SMCR+ View Summer 2024

Whether you've attempted to seek warmer climates abroad, or stuck it out in the UK over the bank holiday weekend, we've prepared a summer SMCR+ View for you to get stuck into in the last days of August.

As you know, we are eagerly awaiting the SMCR Consultation Paper, and we've heard publication could be anytime between the end of September to as late as December 2024. Whilst some rumours suggest it is coming next year, the PRA indicated in writing that it will be published "during 2024" and reconfirmed what we already knew which is that the CP will cover the SMF 7 (Group Entity Senior Manager) function. We're also aware of supervisory engagement with firms in relation to the SMCR, mainly through SMF interview requests, and questions around the in-scope population. Do reach out if you'd like help with any of these engagements, we have lots of experience!

As always, please do let us know if you have found this helpful or if there is more we can be doing.

1. Governance updates: ECB Draft Guide on Governance and Risk Culture; Basel Committee draft Guidance on Third-Party Service Providers, ESMA draft Guidance for CRAs on the management body

For banks regulated in the EU (but relevant to other firms), the ECB has published a draft Guide setting out supervisory expectations for the governance and risk culture of banks. The draft Guide is open for comment until 16 October 2024. In it, the ECB has said that progress has generally not been sufficient, despite this topic being high on the regulatory agenda. At 66 pages it's a chunky document covering everything from the role, composition and functioning of management bodies ("MBs") to the governance of control functions (including their expectations of the CRO/CCO), and the design and implementation of risk appetite frameworks. Member states' national competent authorities have been encouraged to align expectations/practices with this draft Guide.

Much of the draft Guide will unlikely be new to banks - for example, the components of risk culture (tone from the top and leadership, incentives, effective communication, challenge and diversity, and accountability for risk) are not new. However, the ECB has sought to provide examples of good practices throughout the draft Guide which will be helpful for firms to consider and assess their existing practices against. There are also some helpful market practices referenced - e.g. it outlines that the Board Risk Committee of global systematically important banks meet around 11 times per year. This will likely be something firms want to think about in the context of their CRD VI implementation and the SMCR-type regime that comes with it.

This ECB draft Guide comes at a similar time to the Basel Committee on Banking Supervision's recently published draft 12 Principles in relation to third-party service providers ("TPSPs"). Principle 1 and Principle 2 are of most interest from a governance perspective, indicating that Boards should have ultimate responsibility for the oversight of TPSP arrangements, and ensure that senior management implement the policies and processes relating to these arrangements. We expect this will be of particular interest to senior individuals responsible for TPSPs and the relevant governance and risk frameworks associated with it. The consultation closes to responses on 9 October 2024.

For Credit Rating Agencies and Benchmark Administrators, ESMA has also published a Consultation Paper on supervisory expectations for the MB, which considers similar topics to those in the ECB draft Guide, such as accountability and delegation, oversight of strategy setting, tone from the top, composition and training. The Consultation Paper is open until 18 October 2024.

Please do reach out to Alex Ainley (Partner) and Amy Sumaria (Managing Associate) if you have any questions and/or if you'd like to discuss CRD VI implementation.

2. Insurance Sector- FCA Consumer Duty findings, PRA Policy Statement and Dear CEO Letter to Life Insurers

For those in the insurance sector (but relevant to other firms), the FCA has published its Thematic Review (TR 24/2) of insurance manufacturers and distributors in relation to the fair value outcome under the Consumer Duty. It's a fairly damning review, and the FCA expects firms to consider the contents of the report urgently. There are many comments on governance, oversight and control failings in here, which can also be seen through the examples of good and poor practice which the FCA has published on its webpage summarising its findings from its multi-firm review of insurance firms in relation to their outcomes monitoring under the Duty. One of the key points was the ineffectiveness of MI provided to the Board and committees - lots of data, with limited insights as to what this means in practice in relation to consumer outcomes, and no recommendations for future actions to improve outcomes. We have done a significant amount of work (and workshops) around Consumer Duty MI and Board reports. If you'd like to discuss how we might support you with this, then please get in touch with Caroline Hunter-Yeats (Partner).

A couple of updates for the life insurance sector, especially in relation to Funded Reinsurance -A PRA Policy Statement (PS 13/24), requiring Board involvement in setting high level principles underlying recapture plans and reviewing inherent uncertainties, and a Dear CEO letter, explaining how the FCA expects firms to assess their practices against the expectations in the PRA's Supervisory Statement (SS 5/24), around ongoing risk management. As with all Dear CEO letters, ensuring relevant SMFs and delegates are apprised will be of critical importance.

