SMCR+ View - September 2023

After a brief summer hiatus catching those last summer rays before Autumn fully sets in, SMCR+ View is back with a bumper version - the world of SMCR+ has definitely not taken a break! This version covers our follow-up to the Flash SMCR+ View earlier this week with deeper insights into the FCA and PRA Consultation Papers on Diversity & Inclusion. It also covers a plethora of other things including an interesting speech on culture from the European Central Bank, Form A updates, points of note for independent Non-Executive Directors ("iNEDs") involved in value assessments for authorised fund managers, the Dear CEO letter to wholesale banks and a new Final Notice amongst other updates.

As ever, please do reach out to us with any feedback or questions.

1. FCA / PRA - Consultation Papers on Diversity and Inclusion ("D&I") - a deeper dive

Drum roll please... two and a half years after the Discussion Paper was published in July 2021, the FCA and the PRA have finally published Consultation Papers on D&I. We were eagerly awaiting their arrival following the FCA's commitment to publication when discussing non-financial misconduct with the Treasury Select Committee. We published a Flash SMCR+ View covering some of the highlights of the papers, which you can find here.

Now we've been through the papers we've set out some more detail here and some of our views on the:

• Changes proposed relating to non-financial misconduct and fitness and propriety assessments - do these resolve existing issues or create more?
• The reporting and disclosure requirements: whether the regulators' proposals are achievable in practice or simply add uncertainty and legal risk;
• Challenges where the regulators proposals diverge from established employment law protections and definitions;
• Issues around accountability for D&I (particularly for dual regulated firms).

Responses to the Consultation Papers are due by 18 December 2023, with the rules becoming effective one year after the Policy Statement is published which is expected in 2024 (TBC as to whether this date gets pushed out further).

We'll be writing our own response to the Consultation Papers and would love to hear any thoughts you may have on the proposals. You can also subscribe to our DE&I View for more updates in this space. Please do reach out to Fiona Bolton (Partner) and Amy Sumaria (Managing Associate) for any questions you may have.

2. European Central Bank ("ECB") Speech - How culture drives risk in banks and what supervisors can do about it

We won't take it personally, but there was a conspicuous absence of any mention of the SMCR in this latest ECB speech on how culture drives risk in banks and what supervisors can do about it - despite it pointing to other international approaches to supervising behaviour and culture in banks...However, the language used within this speech has a familiar pitter patter to it and mirrors much of what we have seen the FCA and PRA say before.

Whilst the ECB has previously looked at the culture-risk linkage, this speech has a laser focus on the importance of culture in driving the right behaviours and managing risk. It does feel like a line in the sand from the ECB - it makes it clear that culture can be a prudential concern and therefore it must supervise it. The speech addresses head on the concerns around whether it is the role of the ECB to assess behaviour and culture in banks (very similar to some of the Edinburgh Reform SMCR discussions that have been ongoing) - the ECB is very clear in its position that overseeing governance, risk culture, tone from the top and cultural values are all part of its mandate.

The speech suggests that there has been a misunderstanding of the purpose of supervisors attending board meetings, which we found interesting. They state the purpose of such attendance is to assess board dynamics and the board's ability to challenge management. It isn't to participate in or influence board decisions.

The ECB is currently reviewing its Guide on governance and risk culture, which sets out the ECB's expectations on governance, risk management and risk culture (including a set of good practices), although this is not expected to be published until the end of 2024.

If you have any questions, please reach out to Penny Miller (Partner) or Amy Sumaria (Managing Associate).

3. FCA - changes to Form As accessed via Connect

The FCA has updated its webpage announcing that it is reviewing and updating its application forms, starting with the Form A (application to perform senior management functions).

Some of the key changes to the Form A include a checklist of information required to complete the application, less duplication in the employment history section (solo-regulated firms will be able to input ten years of employment history instead of uploading a CV), and integration of the statement of responsibilities into the form, avoiding the need for a second application. The FCA also promises improved guidance, easier navigation and an improved layout... let's wait and see!

Public testing of the new Form A is expected to begin at the end of September 2023, and once the rollout of the new Form A is complete, firms will be required to use this version. If you're really keen you can sign up to test the new forms here.

If you have any questions, please reach out to Penny Miller (Partner) or Amy Sumaria (Managing Associate).

