• FCA Policy Development Update
  • FCA Handbook Notice
  • FCA and PRA Consultation on Regulatory References under Senior Managers and Senior Insurance Managers Regimes
  • Whistleblowing in Deposit-Takers, PRA-Designated Investment Firms and Insurers
  • Bank of England and Financial Services Bill – Extension and Reforms of the Senior Managers and Certification Regime (SM&CR)
FCA Policy Development Update

The FCA’s policy development update, published on 2nd October, sets out a timetable of forthcoming publications which, inter alia, comprises:

A policy statement to “CP15/4: Whistleblowing in deposit-takers, PRA-designated investment firms and insurers”, which proposes measures to formalise firms’ whistleblowing procedures and aims to move towards a more consistent approach, build on existing good practice, and ensure that all employees are encouraged to blow the whistle where they suspect wrongdoing;

A policy statement to “CP15/10: Strengthening accountability in banking: UK branches of foreign banks” which comprises a Senior Managers and Certification Regime (SM&CR), encouraging individuals to take greater responsibility for their actions and making it easier for both firms and the regulators to hold individuals to account;

• A policy statement to CP14/13 “Strengthening accountability in banking: a new regulatory framework for individuals”, proposing changes to the way individuals working for ‘relevant firms’ – i.e. UK banks, building societies, credit unions and PRA-designated investment firms – are assessed and held accountable for the roles they perform;

• A consultation paper on “Implementation of Market Abuse Regulation”;

• Both a conduct consultation and a markets consultation paper on “Implementation of MiFID directive”, due December 2015; and

A policy statement to “CP12/20: Review of the client money rules for insurance intermediaries”, which proposed various changes to the CASS 5 rules. Due date to be confirmed.

FCA Handbook Notice

The FCA’s Handbook Notice 25 sets out recent legislative changes made to the Handbook. The instruments include:

• Senior Management Arrangements, Systems and Controls (Remuneration Code) (No. 6) Instrument 2015, which came into force 1st July 2015. This makes alterations in response to recommendations made by the Parliamentary Commission on Banking Standards in respect of remuneration, and intends to more closely align long-term risk and reward. Significant modifications include the extension of deferral periods for variable pay and the introduction of particular clawback provisions.

Individual Accountability (Solvency II and Consequential) Instrument 2015, which makes amendments to the Handbook to implement reforms to the FCA’s Approved Persons Regime for Solvency II firms as part of the accountability regime. Part of this instrument came into force in 19th August 2015 with the remainder due at the beginning of 2016.

• Fees (Alternative Dispute Resolution Competent Authority) (Financial Ombudsman Service) Instrument 2015, which came into force on 25th September this year. Implementing changes to the FEES section of the Handbook, the new rules empower the FCA to charge the Financial Ombudsman Service (FOS) an annual levy to fund its functions as Competent Authority under the Alternative Dispute Resolution for Consumer Disputes Regulations 2015 (‘the ADR Regulations’). The FCA will also be able to charge the FOS for expenses incurred in performing its functions under the same regulations, such as setting up, certifying, and monitoring the ombudsman service.

• Consumer Rights Act Instrument 2015, aligning the Handbook Rules and Regulatory Guides with legislative requirements under the CRA. This came into force on 1st October 2015.

• Conduct of Business (Optional Additional Products) Instrument 2015, which, in summary, makes final rules on the ban on opt-out selling and Handbook Guidance on improved information for add-on buyers. This is due 1st April 2016.

• Consumer Credit (Amendment No 2) Instrument 2015, which makes final rules to advance the FCA’s consumer protection objective. Part of the instrument came into effect on 28th September 2015 with the remainder on 5th November 2015.

FCA and PRA Consultation on Regulatory References under Senior Managers and Senior Insurance Managers Regimes

A combined FCA/PRA consultation paper (FCA CP15/31 and PRA CP36/15) titled “Strengthening accountability in banking and insurance: regulatory references” was published on 6th October. The publication concerns the references of employment that are passed around firms when certain individuals in the banking and finance sectors move roles, and, in order to prevent the ‘recycling’ of individuals with poor conduct records between firms, sets out the proposed changes to the way firms seek and provide these references.

