SMCR+ View – October 2024

With Halloween round the corner, there’s a spooky silence from the regulators on the SMCR consultation papers with reference to it somewhat conspicuously missing from the FCA’s latest Regulatory Initiatives Grid. We have heard the papers are ‘imminent’, but frankly weeks have gone by since that term was used and nothing has seemed forthcoming (although this is likely famous last words given Sam Woods’ reference to the proposals in his speech here where he said the focus was on changes to the administrative elements of the regime). However, we now have projected timelines for the non-financial misconduct (NFM) policy statement which will be published “around year-end 2024” (nothing like a festive gift from the regulators to get you in the holiday spirit!) and the FCA have now published the NFM ‘survey’ data. The NFM rules are being separated out from last year's D&I proposals (as we suspected it would) and the FCA will publish a D&I policy statement in 2025.

1. Non-financial misconduct survey

The results are in! The FCA has published the key findings from their ‘survey’ (ahem…statutory request for information) on non-financial misconduct and 984 firms have responded. Having helped many firms respond to this survey, we have to give you a health warning about the data (and, to be fair to the FCA, they dedicated an entire three pages to its limitations and we’re pleased to see some of the points we advocated for clients referenced). Specifically, the survey was incredibly complex to answer because of a distinct lack of clarity and definitions and a short timeline for completion. We know that some firms took different approaches and, as a result, whilst this data is perhaps more helpful than nothing, it should be considered with a heavy dose of salt and we should be wary of drawing too many conclusions between the data points. The aim of publishing this data is for firms to benchmark themselves, reflect on their own processes, systems and controls, and review their current compliance and consider enhancements required. The data does not cover all sectors, but rather wholesale banks, wholesale brokers, London market insurers, and London market intermediaries, therefore firms will have to take a view on the applicability and relevance to their specific sector.

By publishing, the FCA want NFM to be discussed at senior management and Board level with steps being taken to improve culture, identification and management of risks, and how the firm addresses NFM going forwards. There is a clear expectation for Boards/senior management to consider this survey and compare it against their position. They want firms to take NFM seriously, have effective systems and controls, and comply with regulatory obligations including reporting to the FCA.

Next steps: no best practice guidance will be published, but a final policy on how NFM should be considered in the rules is coming (Q4 2024 according to the Regulatory Initiatives Grid!).

The headlines:

• NFM trends: Reported NFM incidents increased “significantly” over the three years surveyed. Wholesale banks had the largest volume of incidents (noting they are also some of the largest institutions surveyed). From our experience we think this is likely not reflective of incidents of NFM but rather reflective of firms’ efforts to encourage and support reports. We also suspect that larger organisations may have more developed programmes to encourage issues to be raised.
• Types of NFM: Bullying and harassment, followed by discrimination, were the most common NFM types reported. The proportion of incidents reported relating to sexual harassment was 6-16% depending on the sector which is something to consider carefully in light of the new Duty to prevent sexual harassment that is coming into force on 26 October 2024 (see our insights here). A large proportion of reported incidents were classified as “other” (mostly likely because of the unclear definitions) which obviously isn’t helpful for the industry but includes misuse of alcohol, offensive language, data protection/IT breaches, retaliatory behaviour, and other breaches of policy and procedures. Some firms included gifts & entertainment breaches and performance issues in this “other” bucket which the FCA acknowledge may be categorised as financial misconduct/employee performance.
• Identifying NFM: Grievances or formal escalation processes were the main way firms identified NFM; less identification came from monitoring/surveillance activities. The FCA has said firms should be considering complementary methods of identifying NFM.
• Outcomes: Possession of illegal drugs, sexual harassment, and violence and intimidation were most likely to lead to dismissal. Banks had the highest proportion of reported incidents not upheld over the period. Of those upheld, the majority resulted in training or a verbal or written warning. Remuneration adjustments are less common and firms were more likely to adjust an employee’s variable pay compared to fixed pay or vested pay (i.e. clawback pay).
• Settlement and confidentiality agreements: The number of settlement and confidentiality agreements signed fell between 2021 and 2023, a trend which is heavily influenced by the banking sector. These were signed most commonly in relation to discrimination.
• Governance and Management Information: There is a specific comment about governance structures and management information – with 38% of firms not providing any MI on NFM to Board/Board Committee level, and 22% not having a formal governance structure/committee deciding the outcome and disciplinary actions for those involved in NFM matters. The FCA has pointedly said some of these firms are falling short of their expectations.
• Regulatory references: Over 90% of firms include incidents of NFM in regulatory references and 87% would update a reference (as applicable). The number of individuals, across 1,028 firms, hired with an NFM incident on their regulatory reference was just 5 in 2023 (down from 10 in 2021) perhaps demonstrating (given the number of incidents reported have increased) that firms’ appetite for hiring such individuals has fallen…*although note earlier health warning.

