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TRANSITIONING TO INDIVIDUAL ACCOUNTABILITY 1

TRANSITIONING TO INDIVIDUAL ACCOUNTABILITY

Senior Managers and Certification Regime implementation

TRANSITIONING TO INDIVIDUAL ACCOUNTABILITY2

CONTENTS

FOREWORD

TOP ISSUES

SCOPE

AREAS OF FOCUS

PROJECT PLAN AND TIMELINE

IMPLEMENTATION PROCESSES

WHY HUNTSWOOD?

CONNECT WITH HUNTSWOOD

APPENDICES

- UK BRANCHES OF FOREIGN BANKS

- SUMMARY OF RELATED PAPERS

- APER TO SMR FUNCTION MAPPING

4

6

8

12

25

31

34

36

37

41

42

43


THE CRISIS SHOWED THAT THERE MUST BE MUCH GREATER

INDIVIDUAL RESPONSIBILITY IN BANKING. A BUCK THAT DOES NOT STOP WITH AN INDIVIDUAL OFTEN

STOPS NOWHERE.

Andrew Tyrie Chairman of the Treasury

Select Committee


FOREWORD

The debate around accountability in banking is not new. Since the 2008-09 financial crisis, the regulators have been unanimous; the overall compliance and culture of firms needs to change, and individuals need to be held responsible.

The Parliamentary Commission on Banking Standards’ (PCBS) report back in June 2013 called for the creation of a new Senior Persons Regime. The report’s findings were clear; many individuals operate with very little personal accountability, and with little prospect of enforcement action against them. This is all changing.

For the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA), accountability starts at the top but involves everyone in the firm. There needs to be real clarity around the roles and responsibilities people hold in an organisation, and individuals must be able to be held accountable when something goes wrong.

The PCBS’ changes have been incorporated into the Financial Services Act 2013, and the Financial Services and Markets Act 2000. The majority of the accountability rules have been finalised, and the new regimes are well on their way to implementation. This means that at your firm, change needs to happen, and it needs to start now.

This White Paper builds upon Huntswood’s 18 years’ experience in highly regulated industries. In creating this paper we’ve used our own expertise, what we’ve learnt from our engagements with firms, and what we’ve gauged in our dialogue and work with regulators.

We hope that at the very least, you’ll take away food for thought on issues that you might not have yet considered. At best, this will help you to shape your project plan in implementing the new rules.

PAUL SCOTTDIRECTOR OF MARKETS AND PROPOSITIONS


PAUL SCOTTDIRECTOR OF MARKETS AND PROPOSITIONS


At the moment under theApproved Persons Regime (APER), the Significant Influence Function (SIF) encompasses all who exercise

a ‘significant influence’ over a firm’s affairs. Now the perimeters are narrowing. The SIF is being

replaced with Senior Management Functions (SMF) under the Senior Managers Regime (SMR). Those

who held Controlled Functions, but will not be SMFs, will fall under the

Certification Regime.

Under the ‘presumption of responsibility’ SMFs will be held

responsible for any violations unless they can evidence otherwise.

SENIOR MANAGERS

REGIME

TOP ISSUES

As the accountability landscape changes, we give you our high level summaries of six main areas you need to be aware of.

An individual will be subject to the Certification Regime if they pose a risk of significant harm to a firm or its customers. The firm will need to satisfy itself on an ongoing basis as to the fitness and propriety of those under the Certification Regime, and

issue them with certificates.

CERTIFICATION REGIME

This is a new set of rules that set out the standards of behaviour for bank or building society employees. There is one set for all relevant individuals,

and an additional set for senior managers. Both groups will need to be trained on the rules so that they

understand them in the contextof their roles.

CONDUCT RULES


Firms need to be able to show who was responsible for any areas of

the business, at any point in time, through a Responsibilities Map.

The Responsibilities Map should be auditable, comprehensive,

and up to date.

RESPONSIBILITIES MAP

Any breach of the Conduct Rules by senior managers under the SMR

will need to be reported within seven days of a firm encountering the actual or suspected breach. All

other actual or suspected breaches by staff who are subject to the Conduct Rules will need to be reported on an

aggregate annual basis.

BREACH REPORTING

Only certain non-executivedirectors will be affected by the

Senior Managers Regime (SMR). Any regulatory related challenges brought to the executive by non-

executive directors will need to beevidenced clearly.

THE ROLE OF NON-EXECUTIVE

DIRECTORS

TOP ISSUES


SCOPE

In this paper, we offer you detailed yet concise insights into the new regimes as applicable to UK banks and building societies, and a succinct look at the issues affecting your organisation. We summarise the activity that has happened, is happening, and will happen. Most importantly for your firm, we look at the actions you need to take, and the solutions you may not have yet discovered.

Interestingly, the FCA has already started to look at holding individuals accountable even ahead of the SMR. After three senior executives of Swinton (who are currently out of the scope of the SMR) were fined in November 2014,

the regulator stated:

“Those with significant influence within firms are responsible for setting the tone and the culture; they set the example that others will follow. Today’s

enforcement action should serve as a timely reminder to those at the very top of firms, that the FCA is determined to hold individuals to account where

they fall short of the standard we require.”

CASE STUDY


SCOPE

WHO IS AFFECTED?

The new accountability framework will affect more people, and in different ways than its predecessor the Approved Persons Regime (APER). We illustrate in the table below that:

• Senior Management Functions (SMFs) will replace the existing Controlled Functions

• Many who fall under the certification regime will have previously held SIFs or other Controlled Functions, but would not fall under the scope of the SMFs, e.g. investment advisors

• Conduct rules apply to all staff involved in the financial services activities of the firm (although senior managers will have an additional set of conduct rules)

We describe these in more detail as we look in-depth at the top issues from page 12.

PROPOSED SCOPE OF THE ACCOUNTABILITY FRAMEWORK

Executive Board (plus wider Executive

Committees in large firms)Chairman Relevant committee chairs

Heads of key business areasIndividuals in group

companiesControl or conduct focused functions

SHFs / material risk-takers (CRR)

Customer-facing roles that are subject

to qualification requirements

Any other SIF roles under the current

APER

Individuals who surpervise or manage

another certified person

All other employees other than ancillary staff who perform a role that is not specific to the financial services business of the firm

CO

ND

UC

T RU

LES

SMR

CER

TIFI

CAT

ION

RE

GIM

E


SCOPE

IMPLEMENTATION SCOPE

Our paper will go into the finer details of regime implementation, but the following diagram gives you a high level overview of the assessment hierarchy.