Employment references are a crucial tool for employers in assuring themselves that they are hiring the right people, and this is particularly important given the new Senior Managers and Certification Regimes (SM&CR) being introduced to set out a new accountability framework for individuals working in banks, building societies, and credit unions [but which it may be assumed will be extended across the financial services industry as a whole when the SM&CR is extended in 2018 – see below].

This consultation’s proposals for regulatory references apply to candidates applying for:

  • Senior Management Functions (SMFs) under the Senior Managers Regime (such as a CEO, CFO, or an executive director);
  • Significant Harm Functions (SHFs) under the Certification regime (such as individuals performing the Significant Management Function, proprietary traders, and Material Risk Takers);
  • PRA senior insurance management functions (SIMF) under the Senior Insurance Managers Regime (SIMR);
  • FCA controlled functions;
  • Notified non-executive director (notified NED) roles within a Relevant Authorised Person (RAP) or Solvency II firm;
  • Non-executive director roles in credit unions; and
  • Key function holders (KFHs) and notified NED roles within an insurer.

The requirement to provide a reference in respect of candidates applying for a controlled function already exists for all firms. The extension of this requirement to candidates of a certification function, and for candidates applying for notified NED, credit union NED or KFH roles is intended to enhance the quality of fit and proper assessments undertaken by firms for these roles, before appointment.

Improving Disclosure between RAPS and Insurers
If individuals with poor conduct records move from firm to firm without relevant information about them being disclosed to future employers, the financial system is exposed to needless risk. Therefore this paper sets out proposals for RAPs and insurers (in particular) to seek to provide regulatory references to help prevent this from happening.

Requesting References – It is proposed that RAPs seeking to appoint someone to either a senior management of certification function, and insurers seeking to appoint someone to become a senior insurance management function (or another controlled function), must request a reference covering the candidate’s employment dating back six years. This stands regardless of whether past employers are authorised entities or not, and may also be applied where recruiting an individual from within their own firm if they have been employed by another firm within those six years.

Disclosing Relevant Information – Where a RAP or insurer is requested to provide a reference, they must include as a minimum:

  • Details of any certification function or controlled function (including being a SMF or SIMF) or of any notified NED, credit union NED or KFH role held, and summarise role’s responsibilities;
  • Details of any other roles performed whilst an employee of the firm in the last six years;
    Where the firm has concluded, at any point in the six years before the request for a reference, that the candidate was in breach of COCON or APER, or breaches of a PRA Conduct rule;
  • Where the firm has concluded, at any point in the last six years prior to the request, that the candidate was not fit and proper to perform a function, and the facts leading to that conclusion; and
  • Details of the basis for, and outcome, of any disciplinary actions as a result of the two previous points.

Updating References – RAPs and insurers need to revise a regulatory reference they have given in the past six years where they become aware of matters “that would cause them to draft that reference differently if they were drafting it now”. This does not, however, apply to references provided before 7th March 2016.

Mandatory Template – Included in Appendix 4 of the paper is a proposed standard template for regulatory references in order to improve the consistency of disclosure.

Regulatory Reference Proposals for All Firms
As per a FEMR report, “firms should provide as complete a picture of an individual’s conduct record as possible to new employers, seeking wherever feasible to conclude investigative procedures before employees depart, and avoid giving any legal undertakings to supress or omit relevant information in order to secure a negotiated release”.

The Current requirement for firms to disclose all relevant information in references still stands. All references should be clear, accurate, and fair, and firms should exercise judgement on what should be included (including outside mandated information).

Moreover, all firms are required to retain records of ex-employees’ conduct and fit and proper information for a period of six years following their leaving a firm, and the regulators propose a specific new requirement on firms to establish and maintain adequate policies and procedures to comply with regulatory reference requirements.