If you have any questions or would like to discuss what we can offer to support your team, please reach out to Penny Miller (Partner), Andrea Finn (Partner), or Amy Sumaria (Managing Associate).

2. Lloyd’s consultation – dealing with poor conduct and behaviours (responses by 16 December 2024)

Lloyd’s is revamping their framework for managing financial and non-financial misconduct, focusing on clearer market conduct and operating principles, and granting more autonomy to managing agents and syndicates, while streamlining the process by which Lloyd’s will become involved where the managing agent’s internal process is insufficient.

Amongst other things, Lloyd’s have:

• Created an overarching market conduct and behaviours objective to promote good conduct and address poor conduct in the market;
• Identified market conduct and behaviours operating principles, such as zero tolerance of under-performing managing agents or syndicates due to cultural or behavioural issues, including proposing a (non-exhaustive) list of behaviours, such as: dishonest conduct, poor business practices and behaviour that would bring Lloyd’s or the Lloyd’s market into disrepute. The (non-exhaustive) list also covers “non-financial misconduct”, such as: harassment, bullying, discrimination, abuse of power or authority over more junior individuals, and unprofessional conduct under the influence of alcohol or conducting Lloyd’s business whilst under the influence or in possession of illegal drugs;
• Recognised that most matters concerning individuals should be dealt with by firms internally and encourage early disclosure to them through a “pre-investigation filter process”; and
• Proposed adoption of a unified, “holistic” process that will use both their Oversight and Enforcement powers.

This evolution reflects Lloyd’s commitment to maintaining a respectful and accountable marketplace and it will be interesting to see whether any of this work done by Lloyd’s is considered and reflected in the FCA’s NFM proposals coming later this year.

If you’d like to discuss, please reach out to Jonathan Thorpe(Partner).

3. FCA and PRA speeches

Sam Woods’ speech on Competing for growth and Nikhil Rathi’s speech on Growth: mission possible, are both interesting reads. From an SMCR+ perspective, Mr Woods referenced the recently announced consultation and proposed changes to the remuneration rules and deferral periods and the fact that the PRA are looking at reducing the deferral periods to make the UK less of an outlier internationally and more competitive. The Regulatory Initiatives Grid confirms that the consultation paper can be expected before the end of the year. The regulators’ speeches definitely outline the focus areas for both regulators and the pressure they are under to promote the competitiveness of the UK is palpable. At a high level, the areas covered by the PRA include: remuneration rules, Basel 3.1, Solvency UK reforms, the Strong and Simple framework, amongst some myth busting. The FCA’s focus is on digital infrastructure, operational effectiveness, risk appetite, and much more.

4. FCA - Enforcement

Therese Chambers recently spoke to the FCA’s approach to enforcement, accelerating investigations, with a focus on financial crime. Having received and analysed the 130 responses to the consultation on the FCA’s enforcement guide (now known across the industry as the FCA’s ‘naming and shaming’ proposals) they are now meeting with trade associations and firms and developing the proposition further. While it doesn’t sound like a proposal will be published anytime soon, Chambers did confirm that the regulator plans to “provide greater detail on how it could work in practice” and they will be publishing case studies to examine the application of the criteria, potential announcements, and details on the number of cases potentially impacted. The Regulatory Initiatives Grid also confirms that the FCA aims to reach a decision on proposals in Q1 2025, taking into account the further engagement at the end of this year. For more information on the FCA’s proposals, please contact Thomas Makin (Managing Associate).

5. FCA/PRA regulatory communications: portfolio letters and “Dear Executives” letters

There has been a flurry of portfolio and executive letters this month – we’re flagging these primarily because the relevant Senior Managers will want to ensure that they are apprised of their contents and that they are taking reasonable steps to address all the relevant points in there.