The assessment of Conduct Rules staff and Certification Regime staff lies in the hands of firms themselves, whilst the regulators hold SMF assessment and approval. Training and competence surrounding the Conduct Rules

will need to be embedded into the organisation by senior management, whilst crucial MI such as breaches of the Conduct Rules will have to be fed up through the chain to SMF level for ongoing oversight.

SENIOR MANAGEMENT

FUNCTIONS


CONDUCT RULES STAFF


TIMELINE

The implementation period for firms affected by the new rules is tight. The final rules were published on 7 July 2015. The majority of implementation work is required to have been completed by 7 March 2017. Work needs to

start now to understand where you are, how you’re affected, and to devise a project plan to make sure you’re on track to meet these deadlines.

JOINT CPS

FCA CP14/13 PRA CP14/14

PUBLICATION OF NEAR FINAL

RULES

DEADLINE FOR SUBMISSION OF

GRANDFATHERING DOCUMENT

END OF TRANSITIONAL

ARRANGEMENTS

TECHNICAL CPS ON TRANSITIONAL ARRANGEMENTS

FCA CP14/31 PRA CP28/14

CONFIRMATION OF FINAL RULES

COMMENCEMENT OF THE SENIOR

MANAGERS REGIME AND CERTIFICATION

REGIME

30 JULY 2014 16 MARCH 2015 8 FEBRUARY 2016 7 MARCH 2017

19 NOVEMEBER 2014 7 JULY 2015 7 MARCH 2016

SCOPE


AREAS OF FOCUS

CHALLENGES AND CONSIDERATIONS

Those affected SMFs are classified as important individuals who can seriously impact the way a firm conducts its business.

New SMF rolesThese replace the existing Controlled Functions under the APER, and come under either the PRA or the FCA. However, both regulators can still take action against any senior manager (see appendix p43).

Presumption of responsibility If a firm is in violation of a requirement, the SMF accountable for that area will be automatically assumed to be responsible, unless they can demonstrate they took reasonable steps to prevent it from occurring or persisting (referred to as ‘the reverse burden of proof ’). This is a shift in focus from misconduct to mismanagement for SMFs. Criminal and regulatory sanctions A new offence relating to a reckless decision causing a financial institution to fail, comes with a maximum sentence of up to seven years in prison and / or an unlimited fine. Whilst only likely to be used in extreme circumstances, the presumption of responsibility could lead to more regulatory / civil sanctions.

WHAT YOU NEED TO KNOW

Successors and substitutes Firms need to consider adopting more formal policies and plans for handover, both to longer term successors or shorter term substitutes. Ensure individual accountability Consider committee Terms of Reference, job descriptions of senior managers, and other documentation setting out roles and responsibilities, making sure that they reflect how these roles and responsibilities are allocated. Decision-making processes should move away from committees, and align with individual accountability, with committees supporting this. Systems and controls Review your current approach to evaluating their strength and effectiveness e.g. does your management information (MI) give SMFs a full picture of their area, enabling them to demonstrate reasonable steps were taken to prevent a regulatory or conduct breach? Consider how operational and conduct risks will be identified, monitored, and reported.

SENIOR MANAGERS

REGIME


‘Grandfathering’ activities Prepare a notification form (K), detailing who will be ‘grandfathered’ into the new regime and how. To be finalised for submission by 8 Feb 2016. Attestations The regulator can request an attestation from the relevant senior manager at any time for the notification of a risk change, the undertaking of a requested action, self-certification of the resolving of an issue, or the verification that a risk has been mitigated. Clarity of responsibilities SMFs will need to have a clear and comprehensive CV, job description and statement of responsibilities. The latter is a standalone statement setting out which aspects of the firm’s affairs the person in question will be responsible for managing.

Each responsibility should be described in 300 words or less. Prescribed responsibilities, and all other areas of the business that the SMF is responsible for should be included.

AREAS OF FOCUS

Recruitment and retention With intense scrutiny at the approval stage, and more likelihood of significant action being taken against senior managers, it will be challenging to both recruit and retain high calibre senior managment.

To attract, support and retain your senior managers, consider how easy it is for them and their direct reports to oversee the relevant functions. Look at how simple and accessible your firm’s processes are, and how clear your reporting lines are.

For new SMFs, consider how you’ll use their induction period to allow them to assess the business area they’re taking over, and the budget you’ll make available for third party reviews in this period.

During potential enforcement, will you provide funding for legal support for the SMF separate to the firm’s own lawyers?

Senior managers should always be able to answer the following:

What are the regulatory risks in your business area?

Personally, how are you involved in oversighting these?

How do you monitor what comes under the umbrella of your responsibilities?

How do you prioritise what you need to monitor?

What have you done to mitigate the risks of holding an SMF? E.g. MI, and / or allocation of responsibilities to those below you.

What do you do when things go wrong? A root cause analysis (RCA)? An investigation?

How is all of the above documented?

KEY QUESTIONS


AREAS OF FOCUS

Those affected The Certification Regime (CR) is intended for staff who do not hold an SMF, but who carry out a role that poses a material risk to the firm and / or any of its customers.

These individuals may be carrying out functions that would have previously been a regulatory approved role, but would not fall under the scope of the new SMF. Certain ‘material risk takers’ will also fall under this regime. Specifically, those staff whose decisions have a material impact on the firm might include:

• product governance staff

• other key head office staff

Staff who carry out wholesale activities such as trading, are also likely to fall under this regime, pending final consultation.

All line managers of certified persons must themselves be certified.

Customer-facing staff who need qualifications to perform their role also require certification (as set out in FCA’s Training and Competence Sourcebook).

You will not need to include any staff in the Certification Regime that the regulators do not explicitly state.



DeadlineFirms need to have designed their approach to certification, and have trained all certification staff on the conduct rules by March 2016. You have until March 2017 to issue the certificates of fitness and propriety.

