05 October 2016 - Post by:Sarah Hitchins
Last week the UK Financial Conduct Authority (FCA) published new draft guidance on the meaning of ‘reasonable steps’ for the purposes of the Senior Managers Regime.
If you were hoping that this latest guidance was going to provide us an A to Z guide to ‘reasonable steps’ then, unfortunately, you are going to be disappointed. However, the FCA’s draft guidance does confirm for us: (a) the approach that they will take to assessing whether a Senior Manager has taken ‘reasonable steps’, and (b) some of the factors that we already thought would contribute to that assessment.
The concept of ‘reasonable steps’ is not a new one when it comes to senior management in financial institutions in the UK. Under the old approved persons regime, individuals performing Significant Influence Functions (SIFs) were required to take ‘reasonable steps’ to discharge their regulatory obligations.
After plans for the (controversial) Presumption of Responsibility were scrapped late last year, the decision was taken to formalise this idea of ‘reasonable steps’ and re-brand it as the ‘Duty of Responsibility’.
What is the ‘Duty of Responsibility’?
The Duty of Responsibility can be found in section 66A(5) of the Financial Services and Markets Act 2000 (which came into force on 10 May 2016). In short, under the Duty of Responsibility, the FCA or the PRA may take action against a Senior Manager where:
- Step 1: There has been (or continued to be) a contravention of a relevant regulatory requirement by the Senior Manager’s firm.
- Step 2: At the time of the contravention, the Senior Manager was responsible for the management of the firm’s activities in relation to which the contravention occurred.
- Step 3: The Senior Manager did not take such steps as a person in their position could reasonably be expected to take to avoid the contravention occurring or continuing.
Below we explore in more detail each of these three steps, what the FCA’s latest guidance tells us about each of them and some of our observations on this latest proposed guidance.
Step 1: Contravention by the Senior Manager’s firm
Whether a Senior Manager’s firm has contravened a relevant regulatory requirement will be a matter for investigation by the FCA and/or the PRA. In some cases, the regulators conduct investigations into firms and members of senior management in parallel. In others, the regulators can opt to conclude their investigation into a firm and then turn to investigate members of senior management. However, the FCA’s new proposed guidance does not expressly state that the FCA must take enforcement action against a firm in order to conclude that the firm has contravened a regulatory requirement.
The draft guidance published by the FCA has clarified that in enforcement action brought against a Senior Manager under the Duty of Responsibility, the Senior Manager will not be ‘bound by’ a finding of the FCA’s Regulatory Decisions Committee, a court or a tribunal.
This guidance is welcome. It may help reassure Senior Managers that, if the FCA makes findings about their area of responsibility, they may still be able to dispute those findings should they be investigated themselves. However, it is likely to be a bit of an uphill struggle for a Senior Manager to try and challenge findings that have already been settled between the FCA and a firm, and even more so if they have been found by a court or a tribunal. Senior Managers in this position will be starting on the back foot.
Interestingly, the FCA states in its draft guidance that a Senior Manager will only not be bound by a finding of the FCA’s Regulatory Decisions Committee, a court of a tribunal, which he or she was ‘not privy nor party to’. What ‘privy’ means in this context is unclear. The phrase ‘privy to’ typically means that someone is aware of confidential information. Does the FCA’s use of the phrase ‘privy… to’ in this context mean that if a Senior Manager is aware of an FCA investigation into their firm that he or she will be bound by its findings? We hope that this is not the case, as a Senior Manager in this position would not necessarily have the chance to make formal representations to the FCA on their own behalf, or necessarily know everything about the FCA’s investigation into their firm.
Step 2: Responsibility
The FCA has stated that determining whether a Senior Manager was responsible for something is a matter of fact. The FCA will look at a Senior Manager’s Statement of Responsibilities and their firm’s Management Responsibilities Map in order to help determine what a Senior Manager was responsible for at any given time.
However, the FCA will not stop there. It will also look at how a firm operated and how responsibilities were allocated between Senior Managers in practice. Consideration will also be given to what the Senior Manager actually did in practice (which may be determined by reference to meeting minutes, emails, interviews and recording of telephone calls).
As a result, the FCA may not only take action against a Senior Manager for breaching the Duty of Responsibility in relation to areas that are listed in their Statement of Responsibilities or their firm’s Management Responsibilities Map. If it turns out that a Senior Manager’s responsibilities were different or broader in practice, the FCA may also take action against them in relation to those areas of responsibility.