• FCA Portfolio letter – supervisory strategy for financial advisers and investment intermediaries: This letter, addressed to the CEO/Director of firms, outlines the regulator’s commitment to elevating industry standards, particularly emphasising the importance of rigorous monitoring and the implementation of the Consumer Duty. These sentiments were also reflected in an FCA speech of the same week, which reiterated the intention for a less prescriptive approach and a shift to pragmatism (we can see your eyebrows raising from here!) and outcomes-based approaches. A significant focus is placed on mitigating risks to consumers, with particular attention on: (i) retirement income advice (following on from the Thematic Review earlier this year – see more in April's SMCR+ View), (ii) the adequacy of ongoing advice services, (iii) the enforcement of the “polluter pays” principle, and (iv) the scrutiny of market consolidation activities.
• PRA Dear CRO letter – credit risk management for non-systemic deposit-takers: This letter details the thematic findings of the internal audit review and advises firms to consider the insights as a benchmark for the next credit risk management framework controls review, with the aim of identifying and fortifying potential weaknesses.
• PRA Dear CFO letter – review of 2024 auditor reports: This letter was sent to select deposit-takers providing feedback from a review of written auditor reports. Annexes to the letter outline a range of practices to help firms identify possible improvements that can be made and benchmark against peers.
• FCA Dear CEO letters – APP fraud reimbursement: in line with the new rules on authorised push payment (APP) fraud reimbursement, the FCA has sent letters to payment and e-money institutions, as well as banks and building societies, outlining the regulator’s expectations against the new measures. For more information on the new rules relating to APP, or payments service providers more generally, we highly recommend signing up to Payments View.

If you would like to discuss any of the letters in greater detail, please get in touch with Penny Miller (Partner) or Amy Sumaria (Managing Associate).

6. FCA – Final Notices

We’ve included a summary of the key enforcement actions for this month and there are some interesting lessons coming from them.

• Final Notice – Starling Bank
  Starling Bank has been fined c.£28.9 million for breaches of Principle 3 (management and control) relating to its financial crime systems and controls, including those relating to sanctions. One of the key takeaways from this Final Notice is the FCA’s emphasis on the importance of firm systems and controls evolving at a similar pace to the scale of the business and we would strongly recommend Senior Managers being mindful of this during periods of growth and change. There is also quite a lot of criticism of “senior management” in the Final Notice in relation to a VREQ that had been breached by the bank – notably there was a lack of clarity over which SMF was responsible for ensuring the VREQ was complied with, there was a lack of AML and regulatory change skills and experience, and the management information was lacking in quality and consistency meaning there was no effective challenge and oversight of those implementing the VREQ (amongst other things). All of this we’ve heard before, but it never hurts to be reminded of the regulators expectations (even if it comes in the form of a fine). SMF 16/17s with financial crime responsibilities will also have a specific interest in this matter given the AML/sanctions angle.

  If you’d like to discuss further, please contact Amy Sumaria (Managing Associate and we also have an amazing practice advising on the sanctions framework. Do get in touch with Nick Benwell (Partner) or Cherie Spinks (Of Counsel) if you have any financial crime/sanctions related questions.

• Final Notice – TSB Bank plc
  This Final Notice saw the FCA fine TSB Bank plc £10.9 million for its inadequate treatment of customers facing financial difficulties or in arrears (this relates to matters pre-Consumer Duty, but anyone subject to the Consumer Duty should pay close attention). In the FCA’s view, TSB’s approach to collection and recovery was found wanting in several areas, including policies and procedures that heightened the risk of unfair outcomes, insufficient training that left staff ill-equipped to assess customers’ financial situations accurately, and manual system workarounds that led to errors. It’s a very interesting read and a stark reminder of the financial and reputational consequences of getting things wrong, with TSB now conducting a comprehensive remediation programme and disbursing £99.9 million in redress to over 230,000 affected customers.

  As with the Starling Bank fine, SMF responsibilities, governance and management information were elements of the breach. Sign up to Consumer Duty View for the latest Consumer Duty developments.