The FCA and the PRA will consider in due course, alongside any wider reform of the Approved Persons Regime, whether the specific proposals for RAPs and insurers should be extended to all authorised firms

What next?
The FCA and the PRA will consider feedback and publish its rules in a Policy Statement in early 2016, ahead of the start of the new accountability regime on 7th March 2016.

Whistleblowing in Deposit-Takers, PRA-Designated Investment Firms and Insurers

Individuals working for financial institutions may be reluctant to speak out about bad practice for fear of suffering personally as a consequence, and mechanisms within firms to encourage people to voice concerns – by, for example, offering confidentiality to those speaking up – can provide comfort to whistleblowers. With this in mind, the FCA and PRA have published policy statements (PRA PS24/15 and FCA PS15/24) which set out new rules designed to encourage a culture in which individuals raise concerns and challenge instances of poor practice and behaviour, as well as to build on and formalise examples of good practice already found in the financial services industry.

The Rules
The new whistleblowing proposals have been designed to work in conjunction with the Senior Managers and Senior Insurance Managers Regimes, and are applicable to UK deposit-takers with assets of £250m or greater (including banks, building societies, and credit unions), PRA designated investment firms, and insurance and reinsurance firms within the scope of Solvency II.

Under the new rules relevant firms will be required to:

Put in place internal whistleblowing arrangements capable of handling all types of disclosure from all types of person;

  • Inform UK-based employees of the FCA and PRA whistleblowing services;
  • Necessitate its appointed representatives and tied agents to tell their UK-based employees about the FCA whistleblowing service;
  • Inform staff of the legal protections provided under the Public Interest Disclosure Act;
  • Inform the FCA if it loses an employment tribunal case with a whistleblower;
  • Present a report on whistleblowing to its board on at least an annual basis (a duty of the ‘whistleblowers’ champion’);
  • Prepare written procedures (e.g. staff handbooks);
  • Maintain appropriate records; and
  • Take all reasonable steps to ensure that no person under the firm’s control engages in victimisation of whistleblowers, and to take appropriate measures against those accountable for any such victimisation.

The system and controls that relevant firms will need to put in place will be expected to support whistleblowing procedures required by the rules, and the procedures themselves will be subject to inspection by audit and compliance functions. Internal procedures should ensure the firm protects whistleblower confidentiality if requested, and assesses and escalates concerns to the FCA/PRA where it is warranted.

Firms are expected to consider whether training can help to enhance the effectiveness of their whistleblowing arrangements. This could include:

  • For all staff, training in relation to the need to report instances of wrongdoing, the ways to go about doing so, examples of events that might prompt a report, and action that might be taken. They also ought to be informed of what would constitute a protected disclosure and how one should disclose this to the FCA and PRA.
  • For managers, bespoke training on how to recognise whistleblowing, how to protect whistleblowers, and how to provide whistleblowers with feedback.
  • For the whistleblowers’ champion, possibly tailored training to assist them in the performance of their role;
  • For staff manning a firm’s whistleblowing service, training may include how to ensure confidentiality, assess and grade the significance of information provided by a whistleblower, and how to identify trends.

Whistleblowers’ Champion
Firms subject to the Senior Managers regime and Senior Insurance Managers Regime must allocate, to a Senior Manager, a ‘prescribed responsibility’ relating to the oversight of whistleblowing policies. This person will be referred to as the firm’s ‘whistleblower’s champion’.

The PRA expects that the whistleblowers’ champion presents a report to the board annually in relation to the effectiveness of the whistleblowing systems and controls, and should be responsible for ensuring and overseeing the integrity, independence, and effectiveness of whistleblowing policies and procedures. In response to some concerns voiced by respondents to a joint consultation in February 2015, PRA PS24/15 stresses that the role of the whistleblowers’ champion is concerned with the oversight of such whistleblowing policies and procedures, rather than day-to-day operations of the firm.

The responsibility is placed on a firm to ensure that the whistleblowers’ champion has a level of authority within the firm and access to resources (including access to independent legal advice).

