Article
Running for the hills: the new Senior Managers Regime

JWG analysis.

The commencement date (March 2016) of the Senior Managers Regime is fast approaching – but what does it mean for senior managers?  And will anyone want to be a senior manager when the regime finally commences?

Whilst the new regime will only affect new applicants directly, those who are certified under the existing regime will have their continued fitness and propriety closely monitored.

Key changes

• The Senior Managers Regime will impact senior managers, including chairmen and non-executive directors, holding them accountable for board level decisions and culpable for poor decisions. Prescribed responsibilities will be a big part of the new regime. These will be recorded as part of individual statements and the FCA will require the senior managers to demonstrate that they carry out these responsibilities throughout their day-to-day activities.  A ‘Management Responsibilities Map’ will be introduced, documenting a firm’s management and governance arrangements, including how the statements of responsibility have been allocated.  Most notably, a presumption of responsibility will introduce a reverse burden of proof for senior managers.
• A certification regime will be created to cover “material risk takers”, anyone supervising a certified person and those who perform “significant harm functions”. Senior managers will be required to provide annual attestations that the firm has complied with the regime and that those who fall under the scope of the regime remain “fit and proper” for the purpose of their role. A new framework of behavioural standards will also be introduced against which individual conduct will be judged through conduct rules applicable to all individuals.

Being a senior manager carries a heavy burden

The role of a senior manager will be heavily scrutinised at the certification stage, and will require senior managers to accept an evidential burden.  This will require them to prove that they took steps to prevent and/or prohibit or remedy any regulatory breaches.  It also carries the potential for heavy penalties if they cannot provide this evidence, including public censure, financial penalties, certification withdrawal or being banned from having a regulated role.  In addition, in the event they undertake reckless misconduct, they will potentially incur criminal sanctions.

On top of this heavy civil and criminal burden, the remuneration regime creates uncertainty around whether a bonus will be subject to clawback.

One risk of all this is that quality senior managers may run for the unregulated hills or leave the industry completely.  Attracting the people who are most capable of fulfilling these roles will become tougher.  Alternatively, on a positive note, it could root out those not up to the job when it comes to choosing a new generation of managers in the financial services industry.

What next for firms?

Firstly, organisations should map their existing structures and chart their approved persons, SIF holders, their roles and the chain of command.  For larger firms this will be a long and arduous exercise but, ultimately, it is required if firms are to be ready for the new Seniors Managers Regime.

Secondly, in preparation for the regime, firms will need to draw a transitional map showing how they will work during the transitional period.  In particular, this will involve those already covered by the certification regime who will need to be certified as fit and proper in the transitional period.

Lastly, it is recommended that firms create a Management Responsibility Map, setting out the management and governance arrangements under the new regime.  This will enable firms to undertake a gap analysis between the new and old ways and fill in any areas uncovered.

Conclusion

It is clear that the new Senior Managers Regime increases the scope of the individuals covered and, most significantly, raises the potential penalties for non-compliance – both criminal and civil.  As a result, some intending to take on senior manager roles may want to pause for thought, and those under the current regime may look to move into unaffected areas.  However, if you’re not left cold by the new regime then there you have the opportunity to be part of a new generation of ‘more responsible’ senior managers.