Advice Matters – from the archive

Advice Matters is an accredited monthly e-journal. Each edition contains a number of articles written by industry experts, that combine knowledge and skills related topics, with technical and regulatory updates. Every edition is aligned to the ApEx standards, with a review at the end of each journal to show the learning outcomes and standards covered. (This is not available in the sample below).

Advice Matters will allow professionals to access 12 hours of structured CPD throughout the year from the comfort of their desk, or on the go using a mobile device. Each edition is also accompanied by associated questions and answers to help test and verify knowledge.

Take a look at a recent article from our Skills & Expertise section of Advice Matters that focuses on your personal development. The article provided below looks at the relationship between T&C and the requirements of the Senior Managers & Certification Regime.

skills & expertise

Personal Development is often forgotten or neglected, as it is not seen as important as the other areas of CPD. In reality it can be the aspect that makes the real difference to your clients and your earning capacity. In each edition of Advice Matters we will discuss potential development areas and ensure any Regulator focus that aligns to this area is covered in a very timely manner.

 

Putting the “T & C” in Training and Competence

 

Since the introduction of the FCA in 2013 there has been a greater focus on ensuring staff are competent. In 2016 the Senior Managers and Certification Regime (SM&CR) as well as the extension of the Conduct Rules as they apply to all staff (except ancillary) was implemented in the Retail Banking sector, followed in 2018 by Insurers.

During 2017 those who manufacture, offer or grant mortgages as well as those directly managing/ supervising were brought into scope of the T&C Sourcebook by European legislation in the form of the Mortgage Credit Directive; and the recent Insurance Distribution Directive introduced further minimum knowledge and Continual Professional Development requirements for staff.

 

The 9th December 2019 is a very important date for solo-regulated firms as they become subject to SM&CR and the new Conduct Rules. It is useful to understand the background to the introduction of the regimes, as well as the requirements themselves in order to consider T&C impacts.

The financial crisis of 2008 – 2011 began in the subprime mortgage market in the United States developing into a full-blown international banking crisis with the collapse of Lehman Brothers. The excessive risk taking by banks globally magnified the financial impact.

As a consequence, the UK formed the 2012 Parliamentary Commission on Banking Standards to report on:

  • professional standards and culture of the UK banking sector, taking into account the LIBOR rate-setting process
  • lessons to be learned about corporate governance, transparency and conflicts of interest, and their implications
  • and to make recommendations for legislative and other action.

The findings were published in 2013 in the report titled “Changing Banking for Good” with Parliamentary recommendations to improve:

  • The quality of Senior Management
  • Standards, culture and behaviour
  • Remuneration practices
  • Governance and oversight of strategic decision making
  • And to introduce clear lines of accountability.

In 2014 changes were made to the Financial Services Market Act (FSMA) to enable the introduction of SM&CR in Banking. Bringing into effect the:

  • Senior Managers Regime – a regime that replaces the Significant Influence Function (SIF) element of the existing approved persons regime
  • Certification Regime – a firm led licensing regime that sits alongside the Senior Managers Regime which applies to other staff whose actions or behaviour could seriously harm the firm, its reputation or its customers
  • Conduct Rules – standards that apply to all staff (except ancillary) which the FCA describe as key to improving customer outcomes, raising standards of behaviour and leading to an overall better culture.

Conduct Rules

These are a new set of enforceable rules that set basic standards of good personal conduct, against which the FCA can hold people to account. They are there to help shape the culture, standards and policies of a firm and to promote positive behaviours.

The first tier of rules applies to all Senior Managers, Certified staff, Non-Executive Directors (who are not Senior Managers) and all other employees except ancillary staff. The second tier of rules applies only to Senior Managers with only one applying to Non-Executive Directors (who are not Senior Managers). As the rules apply to almost all staff, the aim is to improve individual accountability and conduct awareness within firms.

The FSMA requires individuals not only to be notified of the rules but also trained in how they apply to them within their roles. So, from a T&C perspective firms need to consider how they are going to train staff and demonstrate understanding.

The link between T&C and the Conduct Rules can also be seen via this extract from COCON (Code of Conduct) providing Senior Manager guidance.

COCON 4.2.6: Senior conduct rules staff members should take reasonable steps to satisfy themselves, on reasonable grounds, that each area of the business for which they are responsible has appropriate policies and procedures for reviewing the competence, knowledge, skills and performance of each individual member of staff.

Senior Managers Regime

This includes Senior Management level functions which are specified and encompass Executive, Oversight and Significant Responsibility roles which require background checks and approval before commencement.

There are a range of Prescribed Responsibilities covering prudential, conduct and people risks, policies and processes which must be allocated to individual Senior Managers. Each Senior Manager then has a Statement of Responsibility setting out the areas of a firm’s regulated activities they are responsible for.