4. FCA/PRA - the murky world of non-financial misconduct ("NFM")

Following the recent buzz surrounding this area, we will be hosting a session on the murky world of non-financial misconduct as part of our Global Legal and Business Outlook events. This session will examine the emerging legal, regulatory and best practice approaches to managing NFM and will include practical tips and common pitfalls based on recent experience and market events.

This will be a 45 minute session on Thursday, 12th October, starting at 2:30pm UK time. To see our full agenda and to sign up please use the link here.

Please reach out to any of the following individuals: Emma Sutcliffe (Partner), Penny Miller (Partner), Andrea Finn (Partner), Richard Sims (Partner) or Amy Sumaria (Managing Associate) if you have any specific questions on this.

5. FCA - Multi-firm review findings on Authorised Fund Managers ("AFMs") assessments of funds value

Following its review of liquidity management of AFMs which we covered in the last version of SMCR+ View, the FCA has now published its findings on the processes used by different AFMs when carrying out assessments of value ("AoVs") for the funds they operate.

We have a great insight available here, but there are a couple of governance and iNED related matters we want to specifically highlight that the FCA found:

• AFM Boards and AoV committees had higher quality management information ("MI") but some boards/committees were not reading it / using it effectively - i.e. they sometimes reached conclusions that didn't seem to account for or be supported by the MI.
• Most AFMs' iNEDs did not provide sufficient challenge, with some too involved in the collection and analysis of information to be able to challenge findings. Some iNEDs thought they shouldn't challenge AoV methodologies and accepted findings at face value, and most iNEDs didn't understand the firm's AoV process or its objective.

As such, we suggest that relevant firms ensure that their iNEDs sufficiently understand the AoV process and their role - this might involve specific training. Firms should also ensure there's an appropriate balance for the iNEDs' role in the AoV process and their oversight and challenge of it / its findings. Challenge provided by iNEDs should be documented appropriately.

You can find further insights on this review in our insights article here and if you have any questions, please reach out to Tristram Lawton (Managing Associate) or Amy Sumaria (Managing Associate).

6. HM Treasury - Response to consultation on payments regulation and systemic perimeter

Cast your minds back to July 2022, and the FCA's indication that the SMCR should be extended to payment service providers and e-money firms - we now have HM Treasury's position via it's consultation response on payments regulation and the systemic perimeter.

In relation to whether systemic payments firms should be subject to the SMCR, HM Treasury confirmed that the responses were largely supportive, provided that a proportionate approach based on an entity's structure, size and existing governance arrangements is taken. However, HM Treasury noted that it will not set out its position on the proposed extension of the SMCR until after the review of the SMCR as part of the Edinburgh Reforms has concluded. Whilst this is definitely something we will be keeping an eye on, it is likely to be a while before any further proposals are received. For more on this please see our thoughts in the upcoming edition of Payments View.

If you have any questions, please reach out to Oliver Irons (Partner) or Amy Sumaria (Managing Associate).

7. FCA - Report on UK Payment Accounts: access and closures

The FCA published its report on its data exercise on bank account access and closures. The paper specifically talks about the SMCR within the context of credit institutions and states that the FCA would consider enforcement action against Senior Managers in cases of serious systemic misconduct for customer account closures when these breach applicable legislation. It says that its general approach to taking enforcement action under the PARs or PSRs will reflect its general approach to taking enforcement action under FSMA 2000.

We've recently published a podcast on "Debunking Debanking". There is also this podcast on DSARs in a debanking context and our upcoming edition of Payments View that has dived a little deeper into the report's slightly controversial findings. Please reach out to Andrea Finn (Partner) or Oliver Irons (Partner) if you have any questions.

8. FCA Decision Notices and Final Notices

Continuing the theme from the last couple of SMCR+ Views, the FCA has published Decision Notices and Final Notices against individuals involved in unsuitable Pension Transfer advice.

