Eversheds Sutherland: The Employment Practitioner’s Guide to Financial Institutions: Key Aspects of the Regulatory Framework

Description

Preface List of abbreviations Table of statutes Table of statutory instruments Table of cases Table of EU material 1 Background to the accountability regime 1 The financial crisis Royal Bank of Scotland HBOS 2 Parliamentary Commission on Banking Standards: ‘Changing banking for good’ APER Changing banking for good Changes following the PCBS report 3 Introduction of the senior managers and certification regime Outline of SMCR 4 The Financial Conduct Authority and the Prudential Regulation Authority Predecessors to the FCA and PRA The PRA The FCA Solo regulated and dual regulated firms Financial Policy Committee 5 European legislation and regulation 6 Regulators’ rules, policy statements etc FCA publications PRA publications 7 Where to find the regulators’ rules Sources Definitions 2 The Senior Managers Regime 1 Background SMCR replaces APER for ‘relevant authorised persons’ Introducing the new accountability regime: background to the senior managers regime final rules SMR – the final rules UK branches of overseas banks 2 Extension of SMCR to all financial services firms 3 The proposed SMCR after extension: who is affected and to what extent? Core firms The enhanced regime Limited scope firms Appointed representatives 4 Summary of requirements under proposed SMCR extension Transfer of individuals between insurance and banking firms 5 Guides for insurers and solo regulated firms on the extended SMCR 6 Transitioning firms to the SMCR Transitioning insurers to the SMCR 7 Senior managers What pre-employment checks should be carried out? Applying to the regulator for approval 8 Senior Management Functions 9 Approvals 10 Prescribed responsibilities 11 Shared prescribed responsibilities 12 Overall responsibility 13 The role of legal counsel 15 Statement of responsibilities Completing the SoR template Records of statements of responsibility Revised statements of responsibility Feedback on statements of responsibility Interaction between the statement of responsibilities and the employment contract Guidance on the statement of responsibilities and management responsibilities maps 16 Management responsibility maps Feedback on MRMs 17 Sharing functions: chief executive and chief operations Feedback on sharing functions 18 Temporary cover for senior managers – the ‘12-week rule’ 19 Handovers PRA requirements FCA requirements 20 Statutory duty of responsibility and criminal offence of causing a financial institution to fail Duty of responsibility Statutory duty of responsibility and insurers and solo regulated firms under the extension of the SMCR Causing a financial institution to fail 21 Regulatory feedback 22 Non-executive directors 23 Transitioning FCA firms to the SMCR: CP17/40, PS18/14 Approved persons Certified staff Core and limited scope firms Enhanced firms Fitness and propriety Banking firms: training staff 24 Guidance on the duty of responsibility for insurers and FCA solo regulated firms: CP17/42/ PS18/16 3 Certification Regime 1 Background 2 Extended regime: a summary 3 Moving to the certification regime under the extended SMCR Fitness and propriety questions 4 The certification regime: final rules for the banking sector 5 Who is in the certification regime? FCA definition of certification employee PRA definition of certification employee 6 Definition of ‘employee’ for certification purposes 7 Territorial application of the certification regime 8 Certification functions Holding several significant harm functions Senior manager carrying out certification function Temporary cover for certified staff for up to four weeks New functions and fitness and propriety assessments Moving functions during the certification year 9 When should employees be assessed for certification functions? 10 Temporary UK role: the 30-day rule 11 Additional flexibility in drafting certificates 12 Length of certification 13 Maintaining a record of certified employees 14 Banking Standards Board response to consultation on extension of the SMCR: points on certification 4 Fitness and Propriety 1 Assessing fitness and propriety Senior managers and certification staff: fitness and propriety assessments Non-executive directors and fitness and propriety assessments 2 Criteria for fitness and propriety assessments Regulators’ rules and guidance on fitness and propriety Sexual harassment and fitness and propriety 3 FIT 1.3 and FIT 2.1–2.3: FCA guidance on assessing fitness and propriety General guidance on carrying out assessments FIT 2.1: honesty, integrity and reputation FIT 2.2: competence and capability FIT 2.3: financial soundness 4 Banking Standards Board guidance on regulators’ fitness and propriety criteria Honesty, integrity and reputation Competence and capability Financial soundness 5 Additional checks to be carried out by the firm Regulatory references Support for individuals being assessed 6 Summary of the Banking Standards Board Guidance on the certification regime: the fitness and propriety assessment process 7 Establishing ‘pass/fail’ criteria 8 BSB guidance: Structure of the fitness and propriety assessment Sourcing evidence Evaluating evidence Actions following assessment 9 Appealing the outcome of an assessment 10 The fitness and propriety certificate 11 Solvency II firms 12 Establishing fitness and propriety as part of a global group 13 Evidencing the fitness and propriety assessment 14 What if the firm cannot certify an employee? 