Training and Competence (T&C)The best way to implement certification is to assess and improve (where necessary) the robustness of your current T&C approach, and then extend it to include all certification staff.

Fit and Proper testsFirms will now need to perform these themselves. Many firms have argued that this goes beyond what they are currently required to do under the APER. The regulator has however been clear that the policy intent of the new framework is to push this responsibility back to firms.

This will include, amongst other things, conducting criminal record checks, and credit reference checks.Assess your vetting process and adjust it in-line with the regulator’s expectations. This includes deciding what information will be required, reviewed, and retained.



In 2011 the FSA (Financial Services Authority) brought a case against

John Pottage, the former chief executive of UBS’ UK wealth management

business. They sought to punish him for failing to put in place proper

checks on the desk he ran between 2006 and 2007. Pottage challenged the

subsequent fine and was cleared of misconduct.

In a world lacking in accountability, the regulator’s stance recognised that

pursuing disciplinary action against senior management in large firms was

highly challenging. Under the new SMR where accountability is clear and

set in stone, the ‘reasonable steps’ Pottage took would have been a crucial

point of examination by the regulators and Upper Tribunal. Would he still

have won at tribunal?

CASE STUDY



AREAS OF FOCUS

Effective control

1. Take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively

Complying with the rules

2. Take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system

Effective oversight

3. Take reasonable steps to ensure that any delegation of your responsibilities are delegated to an appropriate person and that you oversee the discharge of the delegated responsibility effectively

Open and honest

4. Appropriately disclose any information of which the FCA or PRA would reasonably expect notice

SENIOR MANAGER CONDUCT RULES

Those affected The existing ‘Statements of Principle and Code of Practice for Approved Persons’ apply only to Approved Persons. They’ll be replaced by a set of Conduct Rules spanning many more employees.

The individual conduct rules apply to all staff, aside from a small number of non-customer impacting logistical staff such as security guards and receptionists. The additional senior manager conduct rules apply to SMF holders only.


CONDUCT RULES


Doing the right thing

1. Act with integrity

2. Act with due skill, care, and diligence

Open and honest

3. Be open and cooperative with the FCA, the PRA, and other regulators

Conduct of an individual towards customers and the market

4. Pay due regard to the interests of customers, and treat them fairly

5. You must observe proper standards of market conduct

Control EnvironmentSMFs will need to understand how effective their control environment is in the context of their business area.

Proof of complianceThey also need to receive regular assurance through MI that the business is compliant, and is performing as required and expected.

Quality AssuranceYou can gain this understanding and assurance by reviewing how effective the current quality assurance (QA)approach is.

This will ensure that conduct, regulatory, and operational risks are known, controlled, monitored and mitigated (see page 32 for our recommended QA approach).

AREAS OF FOCUS


INDIVIDUAL CONDUCT RULES


Training and competenceFirms will need to educate and communicate to their staff how these rules apply to them in their role.

Embedding the rulesThese rules should be embedded in all elements of recruitment, competence assessment, performance management, and personal objective setting.


Map requirements

• The Map should contain details of the reporting lines, lines of responsibility, anyone that is a part of those arrangements, and their responsibilities

• It should be a single document

• It must include the names of all of your firm’s:

• approved persons

• members of the governing board who are not approved persons

• senior management

• senior personnel

• Remember to keep in mind your firm’s current state when charting your Map. It can be updated post-SMR to reflect new roles and responsibilities

• It should be comprehensive. E.g. if you have business areas that are not included in the regulator’s prescribed list, then those responsibilities will also need to be added to the map to ensure that your whole business is included

Those affected The Management Responsibilities Map falls under the umbrella of the SMR. It records the allocation of general management responsibilities, as well as those with overall responsibility.

A senior manager will have responsibility for the Map, and will be held accountable for it if it doesn’t do its job.

Purpose of the MapThe Map is a succinct way for your firm and the FCA to see that you have a clear organisational structure, and that there are no gaps in who is responsible for what.

The Map will also serve as an important supervisory and enforcement tool for the FCA. If something goes wrong, it is clear who holds ultimate responsibility for the issue. However, the regulators have made it clear that this isn’t the only thing they will use when deciding who is responsible.


AREAS OF FOCUS

RESPONSIBILITIES MAP



Outsourcing of responsibilitiesYou cannot outsource responsibility as such; if a relevant function is outsourced then a SMF must maintain responsibility for it.

Regulatory challengesYou should be ready for any challenges from the regulator around the allocation of responsibilities.

The main challenges will focus on areas such as oversight, and how effectively certain individuals discharge their responsibilities.

AuditabilityYour Responsibilities Map should be auditable, tracking changes over time so that the regulator can pinpoint the correct details for a specific point or stretch of time.

TechnologyConsider how you can effectively use technology to maintain meticulous records of changes, and preserve historic audit trails.

In Huntswood’s work with firms and technology suppliers, we’ve seen that for all but the smallest firms, technology has a major role to play in the creation and maintenance of the Responsibilities Map.

DeadlineThe Responsibilities Map will need to be signed as a true and accurate copy by the appropriate persons by 8 February 2016.

DisentanglementFor many firms, producing this Map will mean disentangling complex webs of responsibilities into one clearly mapped out document.

Shared allocationThe FCA expects each responsibility to be allocated to one SMF; sharing reponsibilities should not be a business norm. If you share responsibilities, you’ll need to be able to articulate why responsibilities are allocated to more than one individual.

A ‘living’ MapThe Map should be a ‘living’ document that is regularly updated when there are any changes to roles or responsibilities. Whenever this happens, you may also need to notify the regulator(s).

AREAS OF FOCUS

DETERMINE WHO IS ON THE HOOK

AND THEN PROVE IT IN THE DETAIL



Breach ReportingThe SMR will require that any conduct rule breaches by senior managers are reported within seven days. Actual or suspected breaches by employees who fall outside of a Senior Manager Function but are still subject to Conduct Rules, must be reported on an aggregate annual basis.

Regulatory referencesUnder the current APER, firms need to keep a record of breaches and share these with the candidate’s potential future employers. This is to help firms make better informed recruitment decisions. The regulators are currently consulting on their rules surrounding references.

The consultation is scheduled for publication in Autumn 2015, and it will particularly consider recommendations from the Fair and Effective Markets Review (FEMR). Final Handbook text is to be in place in time for commencement of the regimes in March 2016.


