SMCR+ View - August 2022

Why so soon for another SMCR+ View we hear you ask…well there have been some significant developments including the publication of the FCA’s Policy Statement on the Consumer Duty and we also want to draw your attention overseas to Ireland where the updated Central Bank (Individual Accountability Framework) Bill 2022 was published last Thursday. As always, do let us know if you have any feedback or questions.

1. Consumer Duty - FCA

If the Consumer Duty (CD) is relevant to your business, we are sure you were eagerly awaiting the Policy Statement and Final Guidance issued by the FCA last week. We have an excellent note (clients’ words not ours) on key changes (including extended implementation deadline) since the Consultation Paper and Consumer Duty View which provides timely updates on this topic - sign up here.

As before, each Senior Manager will be responsible for the CD as it relates to their business area. Other key SMCR and governance points are:

• Boards must have scrutinised, challenged and agreed implementation plans by end of October 2022.
• The Consumer Duty must be embedded in firms’ strategies, governance, leadership and people policies including incentives at all levels.
• There is additional guidance in clarifying the scope of the new Individual Conduct Rule 6 (Act to deliver good outcomes for retail customers).
• There is new guidance in relation to Senior Manager Conduct Rule 4 which includes an obligation (in certain circumstances) for Senior Managers to notify the FCA that another firm is not or may not be complying with Principle 12/PRIN 2A (which could potentially be onerous).
• There is an expectation for firms to identify a ‘Consumer Duty champion’ at Board/governing body level. Alongside the Chair and CEO, they should ensure that the CD is regularly discussed / raised in relevant discussions. Ideally they would be an Independent Non-Executive Director, but the FCA is clear that the expectation applies reasonably (i.e. they don’t expect the same level of formality in smaller firms).

What does this mean in 10 seconds? Work for the firm to establish an implementation plan, work for the Board and potential scrutiny from the FCA meaning governance practices should be robust. Updated COCON training at an appropriate time. Appointment of a CD champion (where reasonable). Revisiting governance/leadership/people/remuneration policies to ensure they embed the CD. Revisiting reasonable steps for Senior Managers (amongst other things).

We are doing a huge amount of work on the Consumer Duty and we’d be delighted to speak to you more on this and share our experience. Please email Caroline Hunter-Yeats (Partner), Penny Miller (Partner) or Alex Ainley (Partner) for more information.

2. SEAR-iously important news on individual accountability in Ireland

Last week, an updated version of the Irish Individual Accountability Framework Bill was published. The Bill sets out further detail on the proposed new Irish conduct framework, which will include:

• Revisions to the existing fitness and probity (F&P) regime;
• A set of clear and enforceable conduct standards;
• The new Senior Executive Accountability Regime (the SEAR); and
• Enhancements to the enforcement processes available to the Central Bank.

In short, the enhancements to the existing F&P regime (including a new obligation for firms to certify relevant persons’ fitness and probity) and the standards will apply to all Irish regulated financial service providers, irrespective of their sector. The bill details three sets of standards: (1) business standards, which apply directly to firms, (2) common conduct standards, which apply to individuals carrying out controlled functions, and (3) additional conduct standards which apply to more senior individuals. Firms must notify and provide training to relevant individuals on the standards that apply to them, and the individuals themselves are under a duty to take reasonable steps to ensure the standards are met.

The details of SEAR will be set out in regulations to be made by the Central Bank, which we also expect to limit its application to credit institutions, insurance undertakings, certain investment firms (those which underwrite on a firm commitment basis and/or deal on own account and/or are authorised to hold client monies/assets) and third country branches of these entities. The SEAR closely follows the SMCR, including the obligations to prepare statements of responsibility, management responsibility maps and to take reasonable steps. The good news is we’re ahead of the game. Using the experience we’ve gained in advising over 150 clients on their SMCR implementation we’ve been working closely with our Irish team to develop solutions to allow firms to quickly adapt their UK processes to comply with the SEAR in the most efficient manner possible. We’re currently updating our SMCR product suite to include SEAR specific content, click here if you’re interested in finding out more about upgrade options.

We’ve prepared a summary of the Bill, available here. To discuss the Bill and the possible impact of the new rules on your firm please contact Derek Lawlor (Partner) or Rachel Stanton (Partner).

