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A sledgehammer to crack a nut with senior managers regime?

The existing regime for combating poor governance within advice firms seems sufficient, but the Treasury has spoken…

A key point on the FCA’s agenda is the extension of the senior managers and certification regime to all its regulated firms during 2018.

The FCA has been challenged by advisers over the introduction of more regulation and red tape but it is the Treasury forcing it to bring in these measures.

The reasoning behind the implementation of the regime in banks and large financial institutions last year stemmed from a 2013 report issued by the Parliamentary Commission on Banking Standards, which was heavily critical of what it believed was a lack of accountability among senior executives within banks.

The report pulled no punches in describing an “accountability firewall”, whereby executives expressed shock at the conduct issues that emerged during the financial crisis based on the fact they did not know what was going on in their own business. It states: “Many banks had a structure of cross-cutting functions and committees, which meant that key decisions and risks were not owned by single executives but were shared, undermining a sense of individual responsibility.”

The result for advisers is that the Treasury has instructed the FCA to dismantle what it calls the “discredited approved persons regime” and extend the senior managers and certification regime to all firms. Current controlled functions will mostly be replaced by senior management functions, if not removed altogether.

But just how ‘discredited’ is the approved persons regime in the context of advice firms? A brief sift through the enforcement notices on the FCA website suggests it does not face the same issues in taking action against senior individuals within small and medium-sized firms as the Treasury believes are involved when dealing with banks and large institutions.

It will also be interesting to understand how the FCA applies this element of the regime to the significant number of one-person and other small firms it regulates, where the questions of individual accountabilities and responsibilities are redundant.

Such challenges serve to highlight the complexities of applying a regime designed primarily for large institutions to the wider industry, which contains firms of all shapes and sizes.

Focusing minds

That said, promoting accountability among directors and business owners is consistent with the FCA’s overall objectives. It is likely firms will need to do more to set out precisely the individual responsibilities and accountabilities of each of their senior managers, which will certainly focus minds.

Firms will also be required to ‘certify’ that their advisers are fit and proper to perform their duties. Mortgage and protection advisers are not required to hold controlled functions to advise customers, so any firm that takes on such an adviser effectively takes on the responsibility of certifying their fitness and propriety.

Similarly, firms must undertake appropriate due diligence checks on investment advisers before submitting their applications to perform controlled functions.

Where a firm’s recruitment processes fall short of the FCA’s expectations, the regulator has the supervisory tools to take action. In the past it has instructed recruitment freezes on firms until such issues have been resolved.

The FCA’s consultation paper on the new regime is due to be published in the next few months. Changes to processes will no doubt be required and there may be a surprise or two. But the regulator is also keen to stress that the new regime will be “proportionate”.

What is striking is that the current regime already appears to provide the tools to combat poor governance and cultures within firms and to hold senior managers accountable for their actions. In light of this, one wonders if the FCA would press ahead with extending the senior managers and certification regime if it was left to act on its own volition.

Carl Wallis is head of compliance at Sesame


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