Employment partner Jane Mann and financial regulatory partner Peter Wright comment on a new report published by UK Finance.

UK Finance, with the assistance of Ashurst, has published a timely report on the effect of the Senior Managers and Certification Regime (SMCR) on the banking sector, where it has now been in force for three years. 

The industry body, which represents over 250 banking and finance firms, surveyed its members, talked to individuals operating the new regime (25 banks took part, along with 60 senior managers) and collected data from other sources.

The full report, available on the UK Finance website, is well worth reading by anyone involved in the implementation of the regime. 

The overall conclusion was that the SMCR has led to an improvement in behaviours and processes; but the report also draws attention to some specific difficulties and recommends some potential changes.  Whilst we agree with some proposed recommendations, we don’t agree with changes that could undermine the benefits from a market, regulatory or indeed employer perspective, simply because there are some challenging aspects to the regime.

The authors read with interest those parts of the report which focus on the behaviours of individuals; as contentious lawyers we are now advising both firms and individuals on a number of issues relating to behaviours that are regarded, or suspected, of falling below the standards expected of finance professionals. 

These issues have never been straightforward for firms in the financial sector to confront.  This is part of the reason why, during the Financial Crisis, unethical individuals were able to engage in egregious conduct (such as LIBOR and FX manipulation) and move from firm to firm undetected, or as “rolling bad-apples” as the regulators have described them.

We have seen real changes in the approach and importance with which these conduct risk and HR issues are taken at the board level.  This is undoubtedly a welcome development post SMCR implementation.

Some of the specific interesting points which emerge from the report and which firms and finance professionals may want to reflect upon include:

  • Many firms are uncertain as to which finance professionals in their organisation could significantly harm their firm or its customers and therefore require certification that they are “fit and proper” to hold their positions.  This appears to us to be an issue that firms should tackle with proper support from their HR, compliance and internal and external legal functions.  The legal criteria are clear (albeit detailed) and all firms should be clear on the scope of their Employees’ activities, if they are to be properly supervised and should therefore be able to answer these questions.
  • 46 % of respondent firms had dismissed employees for not being “fit and proper”.  This is an interesting observation, but it doesn’t clarify the reasons for dismissal and why the individuals were not “fit and proper”.  We would be interested to know whether this is indicative of firms identifying “honesty & integrity” risks more effectively (which would be proportionate for dismissal), or whether a more stringent approach is being taken to performance and “competence and capability” related issues.
  • Most Senior Managers had not considered what their position would be if, after leaving employment, they were drawn into an investigation into something that occurred during their employment.  They were not sure how they would get access to documents, whether they were indemnified by the firm, or covered by insurance in respect of legal fees, and what level of assistance they could expect from their former firm.  These are all points we’ve been negotiating in settlement agreements involving senior finance professionals. 

Regulatory references also attracted much comment.  The report highlighted inconsistent practices across the industry.

  • Some, but not all, firms are rejecting candidates with any negative information, even if minor, in their regulatory reference, thereby depriving that individual of employment in that firm, without a second chance. 

Our view is that firms receiving negative information should adopt a balanced and proportionate, not a zero-tolerance approach to assessing this information, which is the approach adopted by the regulators themselves when approving applicants for senior roles.

  • There is a lack of consistency between firms as to what negative information to include in a reference.  For example, there are inconsistencies where individuals under investigation leave prior to the completion of the investigation; some firms include this information others do not.

This lack of clarity led to a recommendation in the report that question G in the regulatory reference template (any other information you consider relevant) be omitted in future.  We do not agree with this recommendation.  Our view is that the question should be retained and not abandoned simply because it poses some challenge and judgment to answer appropriately. 

  • When to report conduct rule breaches was another area of uncertainty.  69% of the governance function respondents said they’d identified conduct rule breaches; but there was widespread confusion as between firms and the regulators as to which breaches needed to be reported immediately and which could wait until the annual return. 

These issues and the industry body observations are not surprising.  The SMCR forces firms to deal with difficult conduct and employment issues.  The regime also places responsibility upon hiring firms to act as a quasi-regulator when onboarding new staff to make sure they are fit to work in the industry, not just whether they may be an effective employee and meet the firm’s commercial interests.

We think a guiding approach for a firm  providing a reference and assessing its proper content is to apply the lens of whether they would wish to know that information in deciding whether to certify a member of their own staff as fit and proper to hold the role in question.   Whilst not a formal legal approach it does help parties consider issues of relevance, proportionality and the FCA’s specific guidance on the giving of references in a fair and compliant manner.

The guiding principle for the firm receiving the information is that it is for them to arrive at a determination as to whether the proposed new recruit is fit and proper for the role, weighing up what the previous employer has disclosed, along with other factors such as the individual’s own account of what happened before.  The referencing regime requires a fair process – that should not be controversial.

There was also an industry-wide clamour for more training of Senior Managers on the conduct rules.  This was not unexpected, and it’s something that Fox Williams has been undertaking for clients since the regime came in.  Our recent market observation would be that whilst there is a good appreciation of the regime within the HR and compliance function of most firms, the area where real progress could be made is in further training and support to the Managers of Certified Staff, who have to take annual certification decisions and consider issues (as they arise) and whether they may be relevant to certification and future regulatory references.   

As to be expected with new regulation, there are many teething problems, but the direction of travel appears to be, overall, positive for the industry.


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