This proposed approach really reinforces the need for:
- Senior Managers’ Statements of Responsibilities to reflect their actual responsibilities. This may prove challenging in some cases, given that the FCA and the PRA only allow firms to include minimal explanatory information in Senior Managers’ Statements of Responsibilities. One of the pieces of feedback recently provided by the FCA in relation to the Senior Managers Regime (which we will be covering on the blog over the coming days) was that some Senior Managers’ Statements of Responsibilities do not set out enough information or clear information about their responsibilities.
- Senior Managers to properly understand their responsibilities.
- The need for firms’ Management Responsibilities Maps to reflect the responsibilities set out in Senior Managers’ Statements of Responsibilities.
The risk that the FCA may look beyond a Senior Manager’s Statement of Responsibilities in relation to the Duty of Responsibility may also pose operational issues. For example, Senior Managers may be more wary of assisting with things (even on an ad hoc basis) that they feel depart from the contents of their Statements of Responsibilities.
Step 3: ‘Reasonable steps’
FSMA defines ‘reasonable steps’ as the steps that a competent Senior Manager would have taken at a particular point in time, in that specific Senior Manager’s position, with that Senior Manager’s role and responsibilities and in all the circumstances. However, the FCA has gone further when describing its take on ‘reasonable steps’.
Mark Steward (the FCA’s Director of Enforcement and Market Oversight) has described ‘reasonable steps’ as follows:
‘It has been said that a person who takes reasonable steps is one who does not exhibit a negligent or reprehensible state of mind, who is conscientious, exhibiting, through diligence, a keen and watchful eye on his or her field of responsibility, observing, asking questions and so informed and informing, being vigilant, deciding, guiding and monitoring, oversighting, delegating when safe to do so to those who are well-placed, and only acting beyond expertise and experience with competent expert advice. Sounds good. This is not exhaustive and denotes a person not only in terms of qualities – skill and competence – but also in terms of how the person should behave and the behaviour is described with doing words, verbs (these verbs are really the tools of responsibility).
In other words, doing nothing, in circumstances where reasonable steps requires something to be done, will not suffice’.
In its proposed guidance, the FCA has flagged particular areas as ones it may consider when determining whether a Senior Manager has taken ‘reasonable steps’ and discharged the Duty of Responsibility. For example, some of the areas that we are not surprised to see in the FCA’s proposed guidance include a Senior Manager’s role and responsibilities, handovers between Senior Managers, the information a Senior Manager had available to them and what they did with that information and whether a Senior Manager delegated appropriately (mirroring the expectations set out in Senior Manager Conduct Rule 3). However, the FCA has been more granular in some areas, for example, its draft guidance states that a Senior Manager should:
- Take ‘reasonable steps to ensure that the reporting lines, whether in the UK or overseas, in relation to the firm’s activities for which they were responsible, were clear to staff and operated effectively’.
- ‘[S]eek an adequate understanding of issues within a business area’, ‘obtain independent, expert opinion where appropriate from within or outside the firm’.
- Monitor ‘highly profitable transactions, business practices, unusual transactions, or individuals who contributed significantly to the profitability of a business are or who had significant influence over the operation of a business area’.
In relation to collective decision-making (an area in relation to which we have received a lot of questions from Senior Managers) the FCA’s proposed guidance states that a Senior Manager must take reasonable steps to ensure that, where they are involved in collective decision making and it was appropriate for a decision to be made collectively, they informed themselves of relevant matters before taking part in the decision and exercised reasonable care, skill and diligence in contributing to it.
Subject to the outcome of the FCA’s consultation, these factors will appear in the FCA Handbook (DEPP 6.2.9-E).
This new proposed guidance will sit alongside guidance that the UK Prudential Regulation Authority published last December on its approach to the Presumption of Responsibility.
Translating the FCA’s proposed guidance into practice
The FCA’s new proposed guidance does not give Senior Managers ‘answers’ as to what will constitute ‘reasonable steps’ in any given situation. Nor does it provide an exhaustive list of factors that the FCA will consider in this context. However, it certainly should provide food for thought for Senior Managers. This proposed guidance may prompt Senior Managers to undertake a ‘healthcheck’ of how they operate, namely to:
- Double-check that their responsibilities are accurately reflected in their Statements of Responsibilities, job descriptions and firms’ Management Responsibilities Maps (an area where the FCA has recently expressed some concerns).
- See how their actions would stand up to regulatory scrutiny (taking into account this latest proposed guidance) in the event that something went wrong within their area of responsibility.