Reasonable stepsSMFs will be required to show that they have taken reasonable steps to prevent a breach in their area.

Control environmentMultiple individual breaches in one area of a business are likely to raise questions as to the state of the control environment.

SMF oversightA breach by an individual in the Certification Regime may raise questions as to how effectively the relevant SMF is overseeing them.

A supportive cultureConsider how to embed the conduct rules without creating a blame or cover up culture. Instead, drive an open, supportive, and well-informed environment.

Staff trainingYour staff need to be well trained on recognising breaches, and feel comfortable in reporting all issues and near-misses. In this way, the root causes of these breaches can be analysed, put right, and learnt from rather than hidden and misunderstood. This will mitigate the risk of creating a blame or cover-up culture.

SUSPICION OF A BREACH:

A BELIEF THAT IS MORE THAN MERELY

FANCIFUL

AREAS OF FOCUS

BREACH REPORTING


CAROLINE HALLATTHEAD OF BUSINESS ASSURANCE



PRA AND NEDS

Both regulators will only make the following NEDs subject to approval and inclusion in the SMR:

• Chairman

• Chair of the Risk Committee

• Chair of the Audit Committee

• Chair of the Remuneration Committee

• Chair of the Nomination Committee (FCA specific approval)

• Senior Independent Director

This creates a two-tier board structure that firms will need to manage.


In the PRA’s Consultation Paper CP18/15, the PRA clarifies its view on the role of NEDs. In essence, they should:

• Hold management to account against delegated matters

• Be able to challenge the executive effectively and promptly

• Not simply delegate responsibility for major decisions to specialists

• Call on appropriate professional advice as needed

• Work alongside the chairman to actively guard against the risk of being provided with unworkable and impractical levels of information

• Have unrestricted access to a firm’s employees and information about the firm in order to carry out their duties

• Statements of Responsibilities for NEDs under the SMR are expected to be less extensive than those of the executive senior managers

AREAS OF FOCUS

THE ROLE OF NON-EXECUTIVE

DIRECTORS


The PRA also proposes to require the following:

• A fitness requirement and notification process for Standard NEDs

• All board members observe conduct rules regardless of whether they are a SMF

• An additional prescribed responsibility which will require relevant authorised persons which are also CRR and / or MiFID firms, to make a senior manager responsible for overseeing the assessment of the fitness and propriety of all board members, including Standard NEDs

• All members of a firm’s management body to observe the Conduct Rules relating to the open and honest disclosure to regulators, and consider the extent to which each member has done so when assessing their fitness and propriety

EU obligations If ‘general’ NEDs (NEDs without specific responsibilities) cease to be subject to regulatory approval under the SMR and the regime for Solvency II firms, the PRA will need to make them subject to an alternative regulatory application or notification process to continue meeting the UK’s EU obligations.

Fitness and propriety The FSMA requires the assessment of the fitness and propriety of ‘general’ NEDs to be as rigorous as it is for relevant authorised persons. The PRA will thus amend its rules and supervisory statement on fitness and propriety to cover ‘general’ NEDs. This will not place any additional requirements on firms above those consulted on, in the July 2014 CP.

Additional responsibilities Firms should highlight any additional responsibilities specific to NEDs, such as succession planning, that may have been introduced at the firm’s own initiative.

Approval The FCA will not approve ‘general’ NEDs.

Regime exclusion General’ NEDs will not be included within the SMR, and will not be subject to any of its legal and regulatory requirements, including:

• the requirement to provide a Statement of Responsibilities (although the FCA would still expect details of all members of the board to be included in firms’ Responsibilities Maps)

• any of the Conduct Rules

• the presumption of responsibility

• the criminal offence in section 36 of the Banking Reform Act

AREAS OF FOCUS

FCA AND NEDS


STEPHEN HUMPHREYSHEAD OF MARKETS AND PROPOSITIONS



PROJECT PLAN AND TIMELINEPROJECT PLAN AND TIMELINE

The implementation timeline for the Senior Managers and Certification Regime is short.

The dates have been set by statute and will not move.

Consequently, having a robust and comprehensive project plan in place is critical to deliver this change.

To help firms achieve this, Huntswood has put together the following high level plan that details what you need to have done and by when. We hope that this will either validate or challenge

your current programme of work.



30 July 2014 - FCA CP14/13, PRA CP14/14Strengthening accountability in banking: a new regulatory framework for individuals

AUTUMN2015

SUMMER2015

SPRING2015

WINTER2014

AUTUMN2014

SUMMER2014

19 Nov 2014 - FCA CP14/31, PRA CP28/14 Strengthening accountability in banking: forms, consequential and transitional aspects

Corporate governance papers released:

23 Feb 2015 - FCA CP15/5, PRA CP7/15 (joint paper)NEDs in banking and solvency II & senior managers in foreign banks

16 March 2015 - FCA CP15/10, PRA CP9/15 (separate papers)UK branches of foreign banks

23 March 2015 - PRA PS3/15Banking and insurance — responses to CP14/14 and CP26/14

21 May 2015 - PRA 18/15Board responsibilities

Board engagementThe project team should engage the board with the new rules to consider impact and implemention at a strategic level

Programme steering committeeThis committee is established to manage and monitor the long-term project implementation plan, and ultimately ensure a successful delivery

Initial impact assessment Conduct an initial assessment of the impacts of the new regimes to understand who will be affected,and how

Gap analysis to consider:



Implement changes recommended from gap analysis, updating in light of final rules where appropriate

Agree and document responsibilities map and statements of responsibility ensuring all business areas are covered, and that shared responsibility is minimal

Define approach to annual fit and proper tests


Extend T&C regime to defined SHF population

Define your approach to the annual fit and proper tests


Senior management and committee structure

Alignment of committee structure to individual accountability

Job descriptions and contracts from senior managers

Firm culture in the context of SMR

Effectiveness of MI in supporting SMF discharge of responsibilities

Approach to substitutes and successors including handover

Appropriateness of current training and competence (T&C) regime, considering effectiveness of approach to recruitment, onboarding, induction, as well as attaining and maintaining competence

