SM&CR: 'An employment perspective

A major overhaul of the approved persons' regime will apply in the banking sector with effect from 7 March 2016, in the form of the Senior Managers and Certification Regime (SM&CR).

Born out of the response to the financial crisis, the new regime, which is being introduced by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), aims to improve banking culture by shifting the focus away from corporate responsibility to individual accountability. A similar, though arguably less burdensome, regime is also being introduced in the insurance sector at the same time.

SM&CR methods

Senior decision makers of the bank, who carry out designated senior management functions, are to be allocated prescribed responsibilities. These are to cover matters relating to the firm's culture and standards in the different areas across the bank. The bank is required to have 'statements of responsibility' in place, which set out each senior manager's responsibilities. The aim is to ensure that if there is an institutional failing in a particular area of the bank, the relevant senior manager for that area is answerable to the regulators for that failing. The bank also has to produce 'responsibility maps', demonstrating to the regulator that there are no gaps in coverage.

A new certification regime will replace 'approved persons' with 'certified persons' and cover more of the bank's staff than under the current approved persons' regime. The bank, as opposed to the regulator, will assume primary responsibility for ensuring and verifying the appropriateness of its work force: the bank will have to 'certify' each affected employee's fitness and propriety to perform their relevant function each year, on an ongoing basis.

The standard of 'fitness and propriety' will continue to apply, but there will be a new code of behavioural standards that affected employees must comply with. The bank must notify the regulator if the individual breaches the conduct standards, and of any formal disciplinary action taken.
The FCA and PRA can take enforcement action against the senior managers and certified persons who are in breach, including through fines and suspension.

The SM&CR represents a 'sea change' in the way that senior individuals in banking are regulated and there are likely to be a number of legal - and practical - consequences.

The bank's and the senior manager's interests are not necessarily aligned under SM&CR. The bank needs to make sure that all bases are covered by the governance map, and will tend to want the statement of responsibility to be wide. In contrast, as the senior manager is to be personally responsible for institutional failings in their area, they will tend to want the ambit of their responsibilities to be narrow.

As the new regime makes individual sanctions against senior managers more likely in the case of institutional failings, this should bring greater focus to the availability and adequacy of directors and officers insurance, and employer indemnities.

From a commercial perspective, if senior managers are being asked to take on additional personal responsibility, will this be reflected in levels of executive pay? Anecdotally, this is not yet happening, and the executives concerned are being asked to assume the additional duties regardless.

Individual rights

From the perspective of an employment lawyer who regularly acts for senior executives in banking and insurance, it will be interesting to see how the new, additional layer of personal responsibility at a regulatory level interplays with the individual's express and implied employment duties and statutory rights.

For example, if a senior manager considers that there is under-resourcing by the bank of their area, such that they risk being personally responsible for an institutional failing, how does this interact with the manager's duty to follow the employer's lawful instructions and, if the manager is a fiduciary, to act in his
employer's best interests?

In a banking culture where there will be greater ability to level blame given the documenting of who is responsible for what - meaning more finger pointing - it seems at least possible that, in situations where the executive is being placed in a position of conflict by his or her competing duties and interests, the protection afforded to whistle-blowers will play an increasingly significant role in the employment relationship.

Nick Wilcox is a senior employment lawyer at BDBF @BDBF_LLP www.bdbf.co.uk