15 Disciplinary proceedings and fitness and propriety assessments 16 Financial Services Register 17 Criminal records checks Senior managers and certified staff Requesting a criminal records check Carrying out DBS checks for senior manager and certified staff: a summary 5 Regulatory References 1 Background to the introduction of regulatory references 2 Development of the regulatory references regime 3 Common law duties when preparing a reference Spring v Guardian Assurance plc Liability of a prospective employer Accuracy, truth and fairness 4 Data protection Regulatory references and data subject access requests Impact of common law on financial services firms 5 Original consultation on regulatory references 6 Regulatory references: final rules 7 Application of the regulatory reference regime Application of the regulatory reference rules to individuals Territorial application 8 Regulatory references: extension of the SMCR 9 Who is covered by the regime? Volunteers and contingent workers 10 Requirements of the regulatory reference rules Responsibility for compliance with regulatory reference rules 11 The requirement to obtain regulatory references before regulatory approval or certification What information should be requested? When should the reference be obtained? Regulatory references and fitness and propriety approval/certification 12 Collecting regulatory references for regulated roles for the previous six years of employment Making and drafting the request for a reference References for the last six years of employment 13 Providing a regulated reference within six weeks of a request Reference within six weeks Information in the reference Criminal records checks Disclosure of information that has not been verified Is there a conduct rule breach? All relevant information Right to comment: fairness in a reference What if records are incomplete? 14 The mandatory template 15 Information to be disclosed in a regulatory reference 16 Updating regulatory references provided over the previous six years where matters arise that would cause a reference to be drafted differently 17 Not entering into an arrangement or agreement that conflicts with regulatory reference obligations 18 Retaining relevant employment records for a period of six years and implementing appropriate policies and procedures 19 Requirement to consider whether there has been a conduct breach 20 Recruiting internally or within a group 21 Practical considerations arising from the new regime References from overseas and non-financial services employers What about where an executive search firm is used? Regulatory and common law requirements Record keeping Expired warnings Misconduct investigations – past misconduct and employee resignations Can a firm disclose matters which may not amount to serious misconduct which occurred outside the six-year period? What should a firm do if it receives a regulatory request for an ex-employee whose conduct has been called into question after leaving? Legal representation Suspension pending disciplinary action Obtaining references Data protection What happens if disclosing required information requires the disclosure of confidential information? Findings after a reference has been given TUPE transfers 6 The SMCR Conduct Rules 1 Introduction 2 Background Individual conduct rules and senior manager conduct rules 3 Key sources 4 Territoriality 5 Extension of the SMCR to all authorised firms – conduct rules 6 To who do the individual conduct rules apply? Staff who are excluded from the application of the new conduct rules PRA Conduct Rules Senior managers Application of conduct rules to temporary absence replacements 7 The SMCR conduct rules First tier – individual conduct rules Second tier – senior manager conduct rules Relevance of a senior manager’s statement of responsibilities General factors for assessing compliance with the conduct rules Specific guidance on compliance with individual conduct rules General factors for assessing compliance with the senior manager conduct rules Specific guidance on senior manager conduct rules (COCON 4.2) Senior managers at listed companies 8 Contractual enforceability 9 Applying conduct rules to NEDs 10 Practical issue 