3. Improvements to the Appointed Representatives (ARs) regime – FCA (and relevant to Principal firms)

This Policy Statement covers improvements to the Appointed Representatives regime following the FCA’s identification of harms often being driven by principals not undertaking adequate due diligence before appointing an AR and/or due to poor on-going control and oversight. The changes will take effect on 8 December 2022. ARs aren’t currently subject to the SMCR so the FCA has focussed on increased accountability for principals in respect of their ARs. A couple of points to note:

• Principals must, when assessing whether an AR is suitable to act consider (amongst other things) the competence and capabilities of relevant directors, partners, proprietors and managers of the AR, including whether they have the appropriate experience, knowledge, skills and training in relation to the activities/business carried out and the necessary time.
• The fitness and propriety of the controllers, directors, partners, proprietors and managers of the AR (amongst other things) must be reviewed at least annually with any significant issues arising being escalated to the firm’s governing body.

For more information on this please do get in touch.

4. Dear RemCo Chair Letter – FCA (for proportionality level one Banks, Building Societies and PRA designated investment firms)

The FCA’s letter sets out their expectations for RemCo Chairs (SMF 12s). It covers culture and accountability, the Consumer Duty, the rising cost of living, operational resilience, ESG, D&I and remuneration approach for 2022/2023. Relevant SMF 12s should be made aware of this so they can take appropriate reasonable steps. Other firms and RemCo Chairs may wish to consider the letter as it covers broad and pervasive regulatory topics for which there may be read-across.

Some specific FCA expectations to draw out:

• Remuneration policies and/or practices should (1) help identify and manage risks and promote a strong risk culture, (2) support the expectations set by the Consumer Duty (when it comes into effect), (3) and take into account the current and future risk posed by the economic environment.
• Individuals should be held accountable under the SMCR for their conduct and competence and there should be there to be a clear, strong, and evidenced link between behaviours and remuneration outcomes. If there is evidence of regulatory failings, the RemCo Chair should oversee/challenge the process to ensure appropriate, timely and transparent adjustments to remuneration are made. The FCA may ask to see evidence of this meaning firms’ governance processes and the RemCo Chair’s reasonable steps need to be robust.
• Remuneration and incentives have a part in supporting diversity. D&I proposals (to be published later this year) will include proposals to make changes to Remuneration Committee responsibilities. Further, given RemCo Chairs oversee the link between the performance management and incentives they may review how the remuneration policy accounts for some of the risks that an employee’s working preferences negatively influence their remuneration.
• If there are operational interruptions (e.g. service disruptions, data breaches), firms should respond appropriately, including making remuneration adjustments where appropriate.
• Firms may wish to review whether incentives are aligned to ESG risk factors for their senior leadership / MRTs and, more broadly, use remuneration/incentive programmes as a lever to align incentives with ESG commitments.

To discuss this further please contact Andrea Finn (Partner) or Tair Hussain (Partner).

5. Dear CEO letter – BoE and FCA

The FCA’s letter provides and update on the BoE and FCA’s process regarding their joint data collection transformation programme and their plans for 2022. It’s a short letter, but at the end it outlines that firms can join the programme and highlights that firm involvement will enable the BoE/FCA to progress more quickly towards their shared objective to transform, improve, and ultimately reduce the burden of data collection. Not necessarily any action required, but if applicable, your CEO’s may want to consider it.

6. Operational resilience – BoE and FCA

The BoE, PRA and FCA issued a joint Discussion Paper to share and obtain views on potential measures to manage the systemic risks to financial stability, market integrity and consumer protection, posed by certain third parties. Responses to this DP must be submitted by 23 December 2022. This will be relevant to any Senior Manager with operational resilience responsibilities.

There is a reminder in the DP that Senior Managers cannot outsource their responsibilities and that firms entering into outsourcing and other arrangements with third parties remain fully accountable for meeting their regulatory obligations. In particular and where applicable Senior Managers are responsible for: (1) managing the risks in their material outsourcing and third party arrangements; and (2) taking appropriate measures to ensure that their important business services remain within their impact tolerances in case of severe but plausible disruption, including where they rely on a third party to support their delivery.

To discuss this paper further, do get in touch.

7. Whistleblowing quarterly report – FCA

The FCA have published their quarterly whistleblowing data showing those made in Q1 (Jan-March) 2022. The FCA have reiterated that they assess every whistleblowing case they receive that falls within their remit, to inform their work and help them identify actual or potential harm. They also state that multiple reports about a firm may highlight a trend or wider problems with its approach to staff ‘speaking up’ and blowing the whistle.

In Q1 2022 the FCA received 276 new whistleblowing reports containing 540 allegations (the majority submitted via the online reporting form). It is interesting to note that over 100 allegations related to fitness and propriety, over 55 related to the culture of an organisations, and 18 allegations related to poor handling of whistleblowing disclosure by a firm.

To discuss this further please contact Richard Sims (Partner).