• Final Notice – Mr Kashmiri
  The FCA has issued a Final Notice against Mohammed Ali Kashmiri, withdrawing his SMF 29 (Limited Scope) approval and imposing a prohibition order, citing a profound lack of honesty and integrity which demonstrates that Mr Kashmiri is not fit and proper to perform regulated services. The backstory? Mr Kashmiri, failed to disclose his criminal convictions during the application process for becoming an approved person, despite direct enquiries about past criminal offences. His convictions, which were fraud related, not only questioned his integrity but were also considered by the FCA to pose a sufficiently significant risk to consumer protection and the overall confidence in the UK financial system.

If you have any questions on any of the enforcement actions mentioned above, please reach out to Emma Sutcliffe (Partner) and Thomas Makin (Managing Associate).

7. Other updates

• FCA’s whistleblowing policy recommendations: There are some valuable lessons for firms to learn about whistleblowing policies and practices. A review of the FCA’s process prompted a revision of the regulator’s whistleblowing policy, ensuring that non-executive directors share information with advisors solely on a confidential, need-to-know basis when internal escalation is necessary.

• FCA – Consumer Duty price and value outcome rules review: The FCA has published their review findings and examples of good and poor practice for firms to consider. The findings emphasise the need for firms to adopt a holistic approach to fair value assessments, incorporating effective governance to maintain the safeguarding of consumer interests. In particular, best practices identified included firms with comprehensive governance / committee structures that regularly review fair value assessments, and robust product approval processes that involve significant challenge from senior management ensuring products offer fair value. Other suggested positive practices include detailed reporting to governing bodies and the appointment of board-level champions for fair value assessments. Some firms were found to be lacking, particularly in escalating issues identified in fair value assessments to their governing bodies and inappropriately shifting the responsibility for poor value onto customers, without considering proactive measures to improve outcomes.

  For more information on the review’s findings, please check out our Insights Article, and if you have any questions on the Consumer Duty more generally, please contact Penny Miller (Partner) or Amy Sumaria (Managing Associate).

• FCA – Payments Consumer Duty multi-firm review (but learnings and read across for other firms): The regulator has also published their findings from a review of the implementation of Consumer Duty in payments firms. The FCA expect all relevant firms to consider their position against both good and poor practices identified in the review and make the necessary changes. Various governance and management information (MI) related points were made – specifically, the FCA found there was a lack of significant challenge to the Duty’s implementation in Board and committee minutes, alongside minimal evidence of Consumer Duty Champions actively bringing Duty-related issues to the Board’s attention. The FCA also identified that developing a comprehensive and effective MI suite posed a significant challenge for many firms with some struggling to pinpoint relevant metrics, whilst others were overwhelmed by an excess of metrics, hindering efficacy. Firms also often failed to demonstrate its utilisation or integration with other pertinent metrics, undermining the MI’s purpose in evidencing customer outcomes in line with the Duty.

  For more information on the review’s findings, we have published this Insight Article, or if you’d like to discuss then please get in touch with Oliver Irons (Partner) and Matt Handfield (Consultant).

• FCA review on Appointed Representatives (ARs): In a review of ARs, the FCA has acknowledged improvements in the oversight of ARs, while also recognising the need for further action. To aid principal firms in effectively supervising their ARs, the FCA has outlined best practices, such as ensuring the principal firm’s governing body approves ARs and advocating the use of diverse Management Information to evaluate risks comprehensively. For more information and a summary of the key requirements, have a look at our recent Insights Article.

• Investment Association – revised principles of remuneration: This is one for Remuneration Committees and Chairs of those committees. The revised principles are intended as best practice guidelines to ensure executive pay aligns with both investor expectations and the competitive landscape. There is guidance in the document for Remuneration Committees as to how to interpret the document. We have great experience of supporting firms with the regulatory obligations in relation to remuneration. Do reach out to Tair Hussain (Partner) for more information.

• FMSB consultation – front office supervision of wholesale traded markets: This draft statement of good practice, prompted by shifting regulation, technological advancements, and the emergency of new hybrid operating models, aims to provide firms with a robust framework for supervising market and client-facing activities. Accountability and responsibilities are covered in the consultation with the proposed updates focusing on defining clearer support roles within the supervision framework, clarifying the concepts of supervision, responsibility, and controls, and detailing the expectations in relation to managing conflicts of interest and supervisory data, amongst other things. These are just draft guidelines and are not formal standards.

If you have any questions on these updates, or would like to discuss what we can offer to support your team, please reach out to Penny Miller (Partner) or Amy Sumaria (Managing Associate).