07May

Mark Steward, Executive Director of Enforcement and Market Oversight at the Financial Conduct Authority, spoke on March 31 this year about ‘Compliance, Culture and Evolving Regulatory Expectations.’

He began by setting out four key elements of the FCA’s Senior Managers and Certification Regime:

  • It obliges firms to allocate key responsibilities or senior manager functions to specified senior managers
  • It imposes a statutory duty of responsibility on senior managers to take reasonable steps to ensure a firm complies with its regulatory responsibilities.
  • It requires firms to carry out their own fit and proper certifications for employees who are not senior managers but whose role means they have the potential to cause detriment. This assessment needs to be carried out both at appointment stage and then on an annual basis
  • It sets specific conduct rules for employees at all levels of a firm

Mr Steward spoke of how SM&CR had delivered change by saying:

“The regime has wrought some profound changes in the way firms allocate responsibilities, align those responsibilities to relevant controls and ensure oversight as to how these controls operate down the line.”

Addressing the ‘take reasonable steps to ensure a firm complies’ requirement, he commented:

“Implementing the new regime has meant firms have built into their systems explicit reasonable steps to prevent non-compliance. This has required an assessment of what may make a particular control system or function more vulnerable to failure because it is in those places that the senior manager’s reasonable steps need to be particularly evident.”

The FCA director then expressed the hope that SM&CR will be a win-win-win for firms, regulators and consumers alike, by saying:

“By imposing personal liability, the regime uses self-interest – in this case the senior manager’s self-interest in avoiding liability – to avoid the bear pit of enforcement. This is a virtuous circle: what protects senior management from liability also reduces (though cannot guarantee) the risk of non-compliance more generally within firms.”

Mr Steward then posed five questions for firms to consider:

  • What proactive steps do they take to identify conduct risks that exist within the firm?
  • How do they encourage employees to feel and be responsible for managing their individual conduct?
  • What support does the firm provide to enable staff to improve their conduct?
  • How does the Board gain oversight of the conduct standards that exist within the firm?
  • Have they considered whether there are any activities that the firm undertakes that could undermine the various strategies designed to improve conduct?

He then made mention of the fact many SM&CR communications from the FCA refer to senior management setting an example – the so-called ‘tone from the top’. However, he also said that ‘tone from within’ was important, and that this “requires every person in the organisation to be personally accountable and engaged.”

Mr Steward then reminded his audience of what the five Conduct Rules that apply to each individual employee are:

  • To act with integrity
  • To act with due skill, care and diligence
  • To be open and cooperative with the regulators
  • To pay due regard to the interests of customers and treat customers fairly
  • To observe proper standards of market conduct

The FCA director then gave a recent example of a senior manager being jailed for insider trading, and said of this:

“[Her] offending is baffling. As a senior compliance officer, she was trusted to set an example and to uphold the highest conduct standards. The risks she was running were obvious ones, as were the choices she made, especially for an intelligent and experienced compliance officer. Yet she betrayed her employer’s trust and, in effect, swapped her position in a global wholesale bank for a term of imprisonment.”

In conclusion, Mr Steward said:

“The Senior Managers Regime and the FCA’s [five conduct] questions are great drivers of a different approach because they require firms to think about behaviour at the point it might fail.”