11 Training and other initiatives 12 Notification of conduct rule breaches and related disciplinary action to the FCA – what should be notified and when? Reporting to the regulator Settlement or other agreements or arrangements Notifications to the FCA in respect of the suspension of staff 13 Notification of conduct rule breaches and related disciplinary action to the PRA – what should be notified and when? 14 The test for liability for breach of a conduct rule: personal culpability 15 Conduct rule breaches and enforcement action by the FCA 16 The Duty of Responsibility for senior managers PRA guidance on the Duty of Responsibility Commentary 17 Unregulated financial markets and industry codes 18 Financial Stability Board toolkit 19 Culture 7 Remuneration 1 The remuneration codes: introduction 2 The CRD IV Remuneration Codes Scope of the CRD IV Codes Application to individuals Who is a ‘material risk taker’? De minimis concession Part-year Code staff Proportionality: level one, two and three firms The PRA Rulebook: proportionality FCA general guidance on proportionality EBA Guidelines and proportionality Fixed and variable remuneration Role-based allowances Ratio of fixed remuneration to variable remuneration and the bonus cap Variable pay in shares, share-linked or equivalent non-cash instruments Establishing the bonus pool and ex-ante adjustments Awards of variable remuneration Deferral Policy on deferral Proportionality level three firms Performance adjustment: malus and clawback What is malus and clawback? The rules on performance adjustment PRA guidance on performance adjustment Introducing malus and clawback provisions Malus and clawback: other employment law considerations Clawback on a gross or net of tax basis? Guaranteed variable pay Retention awards Buy-outs of variable remuneration Variable remuneration based on future performance and long-term incentive plans Pensions Severance pay Personal investment strategies Non-executive directors and variable pay Record keeping and compliance Breaches of the CRD IV Codes – voiding and recovery 3 BIPRU Remuneration Code Introduction Purpose and general requirement BIPRU Remuneration Code staff Proportionality Key remuneration principles of the BIPRU Remuneration Code General requirements Control functions Profit-based measurement and risk adjustment Pension policy Personal investment strategies Performance assessment Guaranteed variable remuneration, buy-outs and retention payments Ratios between fixed and variable remuneration Severance payments Payment in instruments Deferral Performance adjustment 4 AIFM and UCITS Remuneration Codes Introduction ESMA guidelines on sound remuneration policies Purpose and general requirement AIFM and UCITS Remuneration Code staff Proportionality Key remuneration principles of the AIFM/UCITS Remuneration Codes General requirements Control functions Performance assessment and risk adjustment Guaranteed variable remuneration Ratios between fixed and variable remuneration Severance payments Retained units, shares or other instruments Deferral Performance adjustment Pension policy Personal investment strategies Partners and LLP members Delegates Individuals performing non-AIFMD business 5 Insurers, reinsurers and Solvency II Background Text of Article 275 of Solvency II Regulation Supervisory statement SS10/16: applying Article 275 Remuneration policy Application to non-Solvency II entities Proportionality Solvency II staff Deferral Malus and clawback Performance measurement Termination payments 26 Brexit and financial services remuneration 8 Bonuses and Employment Law Considerations 1 Variable pay – background 2 Express terms Dresdner Kleinwort Limited and Commerzbank AG v Attrill Brogden v Investec 3 Discretionary bonuses and implied terms Partial discretion Implied terms Decisions made capriciously and in bad faith Irrational and perverse Discretion v construction of contract terms 4 Notice periods 5 Termination in repudiatory breach 6 Wednesbury ‘reasonableness’: Braganza v BP Shipping 7 Issues for financial services firms 9 Performance Management and Remuneration Incentives 1 Introduction 2 Guidance on risks to customers from financial incentives 3 Risks to customers from performance management at firms 4 MiFID II remuneration incentives 5 Incentives, remuneration and performance management in consumer credit firms 10 Whistleblowing in Financial Institutions 1 The Public Interest Disclosure Act 2 Protect 3 Whistleblowing and financial institutions 4 Reporting to the regulator 5 The regulatory whistleblowing regime: an overview 6 Requirement to inform staff of regulators’ whistleblowing services 7 Whistleblowing champion 8 The independent whistleblowing channel 9 Reportable concerns 10 Handling disclosures Malicious disclosures 11 Confidentiality of disclosures 12 Informing and training staff 13 Duty to blow the whistle 14 Employment contracts and settlement agreements 15 Detriment and fitness and propriety 16 UK branches of overseas firms 17 Other EU legislation 18 Challenges for employers 11 Women in Finance and Gender Pay 1 Scope of this chapter 2 Background to the GPG Regulations and the gender pay gap 3 Territorial scope of the GPG Regulations 4 Outline of the GPG Regulations and what is required 5 Timing and obligation to publish gender pay gap data 6 What information must be published? 