03 July 2017 - Post by:Sarah Hitchins
The UK Senior Managers and Certification Regime (the SMCR) has been in force now for well over a year. What challenges have firms have been facing? What are the issues that have caused firms most concern? In the first of a series of blog posts, we will be looking at issues that firms have been facing since the implementation of the SMCR in relation to managing employee conduct and performance issues.
A key driving force behind the new regime is reinforcing firms’ responsibilities when it comes to individual accountability. Since the implementation of the SMCR, firms have effectively been turned into ‘mini-regulators’ with responsibility for routine and ad hoc fitness and propriety assessments for Senior Managers and Certified Persons and assessing whether staff have committed breaches of the FCA/PRA Code of Conduct.
Most firms appear to have had at least one fitness and propriety issue to consider over the past 15 months. Some have had many more. These firms have also had to consider in these situations whether the employee in question has breached one or more of the Individual or Senior Manager Conduct Rules. It is these ‘ad hoc’ assessments that have proved particularly challenging for firms, both in terms of the processes that they adopt, as well as the standards that are applied in order to determine if there has been a breach of the FCA/PRA Code of Conduct or if there is a fitness and propriety issue.
Most firms appear to have adapted their existing processes for managing employee conduct and performance issues to suit the requirements of the SMCR, as opposed to adopting completely new processes. For firms that have adopted this approach, retaining existing processes has helped to ensure some familiarity with these processes – both on the part of those who go through them, as well as those who are responsible for running them.
Firms have put in place processes to ensure that they can demonstrate that consideration has been given to conduct and performance issues when these issues arise in relation to Senior Managers and Certified Persons. Firms have recently had to expand the application of these processes as the FCA’s Code of Conduct now applies to a much broader population of employees.
Key observations from across the industry
Some key observations as to how firms have managed employee conduct and performance issues are as follows:
- Performance management and disciplinary processes are no longer solely the domain of HR. We have seen firms adopting a joined-up approach between HR, Legal, Compliance as well as other areas (including Risk and the business) in relation to such processes.
- There is no ‘one size fits all’ approach. Firms need to craft disciplinary and performance management processes that work for them. However, some common themes we have seen across the industry include considering fitness and propriety and Code of Conduct issues as part of a single and combined disciplinary process, as well as the introduction of ‘oversight panels’ that oversee and help to advise disciplinary hearing managers on the relevant regulatory context that applies in particular situations.
The rise of individual accountability exercises
When things go wrong, the regulators expect firms to consider who should be held directly or indirectly accountable for what has happened. Commonly referred to as ‘individual accountability exercises’, these exercises often turn into sub-investigations in and of themselves. The regulators expect firms to think proactively about individual accountability issues and report back on their findings. In some cases we have seen the regulators probe and challenge the output of individual accountability exercises.
The last 15 months have not proved to be entirely straightforward, even for firms that have established robust processes for assessing fitness and propriety and breaches of the Code of Conduct.
A key topic of debate amongst firms at the moment is how they can definitely determine if conduct amounts to a fitness and propriety issue and/or a breach of the Code of Conduct.
No bright lines
In some cases, firms have been confident when concluding whether issues meant that employees were no longer fit and proper and/or had breached the Code of Conduct. However, a number of other instances have been less clear cut. There is a significant grey area in this space, especially where conduct may have been, for example, inadvertent, due to a lack of training, a one-off incident, characterised as a more of a performance issue, rather than misconduct, or relates to conduct outside the workplace (in the case of fitness and propriety only).
Unfortunately, the general consensus amongst firms seems to be that they will continue to encounter grey areas when assessing fitness and propriety and breaches of the Code of Conduct. Industry bodies, advisers or the regulators can (and have) offered guidance in this area, but it is most likely that cases will need to be considered on their own facts in accordance with a firm’s policies and risk appetite. For example, we have seen different firms take varying approaches to similar types of conduct, such as sending confidential information to personal email addresses. Some firms have taken a zero-tolerance approach to this type of conduct, but other firms take a less strict approach.
Through its new reporting requirements, the FCA will be able to view each firm’s entire portfolios of Code of Conduct breaches on an annual basis. It will be interesting to see the extent to which the FCA tries to compare or benchmark the approaches of different firms to similar types of conduct when it comes to fitness and propriety issues and breaches of the Code of Conduct.
In the next blog post in our SMCR reflections series, we will highlight key issues that firms should not lose sight of when considering employee conduct and performance issues, as well as how firms should document decisions they make in this area.