Next Steps
Relevant firms will have until 7th September 2016 to comply with these requirements, with the obligation to assign responsibilities to a whistleblower’s champion taking effect on the same date as the SM&CR and SIMR (7th March 2016). Between 7th March and 7th September 2016, the whistleblowers’ champion will be responsible for overseeing the steps the firm takes to prepare for the new regime.

Bank of England and Financial Services Bill – Extension and Reforms of the Senior Managers and Certification Regime (SM&CR)

The Bank of England and Financial Services Bill was introduced in the House of Lords which, inter alia, introduces amendments to the Senior Managers and Certification Regimes (SM&CR). Most notably it extends its scope to capture all authorised financial services firms – as per a recommendation made by the Fair and Effective Market Review (FEMR) earlier this year – as well as replacing the “reverse burden of proof” with a “duty of responsibility”.

Extending the SM&CR
The UK Government is proposing to broaden the scope of the SM&CR to capture all sectors of the financial services industry, serving as a replacement for the current Approved Persons Regime (APR). The expansion will enhance personal responsibility for senior managers as well as providing a more effective and proportionate means to raise standards of conduct of key staff more broadly, supported by robust enforcement powers for the regulators.

The application of the regime to the whole of the financial services industry also brings in a stronger, comprehensive regime across banking and other financial services. It enables the effective and efficient regulation of groups with a variety of financial services firms within them, supports a level playing field for competition, and get rid of opportunities for regulatory arbitrage (by, for instance, ensuring that the same high standards apply both in the banking and the so-called ‘shadow banking’ sectors).

Reforms to the SM&CR
The Bill announces a number of modifications to the SM&CR, including:

The introduction of a statutory duty of responsibility – superseding the “reverse burden of proof”, which would have applied to banking sector firms when they become subject to the SM&CR in March 2016.The same rigorous underlying obligation will remain on the individual to ensure that they take appropriate steps to prevent regulatory breaches in the areas of the firm for which they are responsible, although the burden will be shifted onto the regulators to evidence that a senior manager has failed to do this.

The application of Rules of Conduct to non-executive directors – the Bill sets out that the regulators will be able to make Rules of Conduct applying to non-executive directors (NEDs), providing a greater range of options to ensure the right outcome for individuals carrying out these important roles in firms.

The removal of the obligation to report breaches of Rules of Conduct to regulators – the provision in FSMA requiring banking sector firms to report all identified or suspected breaches of Rules of Conduct by any employee has been removed by the Bill.

Allowing variation of time limits on senior manager approvals – senior managers approvals can be made subject to conditions or time limits. The conditions (but not the time limits) can subsequently be changed on application by the firm or on the regulators’ own initiative. The Bill alters this by allowing time limits on senior manager approvals to be varied in the same way as conditions.

Allowing separate statements of responsibility to be sent to the PRA and FCA – this clause enables both regulators to receive updates to statements of responsibility for senior managers.

Timing and Implementation
The SM&CR will come into force for banks, building societies, credit unions and PRA-regulated investment firms on 7th March 2016. As the extension of the regime brings approximately 60,000 firms (in a wide range of sectors) into its scope, the government intends that implementation of the newly extended regime should come into operation during 2018.


  • Updated AIFMD Q&As
  • AIFMD Passport and National Private Placement Regimes
  • Responses to Consultation on Remuneration Guidelines
Updated AIFMD Q&As

ESMA is required to play an active role in building a common supervisory culture by promoting common supervisory approaches and practices. In this regard, the Authority develops Q&As as and when appropriate to elaborate on the provisions of certain EU legislation or ESMA guidelines.

On 1st October the most recent Q&A document for the Alternative Investment Fund Managers Directive (AIFMD) was published in which ESMA addressed uncertainty surrounding depositaries under the Directive. It has now been confirmed that when assets of an AIF held custody by the depositary of the AIF are provided by that depositary to the Central Securities Depositary (CSD) or third county CSD in order to be held in custody, the CSD or third country CSD must act in compliance with the provisions on delegations under 21(11) of the AIFMD. Under this article a depositary may delegate to third parties if, for instance, the tasks are not delegated with the intention of avoiding the requirements of the AIFMD, or the depositary is able to demonstrate that there is an objective reason for the delegation.