HR policy suite, including disciplinary procedures and employee contracts

Assess existing learning approach and its robustness, efficiency and efficacy, as well as its suitability to deliver the Conduct Rules training

Consideration of firm culture to ensure that FCA cultural intent is considered through a change programme, and learning approaches deliver the desired outcomes

Regulatory and process assessment of existing issues and the breach management process; assess whether they are fit for purpose under the new regime







07 July 2015 - FCA CP15/22, PRA PS16/15Final rules confirmed by FCA & PRA

Consultation on extending Certification Regime Wholesale market activities

Consequential amendments Other parts of the FCA Handbook

Feedback and near-final rules Incoming branches of overseas firms

Consultation Paper Regulatory references

Final guidance Presumption of responsibility and other enforcement-related matters*

Electronic grandfathering formsAvailable for submission

Guidance The presumption of responsibility* Additional guidance Relating to enforcement matters*

Regulatory referencesExpected consultation scheduled*

Date dependent on legislation: Final rules on incoming branches of overseas firms & territoriality for incoming branches


30 July 2014 - FCA CP14/13, PRA CP14/14Strengthening accountability in banking: a new regulatory framework for individuals

AUTUMN2015

SUMMER2015

SPRING2015

WINTER2014

AUTUMN2014

SUMMER2014

19 Nov 2014 - FCA CP14/31, PRA CP28/14 Strengthening accountability in banking: forms, consequential and transitional aspects

Corporate governance papers released:

23 Feb 2015 - FCA CP15/5, PRA CP7/15 (joint paper)NEDs in banking and solvency II & senior managers in foreign banks

16 March 2015 - FCA CP15/10, PRA CP9/15 (separate papers)UK branches of foreign banks

23 March 2015 - PRA PS3/15Banking and insurance — responses to CP14/14 and CP26/14

21 May 2015 - PRA 18/15Board responsibilities








Agree and document responsibilities map and statements of responsibility ensuring all business areas are covered, and that shared responsibility is minimal

Define approach to annual fit and proper tests


Extend T&C regime to defined SHF population

Define your approach to the annual fit and proper tests


Senior management and committee structure

Alignment of committee structure to individual accountability

Job descriptions and contracts from senior managers

Firm culture in the context of SMR

Effectiveness of MI in supporting SMF discharge of responsibilities

Approach to substitutes and successors including handover

Appropriateness of current training and competence (T&C) regime, considering effectiveness of approach to recruitment, onboarding, induction, as well as attaining and maintaining competence

HR policy suite, including disciplinary procedures and employee contracts

Assess existing learning approach and its robustness, efficiency and efficacy, as well as its suitability to deliver the Conduct Rules training

Consideration of firm culture to ensure that FCA cultural intent is considered through a change programme, and learning approaches deliver the desired outcomes

Regulatory and process assessment of existing issues and the breach management process; assess whether they are fit for purpose under the new regime







07 July 2015 - FCA CP15/22, PRA PS16/15Final rules confirmed by FCA & PRA

Consultation on extending Certification Regime Wholesale market activities

Consequential amendments Other parts of the FCA Handbook

Feedback and near-final rules Incoming branches of overseas firms

Consultation Paper Regulatory references

Final guidance Presumption of responsibility and other enforcement-related matters*

Electronic grandfathering formsAvailable for submission

Guidance The presumption of responsibility* Additional guidance Relating to enforcement matters*

Regulatory referencesExpected consultation scheduled*

Date dependent on legislation: Final rules on incoming branches of overseas firms & territoriality for incoming branches * May be subject to change

TRANSITIONING TO INDIVIDUAL ACCOUNTABILITY28WINTER

2015

8 February 2016 Deadline for completion and submission of grandfathering documentation

7 March 2016Commencement of the SMR and Certification Regime

SMR and certification staff are subject to the conduct rules

Preparations for the application of rules to all other Conduct Rules staff must continue*

In time for commencement of the regime Final rules on: the inclusion of wholesale activities in the Certification Regime, and on regulatory references. Also, possible additional guidance for reporting breaches of conduct rules.

SUMMER2017

SPRING2017

WINTER2016

AUTUMN2016

SUMMER2016

SPRING2016

7 March 2017 End of transitional arrangements

Preparation for the wider application of the Conduct Rules to all other staff must be complete

Program

me closed

own

and

transition

to BA

U

Establish standards for demonstrating reasonable steps towards Conduct Rule and regulatory compliance (e.g. updated MI and risk control self assessment)

Design and build SMF breach identification and reporting processes

Senior management ‘on the hook’ 1-2-1 coaching workshops with each of the new SMFs. SMFs to formally accept personal statements of responsibility

Provide assurance that ‘day one’ compliance has been achieved

Complete grandfathering forms

Carry out a post-implementation review



Complete fitness and propriety testing, and issue certificates to your entire SHF population.

Conduct Certification Regime and Conduct Rules refresher training

Complete Conduct Rules training for the whole population, ensuring that they all understand how the Conduct Rules apply to them

Complete annual Fit and Proper tests for your SMF population, including SMR and Conduct Rules refresher training

Ongoing monitoring of compliance with the regime, and completeness of the Responsibilities Map

Work with affected populations to enable them to understand what it means to be part of the Certification Regime

Train out your approach to Conduct Rules and breach reporting

Design, build and implement your Conduct Rules breach identification and reporting process

First annual submission Notifying breaches of the Conduct Rules required for staff included in the Certification Regime

Whistleblowing responsibility Final handbook text and guidance on formalising firms’ procedures for whistleblowing

TRANSITIONING TO INDIVIDUAL ACCOUNTABILITY 29WINTER

2015

8 February 2016 Deadline for completion and submission of grandfathering documentation

7 March 2016Commencement of the SMR and Certification Regime

SMR and certification staff are subject to the conduct rules

Preparations for the application of rules to all other Conduct Rules staff must continue*

In time for commencement of the regime Final rules on: the inclusion of wholesale activities in the Certification Regime, and on regulatory references. Also, possible additional guidance for reporting breaches of conduct rules.