Dependent upon the size of the firm a management responsibilities map will or won’t be required. This map is to help the regulator satisfy themselves a clear organisational structure is in existence. Even where not required and/or in existence a firm may find this a useful activity to complete and keep up to date.

For the Senior Managers in these roles the firm must be satisfied, through a Fitness and Propriety assessment that the people are fit and proper to do their jobs. We will take a more detailed look at the requirements within the Certification Regime below.

Certification Regime

The Certification Regime covers staff who aren’t Senior Managers, but whose role means they can have a significant impact on customers, the firm and/or market integrity. They are not approved by the FCA however firms will need to check and confirm (‘certify’) at least once a year that these people are suitable to do their role.

The roles that fall within this Regime are classified as Significant Harm Functions and consist of:

  • Significant Management Function
  • Proprietary Traders
  • CASS oversight function
  • Functions subject to qualification requirements
  • The client dealing function
  • Anybody who supervises or manages a Certified Function (directly or indirectly) but isn’t a Senior Manager
  • Material risk takers
  • Algorithmic trading

So, for solo-regulated firms this means a greater population, particularly those subject to qualification requirements under the T&C Sourcebook, for example retail investment advisers, mortgage advisers and pension transfer specialists; any person dealing in or arranging investments with clients (retail and professional); as well as those that manage/supervise someone in a Certification Function (but who isn’t a senior manager) now fall under the Fitness and Propriety requirements.

The firm will have to check and confirm (certify) at least annually that these people are suitable to do their job and issue them with a certificate. The firm must take into account whether the individual:

  • has obtained a qualification
  • has undergone, or is undergoing training
  • possesses a level of competence and capability
  • has the appropriate personal characteristics (including being of good repute and integrity)
  • is financially sound.

In reality this becomes much more than a tick-box exercise for firms. Fitness and Propriety assessments are not absolute and T&C arrangements need to factor in the SM&CR requirements, particularly the area of competence and capability.

The Certification Regime also brings into effect regulatory referencing rules and the requirement to disclose certain information going back 6 years. This includes details of Conduct Rules breaches and any findings that the individual was not fit and proper.

The FCA expects this wider population now captured to have the relevant skills and knowledge and firms to demonstrate their assessment of this. So how do you evidence competence and capability currently? Below are some questions to ask in terms of understanding whether your T&C is fit for the future demands of SM&CR.

  • At what point do you source references and agree a start date?
  • How will you identify and provide the information for reference provision?
  • How do you identify whether the new starter has a skills/knowledge gap and transfer these into an individual training plan?
  • How are training needs identified and who is responsible for evaluating the effectiveness of delivery?
  • How is competence defined?
  • What toolkit of activities do you use to measure competence (file checks, observations, customer contacts, outcomes testing)?
  • How do you supervise new starters and ensure appropriate levels of customer protection?
  • What do you do if someone is not competent and ensure appropriate customer outcomes?
  • How is continual professional development agreed and delivered?
  • How is the level of supervision determined and why?
  • How do you demonstrate the competence of your supervisors/line managers?
  • What do you determine as appropriate record keeping and for how long?
  • How does individual competence assessment align to performance management?

Reviewing and improving T&C practice takes time. Defining new competence measures and applying similar standards to a wider population can be met with resistance where perhaps existing arrangements are not viewed favourably. Be aware that an understanding of how any new policy and practice should be applied is not an overnight deliverable.

 

 

So, what should you be doing from a T&C perspective in preparation for SM&CR?

  1. Start early. There is always a tendency to underestimate the amount of work that is needed to be done.
  2. Plan the implementation of SM&CR. Identify all the key deliverables for your firm
  3. Understand how governance and remuneration impacts on culture
  4. Identify who within your firm will be subject to the SM&CR and Conduct Rules
  5. Make sure role profiles/job descriptions are up to date
  6. Review HR processes (including training)
  7. Review existing T&C arrangements in light of SM&CR deliverables
  8. Have a clear plan for how training will be provided for the different populations and on an on-going basis
  9. Aspire to deliver a joined-up approach to T&C for all populations, whether that be through performance management, ‘traditional’ T&C or other capability arrangements.

 

 

Further Reading

Changing Banking for Good

https://www.parliament.uk/documents/banking-commission/Banking-final-report-volume-i.pdf

The Senior Managers and Certification Regime: Guide for FCA solo-regulated firms – https://www.fca.org.uk/publication/policy/guide-for-fca-solo-regulated-firms.pdf

Assessing Fitness and Propriety – https://www.handbook.fca.org.uk/handbook/FIT/1/3.html

Regulatory References SYSC 22 – https://www.handbook.fca.org.uk/handbook/SYSC/22/?view=chapter

Code of Conduct Rules – https://www.handbook.fca.org.uk/handbook/COCON/2/1.html?date=2016-06-30

 

Advice matters

Hannah Gunthorpe

Open Course Coordinator

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