ESMA’s answers are intended to help AIFMs by providing clarity as to the content of the AIFMD rules, rather than creating an extra layer of requirements.

AIFMD Passport and National Private Placement Regimes

Steven Maijoor, Chair of the European Securities and Markets Authority (ESMA) addressed the Economic and Monetary Affair Committee at the European Parliament to talk about the application of the AIFMD passport to non-EU AIFMs and AIFs.

Previous Assessment
Mr Maijoor recapped on ESMA’s earlier conclusion that the only way to undertake a “proper assessment of the various criteria set out in the AIFMD” was to assess non-EU countries in isolation as opposed to as one single block.

It was considered especially important to make a distinction between the contrasting situations of non-EU states in terms of factors such as demand for the passport, access to the market of non-EU states or EU funds and managers, and their respective regulatory frameworks in comparison with the AIFMD.

ESMA devised and applied a comprehensive assessment methodology to six non-EU states: Jersey, Guernsey, Hong Kong, Switzerland, Singapore, and the US. Although its advice issued towards the end of July was positive with regard to Guernsey, Jersey, and Switzerland (the latter, ESMA considered, would remove any remaining obstacles with the enactment of pending legislation), concerns in relation to competition, regulatory issues, and lack of sufficient evidence to undertake a proper assessment of relevant criteria meant that ESMA failed to arrive at a definitive view for the remaining three jurisdictions.

Next Steps
Mr Maijoor identified in his speech a handful of key areas on which further work by ESMA is required in the short term. Firstly this will include the continued assessment of Hong Kong, Singapore, and the US, in order to reach a definitive conclusion regarding whether or not to extend the AIFMD passport to these non-EU jurisdictions. Second, the evaluation of an additional cohort of non-EU states will comprise Australia, Canada, Japan, the Cayman Islands, the Isle of Man, and Bermuda, and this sample was selected using the same criteria as previously applied. Third, there will be a concerted focus by ESMA on establishing the extensive framework required if the passport is extended to one or more non-EU states – this would entail making preparations for the significant role for ESMA in the functioning of the passporting system and the strengthened supervisory cooperation that will be imperative to its success.

Responses to Consultation on Remuneration Guidelines

ESMA has published responses to its consultation on guidelines on sound remuneration policies under UCITS V and the AIFMD.

The paper, published 23rd July 2015, represents the first step in the development of the guidelines on remuneration policies required by the UCITS V Directive, and sets out EMSA’s formal proposals for these guidelines. It also proposes a targeted revision of the Guidelines on sound remuneration policies under the AIFMD, which were published on 3rd July 2013.

The Responses
A number of respondents agreed with ESMA’s approach to the application of the proportionality principle, and encouraged the Authority to retain the possibility for firms to neutralise certain provisions of the remuneration principles, on a case-by-case basis, where proportionate for them to do so.

However, whilst a handful of respondents agreed that the remuneration requirements applicable to UCITS managers should generally be consistent with and similar to those proposed for managers of AIFs, they argue that differences between UCITS and AIFs must also be acknowledged and there must be proportionality in application for various sectors of the industry.

With regard to performance fees, it was noted by some respondents that ESMA’s definition does not align with that of the International Organisation of Securities Commission (IOSCO), and therefore suggest that this is amended to achieve uniformity.

A number of respondents agreed that ESMA should align deferral periods with recommended holding periods and investment risk time horizons. However, in order to ensure that this is done appropriately different UCITS products ought to be taken into consideration, including those that have maturity of less than three years. These respondents, therefore, disagree that deferral periods must either be applied in full (i.e. at least three years) or capable of being dis-applied in full on the basis of proportionality.

As regards timing, ESMA states that an absence of response by competent authorities within two months of the date of publication by ESMA means that competent authorities will be regarded as non-compliant. Some respondents highlighted that it is unclear whether “publication” means the first publication in English, or upon publication of the translations, and they encourage ESMA to clarify that it is the latter.

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