7 Which employees are counted towards gender pay gap reporting? 8 Calculating the gender pay gap 9 What is ‘pay’? Mean and median What earnings are taken into account when calculating the mean and median hourly rates of pay? How do you calculate the hourly rate of pay? 10 Bonus pay 11 Calculating the gender bonus gap 12 Salary quartiles 13 Non-compliance 14 Problem areas Atypical workers International employees Salary sacrifice Sign on, buy out and retention bonuses The bonus period for exercise of options How does the application of malus and clawback affect reporting? LTIPs in the form of conditional awards or nil cost options Bonus buyouts 15 Women in Finance Charter Background to the Charter Gender diversity in financial services firms The Women in Finance Charter Sexual harassment and the role of the regulators 12 Senior Managers and Certification Regime for Insurers 1 Background to the Senior Insurance Managers Regime 2 Extension of the SMCR regime to insurers: an overview Extended regime: transitional arrangements Conversion Checking for approvals Statements of responsibility Prescribed responsibilities Certification and conduct rules Other conduct rules staff Overlap rule Failure to submit a conversion notification Applications for approval to take effect on or after Commencement New forms Appointed representatives Transfer of SMFs from insurance firms to banking firms 3 SIMR – the old regime in outline 4 Differences between the SMCR and the SIMR 5 Senior managers Senior insurance managers – the old regime 6 Extended regime: senior (insurance) managers, senior manager functions and prescribed responsibilities Senior management functions Territorial limitation Sharing a management function Statement of responsibilities Holding more than one SMF Sharing a SMF Small NDFs and ISPVs Prescribed responsibilities Overall responsibility requirement Statutory Duty of Responsibility Handover of responsibilities Governance maps/management responsibilities maps Overlap rule 7 Certification regime Territorial application Who is in the regime? More than one certification function Temporary appointment Assessment of fitness and propriety 8 Transfers of individuals between insurance and banking firms 9 Non-executive directors 10 Conduct standards/conduct rules PRA individual conduct rules PRA SM conduct rules Assessing compliance with a conduct rule Breaches of conduct rules FCA conduct rules Training Notifications of breach of conduct rule 11 Assessing fitness and propriety Criminal background checks and criminal offences 12 Regulatory references Recruiting from overseas: regulatory references Recruiting internally – regulatory references Timing of request for a reference Providing regulatory references Agreements and settlements Regulatory reference template Right of reply Updating a reference Legal obligations 13 Whistleblowing 13 Enforcement and the SMCR 1 Investigations into senior management – the FCA’s enforcement powers 2 General statistical analysis of 2008–2018 enforcement decisions 3 FCA Enforcement decisions prior to the introduction of the SMCR Anthony Claire, Nicolas Bower and Peter Halpin – Prohibition Orders and a cumulative fine of £928,000 Peter Cummings – fine of £500,000 4 Other cases of note Paul Flowers – prohibition order John Pottage – reversal of FCA fine by the Upper Tribunal Barry Tootell and Keith Alderson 5 FCA/PRA enforcement decisions against senior individuals since the SMCR The introduction of the SMCR – a brief recap 6 FCA/PRA enforcement powers since the SMCR 7 Enforcement decisions – March 2016 to present 8 Examples of enforcement decisions John Radford Jes Staley 9 What is in the pipeline, based on FCA’s public statements in its annual business plan and recent speeches in 2017/18? Extending the SMCR 10 FCA/PRA enforcement trends Harder to resolve by agreement 11 Individual responsibility Appendix Appendix 1 SYSC 22: Regulatory references Appendix 2 SYSC 18: Whistleblowing Appendix 3 SUP 10C7.3 G Guidance on how the other overall responsibility function applies Appendix 4 Submitting statements of responsibilities: examples of how the requirements work Appendix 5 FCA Policy statement PS18/4: Credit card market study Appendix 6 GC18/4: Senior Managers and Certification Regime – Proposed guidance on statements of responsibilities for FCA firms Appendix 7 Guide for FCA solo regulated firms Index