All of the Notices are against former directors for their roles in operating a flawed pension advice process. For CFP Management Ltd ("CFP"), the FCA imposed a fine of £681,536 on Ms Toni Fox (an SMF 3 and SMF 16), and a fine of £632,594 on Mr David Price (an SMF 3 and SMF 17) and withdrew their SMF approvals (noting however that both individuals are appealing the decisions to the Upper Tribunal). For Mansion Park, the FCA fined Mr Andrew Allen £25,606 and Mr Keith Dickinson £245,914 (both CF1s (Directors) and CF30s (Customer)) and prohibited them from performing any function in relation to a regulated activity of advising on Pension Transfers.

Ms Fox was found to have failed to act with integrity in carrying out her role by recklessly designing, implementing and overseeing the flawed advice process with regards to the transfer of clients' safeguarded pension arrangement - note we saw the Upper Tribunal specifically talk about "recklessness" within the context of integrity findings in FCA vs Seiler, Raitzin and Whitestone. This breach was seen as especially serious given Ms Fox's role in designing the process, and that she benefitted substantially as a result of the breach. Mr Price was also found to have failed to act with integrity by recklessly overseeing and participating in the flawed advice process, which was also seen as serious given the significant financial benefit Mr Price received together with the number of clients impacted, especially given that some of these clients were vulnerable due to their age or financial situation.

Both Mr Allen and Mr Dickinson were found to have acted without due skill, care and diligence, with Mr Allen failing to conduct adequate second level reviews of Pension Transfer advice given by other advisors, and Mr Dickinson giving unsuitable Pension Transfer advice. The FCA also found these failings to be serious, on the basis that the impacted customers were in a vulnerable position.

If you have any questions, please contact Richard Sims (Partner).

9. FCA Dear CEO Letter: Wholesale banks portfolio analysis and strategy forum

The FCA has published a Dear CEO letter to CEOs of wholesale banks active in the UK, in order to set out its supervisory work programme over the next two years. Some of the key points to highlight are:

• Risk Management: This is an area which the FCA indicates it will be increasingly engaging in, and will look to senior management to evidence how they are delivering better risk management and oversight across the business and how they are comfortable that this is underpinned by a strong culture. The FCA will also look to Boards to evidence how they are ensuring that any improvements are lasting.

• Standard of control: The FCA pointed to blurring of responsibilities between the first and second lines of defence, and particularly call out ESG-related activities as an area where there is a lack of clarity as to who is responsible for delivering against public commitments. Something for those with ESG related responsibilities to consider.

• Operational Resilience: The FCA will be engaging with Senior Managers with responsibility for operational resilience to assess how they have learnt lessons from operational resilience events (even if their firm has not been directly impacted).

• Diversity equity and inclusion: The FCA confirmed that its focus will be to understand how wholesale banks are playing a role in accelerating the pace of meaningful change in this space (even more relevant with the publication of the D&I Consultation Papers this week).

• Non-financial misconduct: The FCA confirms that it expects firms to have effective systems in place to identify and mitigate risks, to take any allegations or evidence of NFM seriously, deal with these through the appropriate internal procedures and act according to the "established" facts. We think this use of "established facts" is quite unhelpful!

The FCA expects all CEOs to have discussed this letter with their boards within two months of its publication (i.e. by 8th November) and agree any actions to align with the FCA's expectations.

If you have any questions, please reach out to Penny Miller (Partner) or Amy Sumaria (Managing Associate).

10. FCA - Dear CEO letter - supervisory strategy for principal trading firms

First off, if you've made it this far - well done...

Second, this is the FCA's Dear CEO letter regarding its supervisory strategy for principal trading firms ("PTFs") over the next two years. Some of the key risks associated with PTFs the FCA is focussed on include inadequate controls (specifically in the context of third-party suppliers and operational resilience) and leadership combined with poor market abuse policies that may result in market manipulation and disruption. The FCA stated that some firms needed a "mindset change" to improve their governance and control infrastructure... Specifically in relation to algorithmic trading controls, the FCA reiterates that senior management are ultimately responsible and accountable, with Boards also playing an important role in providing effective challenge. This is an area within which the FCA indicates it intends to conduct further work.  

SMF 1s (CEOs) of PTFs must discuss this letter with the Board and agree any actions or next steps by the end of September 2023. The letter is also relevant to senior management as they are also responsible for ensuring their respective areas of oversight and control are compliant with the FCA's expectations and fully resourced.

If you have any questions, please reach out to Penny Miller (Partner) or Amy Sumaria (Managing Associate).