SUMMER2017

SPRING2017

WINTER2016

AUTUMN2016

SUMMER2016

SPRING2016

7 March 2017 End of transitional arrangements

Preparation for the wider application of the Conduct Rules to all other staff must be complete

Program

me closed

own

and

transition

to BA

U

Establish standards for demonstrating reasonable steps towards Conduct Rule and regulatory compliance (e.g. updated MI and risk control self assessment)

Design and build SMF breach identification and reporting processes

Senior management ‘on the hook’ 1-2-1 coaching workshops with each of the new SMFs. SMFs to formally accept personal statements of responsibility

Provide assurance that ‘day one’ compliance has been achieved

Complete grandfathering forms




Complete fitness and propriety testing, and issue certificates to your entire SHF population.

Conduct Certification Regime and Conduct Rules refresher training

Complete Conduct Rules training for the whole population, ensuring that they all understand how the Conduct Rules apply to them

Complete annual Fit and Proper tests for your SMF population, including SMR and Conduct Rules refresher training

Ongoing monitoring of compliance with the regime, and completeness of the Responsibilities Map

Work with affected populations to enable them to understand what it means to be part of the Certification Regime

Train out your approach to Conduct Rules and breach reporting

Design, build and implement your Conduct Rules breach identification and reporting process

First annual submission Notifying breaches of the Conduct Rules required for staff included in the Certification Regime

Whistleblowing responsibility Final handbook text and guidance on formalising firms’ procedures for whistleblowing

* May be subject to change


PHIL FESTADIRECTOR OF NON-EXECUTIVE ENGAGEMENT

TRANSITIONING TO ACCOUNTABILITY30


IMPLEMENTATION PROCESSES

THE APPROVED PERSONS REGIME HAS CREATED A LARGELY ILLUSORY

IMPRESSION OF REGULATORY CONTROL OVER INDIVIDUALS …

...THERE WAS LITTLE REALISTIC PROSPECT OF EFFECTIVE ENFORCEMENT ACTION,

EVEN IN MANY OF THE MOST FLAGRANT CASES OF FAILURE.

The Parliamentary Commission on Banking Standards

Once you’ve understood the key points and their challenges, you’ll need to be

able to demonstrate that you’ve taken appropriate action within your firm. The

following diagrams detail simple high-level processes you can use to evidence

that every angle of the new rules are being addressed.

PHIL FESTADIRECTOR OF NON-EXECUTIVE ENGAGEMENT


DIRECTOR LEVEL

OPERATIONALFUNCTION

OPERATIONALFUNCTION

OPERATIONALFUNCTION

OPERATIONALFUNCTION

DIRECTOR LEVEL

OPERATIONALFUNCTION

OPERATIONALFUNCTION

OPERATIONALFUNCTION

QA FUNCTION

OPERATIONALFUNCTION

DIRECTOR LEVEL

OPERATIONALFUNCTION

OPERATIONALFUNCTION

OPERATIONALFUNCTION

QA FUNCTION

OPERATIONALFUNCTION

Under the threat of the ‘reverse burden of proof ’, SMFs

responsible for operational functions must find comfort that

they are complying with the conduct rules.

An independent function can then be set up which:

1. Sets the standards for how these areas will function on a

day-to-day basis

2. Provides QA oversight, ensuring fair outcomes are

delivered and regulatory breaches are identified

The independent QA function reports into the SMF on an

ongoing and regular basis, providing assurance that the

delegation of the SMFs responsibilities is appropriate. This

also demonstrates effective oversight of that delegation in-

line with Senior Manager Conduct Rule 3.

TRAINING AND COMPETENCE


WHAT IS GOOD MI?

POSITION AGAINST APPETITE

OVERSIGHTAND CHALLENGE

OPPERATIONAL EFFFECTIVENESS

OPPERATIONAL MANAGEMENT





LEVELS OF ESCALATION

Your organisation should be grouped into levels of escalation for MI:

Position against appetite - A board level function

Oversight and challenge - A ‘service review panel’ type function to assess

quality, targets, and operational change and bringing forward challenges

Operational effectiveness - Delivery managers are responsible for

evaluating team performance, assessing wider issues, making any

necessary changes, and addresing any wider policy issues with the client

Operational management - Team leaders who focus on the productivity

and quality for each individual call / client handler

ESCALATION

The MI pack that each level receives should be tailored specifically to their

level so that it can be clear what it needs to take action on, and what needs

to be escalated. The pack should highlight what lies outside of risk appetite

for the necessary focused management action to be taken.

FOCUSED MANAGEMENT ACTION

The quality of senior management MI is determined by its ability to use

the MI to drive focused management action down through the business.

Clear, relevant MI packs are a part of what SMFs can use to evidence that

reasonable steps have been taken to achieve regulatory compliance, and

deliver fair customer outcomes.

MI needs to be tailored to each level of the organization. For SMFs it needs to be sufficient to drive

management action in all necessary areas, but also concise and direct enough so that they can digest it.





OPERATIONAL MANAGEMENT

OPERATIONAL EFFECTIVENESS






What elements do we think make a best practice T&C scheme?

• It is about support, nurturing, coaching and growing talent. It is not a tick box or negative feedback exercise

• Monitoring is risk based depending on the individual, the product, the interaction, and the customer type

• There is continuous feedback to the individual, and to the customer’s journey

• T&C should focus on a holistic assessment. Were the right customer outcomes delivered? Was the interaction conducted in the right way? Consider these questions as opposed to whether everything was said in a prescribed way, or at a given point in time

• Through T&C, you’ll be able to have a good view on individual quality and performance, which can then be communicated up through the supervision lines

RECRUITMENT

MAINTAINING COMPETENCE

TRAINING AND ATTAINING

COMPETENCESUPERVISION


The certification regime is best implemented through your firm’s training and competence scheme. Ensure you have robust policies, and an approach to recruitment, attaining and maintaining competence, ongoing

supervision and performance management.



