SMCR View - January 2021

1. What are our 2021 SMCR predictions?

It is always difficult to predict what will happen in the year to come but one of our predictions is that there will be three final notices against Senior Managers under the Senior Manager Conduct Rules and/or the Duty of Responsibility (with the first finding against a Senior Manager for a lack of integrity under Conduct Rule 1). It is important for the FCA to show that the SMCR is working in practice and 'has teeth'. With no outcomes to date under SMCR, the FCA will be pushing for its open investigations into Senior Managers to reach the outcome stage in 2021. We do, however, note the following quote from the recent Beckwith judgement in relation to the SRA rules for solicitors where the High Court said: "Regulators will do well to recognise that it is all too easy to be dogmatic without knowing it; popular outcry is not proof that a particular set of events gives rise to any matter falling within a regulator's remit" (we note that, while not directly relevant, we think this is interesting in the context of the FCA/PRA and regulated firms). So...watch this space...

2. What's up with WhatsApp (and other communication platforms)

In Market Watch 66 the FCA focussed on the increased risk of misconduct arising from individuals' sharing potentially sensitive / confidential information via unmonitored or encrypted communication apps (e.g. WhatsApp, Signal, Telegram) whilst working from home - something we've seen much of in the press recently. If these communication apps are on business devices and used for in-scope activities, then the FCA are clear - they must be recorded and auditable. Given the challenges with monitoring certain apps (although we note ongoing trials of monitoring software) many firms prohibit the use of these apps (1) on business devices, and (2) on personal devices for business purposes, and take disciplinary action in the event of a breach. Firms are also looking at practical ways of enabling staff to engage with clients on their preferred medium, whilst ensuring compliance with regulatory expectations. The FCA have also said that firms should be proactively reviewing their recording/communications policies and procedures (and here is the interesting part...) each time the environment/context they operate in changes. This means that firms and relevant Senior Managers will need to (1) demonstrate that this review has been done since the move to working from home, and (2) continue to take reasonable steps to ensure that timely reviews are conducted as contexts change in the future (e.g. if there is a material change in government guidance on working arrangements, new apps that come to market, or even if there is any change/news in relation to how staff are using these platforms). What is included in a firm's policy is crucial for not just outlining the scope of which apps can and cannot be used, but the extent of the firm's reach should it wish to access the information in the app (we note that for firms with a Bring-Your-Own-Device policy the position is complex). The FCA emphasises that it has taken action regarding the use of WhatsApp/other social media platforms in the past (one example is the Niehaus case) - a suggestion that it will do so again - so this is important for firms and Senior Managers to get right. The FCA also reiterated the role of Senior Managers more generally in establishing and embedding good culture/governance which in turn improves standards of conduct. This might mean Senior Managers considering whether any reminders on market conduct / use of communication apps, and the firm's culture more broadly is necessary for their business areas given the FCA's focus. We have done many training sessions for Senior Managers on lessons learned from the past year where we discuss this amongst other things. Do let us know if this would be useful for your Senior Managers too.

3. LIBOR

It may be a distant memory now, but in 2019 the FCA issued guidance that (where appropriate) firms should identify the Senior Manager responsible for overseeing the transition away from LIBOR and update their statement of responsibilities. Why bring this up again? Well in January this year the FCA published "The final countdown" press release on LIBOR in which they said that Senior Managers with responsibility for the transition should expect close supervisory engagement on how they are ensuring their firm's progress relative to industry milestones. Given the FCA's express focus on LIBOR, we would encourage firms to ensure that the relevant Senior Manager has their ducks in a row and their reasonable steps are robust. Do check out our IBOR portal and if you have any questions please contact Penny Miller or Rosie Davies.

4. Proprietary trading review

In light of the PRA's Proprietary Trading Review issued last September we know that some of you are re-considering the scope of the "proprietary trader" certification function. In particular, the report details how the statutory definition is wide in scope, despite it sometimes being more narrowly conceived as only covering "classic" proprietary trading (i.e. the firm acting as principal buying or selling a financial instrument for a short term gain in its trading account unrelated to customer activity) and that some firms even have narrow internal definitions of "classic" proprietary trading (i.e. they restrict it to only include activity that is 'solely' for the purpose of generating profit). In the PRA's view the four principal activities falling within the statutory definition are: (1) classic proprietary trading, (2) market making / forms of client facilitation in the trading account where the firm acts as principal, (3) investment of liquidity and other treasury functions conducted as principal and (4) own-account hedging activity carried on by the firm. This report is clearly something for those with prescribed responsibility (b) (certification regime) and prescribed responsibility (v) (proprietary trading activities) to consider and for a determination to be made as to whether any changes to the firm's scoping of the proprietary trader certification function are required. Do let us know if you would like to discuss further.