If you have any questions, please reach out to Jonathan Thorpe (Partner) and Amy Sumaria (Managing Associate).

3. FCA Report on Authorisation Metrics and Quarterly Whistleblowing Metrics

The FCA has published its first report on its Secondary International Competitiveness and Growth objective, which includes metrics in relation to authorisations. The FCA confirms that 91.9% of Senior Manager applications are successful, and the FCA is now meeting statutory deadlines for Senior Manager approvals with an average approval time of 41 days (although we've seen it as quick as 19!). The metrics also confirmed that as at 31 March 2024, there were 62,953 individuals approved for at least one Senior Manager function, and 168,115 individuals approved to hold at least one Certification Function... We've assisted a huge number of firms and Senior Managers with their Form A applications and the interview process, so please do reach out to Penny Miller (Partner) and Amy Sumaria (Managing Associate) if we can assist you with these and the new Form A (which we mentioned in June's SMCR+ View).

The FCA's quarterly whistleblowing metrics indicate that the FCA received 253 whistleblowing reports in Q2 2024. 135 related to Compliance, 92 related to fitness and propriety and 78 related to the culture of the organisation. The PRA and BoE also published their annual report on whistleblowing disclosures for 1 April 2023 to 31 March 2024, indicating that they received a total of 240 disclosures which were subject to assessment. 14 of the whistleblowing reports received were subject to significant regulatory or supervisory activity, and 120 are currently subject to ongoing supervisory assessment. We have a sophisticated cross practice employment, regulatory and contentious regulatory team that regularly support firms in relation to disclosures - do reach out to Penny Miller (Partner), Amy Sumaria (Managing Associate), Andrea Finn (Partner), or Emma Sutcliffe (Partner) for more details.

4. Other updates...

Despite the election dominating the start of the summer and putting a pause on the regulators' activities, since the landslide Labour election the regulators have had a busy summer. Below is a brief summary of the key updates to note:

• FCA publishes findings on treatment of Politically Exposed Persons ("PEPs") for Anti-Money Laundering Purposes: The FCA reiterates that it expects senior management to have effective oversight including taking a risk based approach to the approval process when establishing and maintaining relationships with PEPs and Relatives and Close Associates. There was also reference to the need for adequate MI in order to enable senior management to provide such oversight. Good practices identified include (i) proportionate management level sign-off based on the PEP risk rating, (ii) evidence of escalation to relevant committees for higher risk PEPs and (iii) an approval process involving stakeholders in the first and second lines of defence, including clearly documented rationale for decision making. Other areas of focus include communicating with PEPs in line with the Consumer Duty, and ensuring staff dealing with PEPs receive improved training.

• BoE publishes second resolvability assessment: This includes some key points on governance processes (with good practices identified including board and senior management engagement and challenge) as well as embedding risk and internal audit into the resolution governance process. Boards and senior management are expected to "continue to test and refine their preparations for resolution" so they remain fit for purpose and ready to respond to events.

• Draft Audit Reform and Corporate Governance Bill: The King's speech proposed the Draft Bill, which will introduce a new regulator with powers to investigate and sanction company directors for serious failures in relation to their financial reporting and audit responsibilities (currently only directors that are members of an accountancy body can be held accountable for making incorrect financial statements). The proposal is that this would apply to larger companies.  

• Introducing criminal background checks on owners and controllers: The FCA has published proposals in CP 24/11 to require DBS criminal background checks (or an equivalent for persons outside of England and Wales) for potential controllers as part of a change of control, a new firm authorisation application, or those with qualifying holdings in a payment or e-money institution (amongst others). The requirements will apply from January 2025.

• Consumer Duty updates: The FCA published a speech one year on from the go live date, together with next steps, which will include the publication of a grid of the FCA's programme of work. The FCA also published a Consultation Paper on the Value for Money framework, focusing on defined contribution pension schemes. Look out for more details in our Consumer Duty View and definitely one to flag to your Consumer Duty Champions.

• FCA Policy Statement - Access to Cash (PS 24/8): This sets out the FCA's final rules to support access to cash for consumers and businesses, applicable to the Treasury's 14 designated firms, which include UK large banks and building societies. Firms are required to establish, access and periodically review the effectiveness of their policies and procedures in relation to the cash assessment and ensure they remain compliant with the rules, as well as having appropriate governance arrangements in place for the Board to approve the cash assessment process.