INTRODUCTION & SETTING THE SCENE

ESTABLISH CUSTOMER

NEEDS

CUSTOMER SOLUTIONS AND

PRIORITIES

CLOSE / NEXT STEPS

• Customer understands purpose of the meeting and expected

outcome(s)

• Customer is confident that the advisor is adequately prepared with

knowledge of their personal circumstances

• Customer understands all initial disclosure information including

the level of advice being provided

• Customer is satisfied that the advisor has effectively understood

their needs and wants

• Customer is engaged with the advisor and feels valued as an

individual

• Customer understands the link between the objective of the

meeting and the questions being asked to achieve this

• Customer understands how the solutions proposed address their

needs and wants

• Customer is satisfied their priorities have been understood and

considered

• Where customer priorities differ from guidelines, customer

understands why and is actively engaged in decision making

• Customer understands the outcome of the sale and how it

addresses their needs and wants

• Customer understands the next steps and timescales

• Customer understands how and who they should contact for help

and / or support post enquiry / sale, and throughout the product

lifecycle

CUSTOMER JOURNEY CUSTOMER OUTCOME

T&C can be used to assess outcome delivery and individual conduct across the customer journey. Below is an

example of a QA assessment approach for a sales process, which supports a T&C scheme.


Governance and organisation-wide alignment

• Focus groups with board and executives upfront

• 1-2-1 coaching workshops with each of the new SMFs and the population as a whole

• Ensure executives understand their responsibilities, regulatory expectations, and customer outcomes

• Mission, values, and vision consistency

• Organisational development (cultural) support

Aligned understanding and consistent learning

• Face-to-face training upfront, and on induction of new SHFs

• Coaching and coach-the-coach

• Ongoing support to aid learning

• Measure learning through desk-based project assessment

• Post-implementation observational assessment

70%

20%

10%

Everyday learning

Informal, on the job, experience-based,

and practice

Classroom follow up

Coaching, mentoring, and

development through others

In the classroom

Formal learning interventions, and

structured workshops

Tailored training for conduct rules only staff

• Limited face-to-face training for all followed by utilisation of ‘champions’ on an ongoing basis

• Workshops to discuss issues, collaborate, and ensure consistency

• Take into account the 70/20/10 model for learning and development (see diagram below)

CONDUCT RULES ONLYSHFS SMFS


It is crucial to a successful implementation to make sure yourself and your people understand, and buy-in to the changes. Here we outline the various successful methods of training and instilling the changes that can

be applied at each level of the organisation.


CONDUCT RULES

Map the end-to-end /

customer process journey

Identify desired outcomes at

each stage of the journey

Identify risks to achieving fair

outcomes

Identify the controls in place

to migrate the risks

BREACH IDENTIFICATION

This model suggests a methodology that firms can use to show that they’ve taken reasonable steps to identify conduct rule breaches through the customer journey, as a part of its outcomes testing QA. A QA function can

be trained to pair potential breaches with each possible desired outcome, and take action against the risks accordingly.


WHY HUNTSWOOD?

Huntswood is a specialist resourcing and consultancy firm operating in the areas of governance, compliance and complaints. We offer smart advice from industry leading professionals. 18 years’ experience in highly regulated industries has given us the technical expertise to understand and meet our clients’ needs.

We’re a leading advisor in the implementation of the SMR, the Certification Regime, and the new conduct rules. We’ve worked closely with our clients, the FCA and key trade bodies to build a market-leading proposition.

Senior Managers and Certification Regime implementationThrough our engagement with firms, we’ve developed a comprehensive understanding of how they’re affected from top to toe. This has helped us to produce our all-encompassing accountability proposition, and to gauge where and how we can tailor our services to your specific needs.

Trade bodiesWe’ve been appointed to deliver SMR workshops for the British Bankers Association (BBA), and have led major sessions at a conference by the Building Societies Association (BSA) on SMR.

We’re implementation specialists. We have an all-embracing understanding of the practical

Our experience with the imminent regimes

implications of the new accountability framework. We don’t just talk about implementation, we ‘bring it to life’ for your firm.

Through our deep understanding of organisations and their processes, we can align ourselves culturally to the way your firm works. Implementation will be efficient from beginning to end.

We can also offer you a tailored approach to cover your implementation through Business Improvement, and Learning & Development services.

WHAT SETS US APART?


Senior Managers and Certification Regime readiness reviewWe all understand that regulatory change is complex to say the least. We can help greatly with this burden with this short but very intense piece of work. We’ll pinpoint the main regulatory risks in your business, and identify any gaps in the allocation of your firm’s responsibilities – something that needs to be made clear and definite in the new world of the SMR. We’ll then summarise our recommendations for change in an ‘SMR readiness report’.

This thorough report will be in the form of a ‘gap analysis’ – your current performance in relation to the level of performance you need to achieve - and will detail our findings with current and future regulatory requirements in mind.

Learning & Development supportInstilling the right knowledge and culture in firms is paramount to successful regulatory compliance and the right outcomes for customers. We design and deliver engaging training programmes and workshops, to make sure anyone affected by the SMR know all that they need to for their roles.

Through one-on-one training, desk-based assessments and even large scale training programmes, we work to ensure the wrong old habits are broken and the right new ones are embedded. From executive and board level, to frontline staff, and anyone in-between, our support is personalised to you and is ongoing to guarantee the changes have been successfully instilled.

WHY HUNTSWOOD?

OUR SERVICESProgramme managementSuch significant changes clearly need to be managed efficiently and effectively. We help you to clarify where your firm sits right now with respect to the new regimes, and where you want to be at the point of implementation, and beyond.

We can then work with you to create a detailed activity plan, and provide a dedicated programme manager to make sure everything is delivered effectively, on-time and within budget.


CONNECT WITH HUNTSWOOD

Contact us to discuss any of the topics and issues we’ve raised in this White Paper. We’re also happy to talk about how your business can benefit from Huntswood’s implementation

insight and support.

PAUL SCOTTDIRECTOR OF

MARKETS AND [email protected]

t 0118 971 8262 m 07809 391 508

STEPHEN HUMPHREYSHEAD OF

[email protected]

t 0118 971 8467m 07894 588 577

STUART O’SULLIVANPRINCIPAL

[email protected]

t 0118 971 8321m 07920 006 125


APPENDICES

UK BRANCHES OF FOREIGN BANKS

There have been many questions as to how the new framework will be regulated in the context of incoming foreign banks. We’ve summarised what is transpiring thus far.

The regimes will apply in their entirety to foreign banks although there is a separate consultation paper expressly for, and tailored to these incoming branches.