5. Update to PRA/FCA's expectations of firms

Just before Christmas the PRA and FCA updated their webpages on their expectations of solo-regulated and dual-regulated firms. We discussed the solo-regulated firm updates in our latest webinar but some highlights include:

• that regulatory forbearance shown in relation to SMCR notifications (e.g. Form J) has now ended (save for the Modification by Consent for solo-regulated firms ending 30 April 2021);

• for solo-regulated firms, the FCA specifically highlights that each Senior Manager is responsible for risks in their area of responsibility, which might mean revisiting their reasonable steps;

• for solo-regulated firms, the FCA are clear that records should be kept regarding any temporary arrangements in place under previous FCA guidance in case they request it now or in the future - perhaps a sign from the FCA that there may be future regulatory scrutiny.

6. End of consultation period for temporary, long-term absences

Just a quick reminder that the deadline to respond to the FCA and PRA's consultation on temporary, long-term absences is 4 February 2021. You can email cp20-23@fca.org.uk with your response to their proposals.

7. PRA Forms update

Last Friday (22 Jan) the PRA issued its final policy following its consultation on various SMCR Form updates. The final policy includes an amended Notifications Part of the PRA Rulebook, updated Notifications Form (e.g. to reflect the new FCA address, updated PRA Rulebook references etc) and updated Form L (e.g. to reinstate question 3.05 which requests firms making a notification to provide details of any disciplinary action taken). These are all relatively minor changes.

8. What is happening in Ireland I SEAR you ask?

Bad puns aside, in Ireland we are awaiting finalisation of the new individual accountability framework (first proposed by the CBI in 2018). The framework involves enhancements to the existing fitness and probity regime, clear and enforceable conduct standards, a new unified enforcement process, and the introduction of a new Senior Executive Accountability Framework ("SEAR") (very closely modelled on SMCR). SEAR will introduce the concept of Senior Executive Functions ("SEFs"), some of which will be mandatory depending on the type of firm. A statement of responsibilities will be required for a SEF and their firms will need to have responsibility maps. SEAR will be implemented on a phased basis, beginning with banks, insurance undertakings and large investment firms (although there are currently no indications of when this might be). For further information please contact Derek Lawlor.

9. Is there anywhere else we need to be thinking about? Yes - it isn't just Ireland

• In Hong Kong, the Securities and Futures Commission's ("SFC") Manager-in-Charge ("MIC") regime has been in effect since 17 October 2017. In common with regimes in other jurisdictions, the MIC regime focuses on individual responsibility and accountability. Although the SFC has always stated that the MIC regime is not intended to be an enforcement tool, we expect to see enforcement action by the SFC against MICs in the future - so (as in the UK...) watch this space....For any questions please contact Sarah Berkeley.

• In Singapore, the Monetary Authority of Singapore ("MAS") released its finalised Guidelines on Individual Accountability and Conduct (the "Guidelines") in September 2020. Effective from 10 September 2021, the Guidelines set out the MAS' general principles and expectations relating to individual accountability and conduct, and in particular require financial institutions (FIs) to achieve five key outcomes ("Five Outcomes") in respect of senior management, material risk personnel and governance and conduct frameworks. In addition, financial institutions with less than 50 employees are not ordinarily expected to adopt the specific guidance described in the Guidelines, although they may be required by MAS to adopt specific guidance if there are potential gaps in accountability and oversight, or where their operations are complex. While FIs with 50 or more employees are expected to comply with the IAC Guidelines as a framework and best practice for achieving the Five Outcomes, they may also choose not to adopt a specific guidance where they have assessed this to be irrelevant to their businesses. That being said, all FIs must be prepared to justify their decision for not adopting specific guidance and demonstrate how they are still able to achieve the relevant Five Outcomes. For more information on this please contact Grace Chong.

10. SMCR Toolkit Update

Many of you are subscribers to our SMCR Toolkit. Given the plethora of additional guidance we've seen from the FCA/PRA and the evolution of their expectations and market practices, we are gauging interest in whether an update to key documentation and the addition of new documents would be something that you would be interested in subscribing to. These would be based on key queries from our clients over the last few years and the engagement we have had with the FCA/PRA and include conduct panel terms of reference, template Form A application documents with drafting notes etc. The initial and ongoing annual update would be a ct-effective mechanism to meet regulatory requirements and we strongly believe that by sharing intel across the market we are able to help achieve this for you. All feedback would be very welcome.