigation, internal investigations or employment matters.

The FCA and PRA expect firms to ensure that their employees understand how the Conduct Rules apply to them and their specific roles and responsibilities. As a result, in-house lawyers and compliance officers will need to understand how the Conduct Rules will apply to them; for example, they must conduct litigation, investigation and employment matters with due skill, care and diligence (Conduct Rule 2), and, to the extent that litigation, an investigation or a complaint involves their firms’ customers, they must pay due regard to the interests of those customers and treat them fairly (Conduct Rule 4).

#2: Potential privilege issues

In-house lawyers who find their actions being scrutinised by the FCA or the PRA may encounter difficulties. Most, if not all, of their work is likely to be privileged and that privilege will belong to their employer, not to them. As a result, unless their employer is willing to waive privilege over relevant evidence, it may be difficult for in-house lawyers to defend themselves in the course of FCA and PRA investigations.

Privilege is also a topic that is likely to feature prominently in the FCA’s forthcoming consultation as to whether general counsel and heads of legal need to be senior managers. For example, the FCA has acknowledged concerns that Senior Manager Conduct Rule 4 relating to disclosure of information to the regulators could be interpreted as requiring general counsel and heads of legal to disclose privileged information.

#3: Fitness and propriety in investigations

Under the new regime, firms will need to satisfy themselves that their Senior Managers and Certified Persons continue to be fit and proper to perform their roles.

If an employee is involved in an internal investigation, firms may sometimes not be comfortable with certifying that employee as fit and proper and allowing him/her to continue in their certified role. It may not always be possible to suspend an employee in this situation, or to move them to a new, temporary role. As a result, firms may wish to prioritise reaching a conclusion, even an interim one, in relation to Certified Persons, so that a decision as to their fitness and propriety may be taken. It will be important that in-house employment, legal and HR are involved, and, in light of the effect that this decision would have on an employee’s career, employment litigation and the employee’s rights should be factored into any decision.

In the event that a Certified Person is suspected or found to have engaged in misconduct, it is likely that the regulators will ask questions about why that individual was certified as fit and proper. In that situation, it will be important that a firm can provide evidence that a thorough and robust certification process was followed.

#4: Notifying breaches of the Conduct Rules

There has also been a shake-up in terms of the procedure that firms will be required to use to notify breaches of the new Conduct Rules that occur from today onwards:

• Senior managers and PRA-certified persons. Firms will need to complete a new, more detailed form (‘Form C’ or ‘Form D’ for Senior Managers, ‘Form L’ for PRA Certified Persons). These forms will require firms to set out precisely which Conduct Rules a Senior Manager or PRA-Certified Person has breached, the basis for this conclusion, and the details of any disciplinary sanctions applied.
• FCA-certified persons and others subject to the new rules. Firms will need to submit an annual return (new ‘Form H’) listing details of each employee (i.e. those who are not Senior Managers or PRA Certified Persons) who has been found to have breached the Conduct Rules in the past 12 months, the basis for those conclusions, and the details of any disciplinary sanctions applied.

In addition to considering the specific notifications listed above, if an employee is found to have breached the conduct rules, firms will need to consider whether they are under a separate obligation to notify the FCA or the PRA or both of this under their respective self-disclosure and notification rules.

This blog post is based on a longer article which appeared in the March issue of PLC Magazine, available here.