11 July 2017 - Post by:Sarah Hitchins
A lot of time has been spent by some firms managing conduct and performance issues under the UK Senior Managers and Certification Regime (the SMCR) over the past 15 months. In our second blog post looking at these issues (the last one is available here), we highlight key areas that firms should not lose sight of, as well as relevant record-keeping considerations.
Senior Manager Conduct Rule assessments
The FCA/PRA Code of Conduct is split into two. The first five rules (‘Individual Conduct Rules’) apply to almost Senior Managers and Certified Persons and, for the FCA only, almost all other employees who work for in-scope firms. The second four rules (‘Senior Manager Conduct Rules’) only apply to Senior Managers.
We understand that certain trade unions have raised concerns with firms that more junior employees may be more likely to be found to have breached the Individual Conduct Rules than more senior employees, especially now that almost all employees working for in-scope firms (including firms’ most junior employees) are now subject to the FCA’s Code of Conduct.
This is proving to be an interesting dynamic for firms to manage, especially as the regulators’ focus (including from an enforcement perspective) is likely to remain on more senior employees. As a result, the regulators will be expecting firms to consider and take appropriate action against more senior employees if they engage in conduct that breaches the Individual and/or Senior Manager Conduct Rules, even if they are only indirectly implicated in regulatory failings or misconduct identified. In these situations, firms will be required to assess whether Senior Managers have breached both the Individual and Senior Manager Conduct Rules. Firms will not be able to shy away from making these kinds of decisions in practice.
In light of the way in which most of the Senior Manager Conduct Rules are drafted (i.e. premised on the concept of taking ‘reasonable steps’) firms may find that these assessments to be quite finely balanced and complex in practice. Previous FCA enforcement cases and Upper Tribunal decisions provide some sort of benchmark for firms to use. However, those cases have tended to focus on more egregious conduct by senior individuals, and do not represent the full spectrum of conduct firms may have to consider in practice. The guidance provided by the FCA and the PRA on the Code of Conduct, as well as ‘reasonable steps’ under the Duty of Responsibility, should be considered but is unlikely to provide firms with definitive direction in this area.
One theme that has emerged across fitness and propriety and Code of Conduct breaches over the past year is how employee reactions and explanations can impact a firm’s decision as to the seriousness of their conduct.
For example, instances where employees’ reactions have caused firms to lean towards a finding that they are not fit and proper include where employees have failed to own up to misconduct even in the face of strong evidence, or failed to show remorse for their actions or any recognition that their conduct has fallen below the standards expected of them.
In some cases, it has been the employee’s behaviour in response to allegations put to them that ultimately results in their fitness and propriety or compliance with the Code of Conduct being called into question, as opposed to their original underlying conduct itself.
Record-keeping and audit trails
Decisions relating to fitness and propriety issues and breaches of the Code of Conduct may come under external scrutiny, for example, by the FCA, the PRA or by an employment tribunal. With this in mind, firms should ensure that such decisions are consistent (to the extent possible) and recorded in an appropriate level of detail.
We have seen firms record their decisions relating to fitness and propriety and Code of Conduct breaches in varying levels of detail. Some firms have kept quite brief records of these decisions, whereas others have produced more detailed analysis. The nature and content of these records should record the decision taken and the reasons for it. However, there may also be strategic considerations for firms to take into account when documenting their decisions, in light of any potential employment litigation and/or regulatory risk.
Senior management are likely to be notified of, or otherwise aware of, specific conduct and performance issues that affect particular employees who fall within their area(s) of responsibility. However, firms are also choosing to look at these kinds of issues on a more holistic basis. For example, many firms are providing their senior management with management information that seeks to identify emerging or realised themes and trends in relation to findings concerning breaches of the Code of Conduct and fitness and propriety issues, as well as the potential for ‘read-across’ between different business areas and functions.
In our view, the FCA and the PRA will expect firms to be taking this kind of approach at senior management levels, and for senior management to be taking appropriate action in response to the information that they receive.
The stakes are higher for firms now when they reach conclusions relating to fitness and propriety and breaches of the Code of Conduct. Decisions may need to be reported by firms to the regulators in some circumstances, and may also need to be reported to other firms via ‘new style’ regulatory references. In our next post in this series, we consider these reporting obligations and how they are bedding down across the industry.