These branches are split into two categories EEA and non-EEA. Key points for firms

• The PRA’s rules will only apply to non-EEA firms

• The FCA’s rules will apply to non-EEA and EEA firms

• Both require a Responsibilities Map

• Where PRA and FCA rules apply, you only need to seek approval for PRA functions

• Certification applies to both regulators

• Conduct rules will apply

• Consultation is still ongoing around how breaches will be recorded, and the timescales for this etc

• The PRA is proposing a customised set of Prescribed Responsibilities for incoming non-EEA branches. The FCA is proposing to specify a subset of the PRA’s customised list of responsibilities for non-EEA branches, which will be shared with the PRA. The FCA is also proposing two FCA-only responsibilities concerning CASS and financial crime which will apply to both UK relevant firms and non-EEA branches

• The regulators are considering extending the certification regime to all individuals involved with wholesale activity. This consultation will be in the spring / summer of 2016

Key points for individuals

Pre-approved head of an overseas branch:

• The PRA will require all non-EEA incoming branches to have a minimum of one with this role. This person will typically be performing similar functions to those of the CEO. The PRA proposes to describe this SMF as the function of having either solo or joint responsibility for the conduct of all activities of the UK branch of overseas firms

Overseas Branch Senior Manager (OBSM) Function

• The creation of this SMF is specific to non-EEA branches, and reflects the fact that these individuals, while performing a senior manager role for the branch, may not necessarily exercise the same level of responsibility for the overall firm. This role has therefore been defined to apply to the individual’s responsibilities in relation to the branch only

NEDs

• Neither the PRA nor the FCA intend to bring any NED functions into scope of the SMR for incoming branches

Credit Unions

In the PRA’s CP14/14, it detailed a number of provisions aimed at ensuring a proportionate application of the PRA’s SMR. In particular, the CP consulted on a tailored, less complex regime for ‘small credit unions’ (defined as those with gross total assets of £25 million or less).


SUMMARY OF RELATED PAPERS

PAPER DATE SUMMARYFCA CP14/13 and PRA CP14/14

Strengthening accountability in banking: a new

regulatory framework for individuals

Jul-14 Joint Consultation Papers released with proposals for a new

framework to encourage individuals to take greater responsibility

for their actions, and to make it easier for both firms and

regulators to hold individuals to account.

FCA CP14/31 and PRA CP28/14

Strengthening accountability in banking:

forms, consequential and transitional aspects

Dec-14 This technical joint Consultation Paper sets out proposals on

transitional arrangements for implementing the regimes, new

forms to support the regimes, and consequential changes to the

Handbook.


Approach to non-executive directors in

banking and Solvency II firms & application

of the presumption of responsibility to senior

managers in banking firms

Feb-15 This paper sets out the revised approach to independent non-

executive directors (NEDs) in UK banks, building societies, credit

unions and PRA-designated investment firms (relevant authorised

persons) and Solvency II firms.

FCA CP15/9

Strengthening accountability in banking: a new

regulatory framework for individuals - March

2015

Mar-15 Feedback from the FCA on the responses received to the

consultation, and setting out its policy intentions as a result. Also

consulting on guidance on the presumption of responsibility that

applies to senior managers under the Financial Services (Banking

Reform) Act 2013.


Strengthening accountability in banking: UK

branches of foreign banks

Also see SS10/14; a Supervisory Statement

on the PRA’s approach to branch supervision

published in Sep 2014

Mar-15 Explains how the SMF will apply to UK branches of Foreign Banks

(Incoming Branches) and EEA Branches.

PRA PS3/15

Strengthening individual accountability

in banking and insurance — responses to

CP14/14 and CP26/14

Mar-15 This policy statement provides feedback on responses to the

proposals in CP14/14 Strengthening accountability in banking:

a new regulatory framework for individuals, and CP26/14 Senior

Insurance Managers Regime. It also proposes lesser requirements

for firms with a balance sheet of less than £250m.

FCA CP15/22 and PRA PS16/15

Strengthening accountability in banking:

Final rules (including feedback on CP14/31

and CP15/5) and consultation on extending

the Certification Regime to wholesale market

activities.

Jul-15 Final rules for the new accountability framework for individuals

working in banks, building societies and credit unions, including

feedback on FCA CP14/13 and PRA CP14/14. Additional

consultation on further guidance.


APER TO SMR FUNCTION MAPPING

APER CONTROLLED FUNCTION PRA SENIOR MANAGEMENT FUNCTION

PRESIDING REGULATOR

Director CF1 Chief Finance SMF2 PRA

Executive Director SMF3 FCA

Chief Risk SMF4 PRA

Head of Internal Audit SMF5 PRA

Non-Executive Director CF2 Group Entity Senior Manager SMF7 PRA

Credit Union Senior Manager SMF8 PRA

Chairman SMF9 PRA

Chair of the Risk Committee SMF10 PRA

Chair of the Audit Committee SMF11 PRA

Chair of the Remuneration Committee SMF12 PRA

Chair of the Nominations Committee SMF13 FCA

Senior Independent Director SMF14 PRA

Chief Executive CF3 Chief Executive SMF1 PRA

Credit Union Senior Manager SMF8 PRA

Compliance Oversight CF10 Compliance Oversight SMF16 FCA

Money Laundering Reporting CF11 Money Laundering Reporting SMF17 FCA

System and Controls CF28 Chief Finance SMF2 PRA

Chief Risk SMF4 PRA

Head of Internal Audit SMF5 PRA

Significant Management CF29 Head of Key Business Area SMF6 PRA

Group Entity Senior Manager SMF7 PRA

Significant Responsibility SMF18 FCA


ABOUT HUNTSWOODHuntswood is a specialist resourcing and consultancy firm operating in the area of governance, compliance and complaints. We

have over 18 years’ experience in the highly regulated industries, helping our clients enhance their reputation with their customers, people and regulators.

NOTES RELATING TO HUNTSWOODThis document and its contents are confidential and proprietary to Huntswood or its licensors. No part of this document may be

copied, reproduced or transmitted to any third party in any form without our prior written consent. Huntswood cannot accept any liability for the information given in this document which is offered as a general guide only. All Huntswood engagements are

subject to a binding contract, fully setting out all terms and conditions. A full summary of terms and conditions is available on request. Huntswood CTC Ltd trades as Huntswood, Abbey Gardens, Abbey Street, Reading RG1 3BA, registered company number

3969379.

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