• FCA Consultation Paper (CP 24/13) on the New Public Offer Platform ("POP") Regime: This sets out proposed rules for the new regulated activity of operating an electronic system for public offers of relevant securities. Firms operating a POP will be required to have adequate governance arrangements, controls and procedures, and will be subject to the SMCR. The FCA are proposing that all POP operators will be subject to the remuneration incentive rules, meaning that POP operators cannot be remunerated in a way that could potentially conflict with their duties to act in the best interest of platform investors. Where relevant to their products and services, POP operators may also be in scope of the Consumer Duty. The CP is open until 18 October 2024, with an aim to finalise the rules by the end of H1 2025.

If you have any questions in relation to the updates above, please reach out to Penny Miller (Partner), Alex Ainley (Partner) or Amy Sumaria (Managing Associate).

5. FCA Enforcement Action

We've seen quite a few enforcement actions across July and August, and we've summarised the key takeaways below:

• A fine of £3,503,546 for CB Payments Ltd (an electronic money institution) for failing to exercise due skill, care and diligence. This focusses on the inadequate implementation of software to identify high-risk customers, including inadequate pre-implementation testing, failing to provide engineers working on the software with complete instructions and inadequate records of the steps taken in respect of designing and implementing the software. This is in addition to the firm identifying breaches, and subsequently failing to conduct a formal review of the software's effectiveness. The FCA specifically calls out their previous communications to the firm on this topic, via general Dear CEO letters to the industry, FCA published materials and bilateral engagements. Worth keeping in mind in relation to all those Dear CEO letters!

• A Final Notice against H2O LLP, a portfolio management company, for failing to act with due skill, care and diligence, failing to take reasonable care to organise its affairs effectively and failing to deal with the FCA in an open and cooperative way. The firm engaged in a strategy which involved investing €1.643 billion in higher-risk, illiquid assets, without adequate due diligence ("DD") or risk management systems in place and in a significant divergence from its typical investment strategy, which exposed investors to undue risk. The firm's failure to conduct sufficient ongoing DD, coupled with a lack of effective governance and risk management systems was exposed by substantial investor redemptions following adverse media coverage. The firm subsequently provided false and misleading information to the FCA, including fabricated documents and DD reports created retrospectively. One of the firm's Senior Managers also engaged in efforts to conceal the inadequate level of DD conducted and the firm's poor record-keeping practices. This misconduct extended to failing to disclose significant conflicts of interest and the receipt of hospitality, which could have influenced investment decisions. Whilst the relevant period for this Notice was pre-SMCR, and as such there will be no finding of breaches of the Senior Manager Conduct Rules, we'll be keeping our eyes peeled for any consequential actions taken against the Senior Manager in question.

• A quick and unsurprising Decision Notice, where a sole director's consistent lack of probity in relation to other firms resulted in the FCA saying that it was not satisfied that a new firm applying for authorisation (and for which the director was the sole director and controller) would meet the Suitability Threshold Conditions. The FCA said the individual had consistently failed to act with probity and had put his interests above those of his clients. This has been referred to the Upper Tribunal and might be interesting to watch in the context of the potential changes to the FCA's rules/guidance on the Suitability Threshold Condition as part of the non-financial misconduct guidance.

• Some Final Notices in relation to ensuring customers are treated fairly, focussing on the individuals knowingly and recklessly engaging in activities which would cause detriment to consumers. This includes Final Notices against Steven Harbinder Singh Sahota (CF 30, Customer), Anthony Dale Cuming (CF1 Director, CF10 Compliance Officer, CF11 MLRO, CF30 Customer) and Kyle Anthony Jones (all pre-SMCR) who were involved in a scheme to intentionally ensure pension funds were invested in high risk investments to generate significant marketing fees for themselves and deliberately concealing their involvement in the scheme. Another was Uman Qureshi (CF 8 Apportionment and Oversight, pre-SMCR), convicted for engaging in unfair and misleading commercial practices. We have also seen a Notice for Mr Sarl (CF 1 Director, pre-SMCR) who dishonestly failed to pass on clients' premiums to insurers, even after the failure was pointed out to him by insurers and queried by customers. All the individuals were found to have recklessly and deliberately disregarded the personal interests and financial circumstances of the customers and as such lacked integrity.

If you have any questions on these Final Notices, please reach out to Emma Sutcliffe (Partner) or Thomas Makin (Managing Associate).