Guidance on the duty of responsibility in the context of the UK Senior Managers Regime

In May 2017, the FCA published a Policy Statement (PS17/9) setting out final amendments to the Decision Procedure and Penalties Manual (DEPP) to give guidance on how it will enforce the “duty of responsibility”. The final guidance, which is inserted into DEPP 6.2, has applied with effect from 03 May 2017.

The Policy Statement follows the FCA’s consultation on how it would enforce the duty of responsibility in CP16/26, which it published in September 2016. The PRA also published an equivalent Consultation Paper (CP34/16) and Policy Statement (PS12/17), which are consistent and aligned with the FCA’s rules and guidance. Further information is available here.

Background

In October 2015, the Government announced that a duty of responsibility would replace the previous presumption of responsibility (not yet in force), which had proved to be controversial. The duty of responsibility came into force on 10 May 2016. It applies to persons performing senior management functions (our comprehensive Senior Managers Regime microsite is available here) at UK banks, building societies, credit unions, PRA - designated investment firms, and incoming branches of overseas firms (Senior Managers).The FCA is currently consulting on the extension of the Senior Managers Regime to all FCA solo-regulated firms from 2018.

The duty of responsibility

The duty of responsibility is set out in section s.66A(5)(a) and (b) of the Financial Services and Markets Act 2000 (FSMA) which enables the FCA and the PRA to take enforcement action against Senior Managers where:

  • there has been (or continued to be) a contravention of a relevant requirement by the Senior Manager’s firm
  • at the time of the contravention, the Senior Manager was responsible for the management of any of the firm’s activities in relation to which the contravention occurred, and
  • the Senior Manager did not take such steps as a person in his or her position could reasonably be expected to take to avoid the contravention occurring (or continuing).

The duty of responsibility will apply across the financial services industry when the Senior Managers Regime is extended to firms beyond the banking sector.

Scope of the guidance

The FCA's final guidance sets out:

  • the circumstances in which it will apply the duty of responsibility
  • a non-exhaustive list of considerations that may be relevant when determining whether a Senior Manager was responsible for the management of any of a firm’s activities in relation to which a contravention of a relevant requirement by the firm occurred, and
  • a non-exhaustive list of considerations the FCA will keep in mind when determining whether or not a Senior Manager took such steps as a person in his or her position could reasonably be expected to take to avoid the firm contravention occurring (or continuing).

Final guidance

When determining under section 66A(5)(d) of the FSMA whether or not a Senior Manager has taken such steps as a person in his or her position could reasonably be expected to take to avoid the contravention of a relevant requirement by the firm occurring (or continuing), the FCA would expect to have regard to the following (non-exhaustive) considerations:

  • the role and responsibilities of the Senior Manager (for example, such steps as a Senior Manager in a non-executive role could reasonably be expected to take may differ, depending on the circumstances, from those reasonably expected of a Senior Manager in an executive role)
  • whether the Senior Manager exercised reasonable care when considering the information available to him or her
  • whether the Senior Manager reached a reasonable conclusion on which to act
  • the nature, scale and complexity of the firm’s business
  • the knowledge the Senior Manager had, or should have had, of regulatory concerns, if any, relating to his or her role and responsibilities
  • whether the Senior Manager (where he or she was aware of, or should have been aware of, actual or suspected issues that involved possible breaches by his or her firm of relevant requirements relating to his or her role and responsibilities) took reasonable steps to ensure that the issues were dealt with in a timely and appropriate manner
  • whether the Senior Manager acted in accordance with his or her statutory, common law and other legal obligations, including, but not limited to, those set out in the Companies Act 2006, the FCA Handbook, and, if the firm was listed on the London Stock Exchange, the UK Corporate Governance Code and related guidance
  • whether the Senior Manager took reasonable steps to ensure that any delegation of his or her responsibilities, where this was itself reasonable, was to an appropriate person with the necessary capacity, competence, knowledge, seniority and skill, and whether the Senior Manager took reasonable steps to oversee the discharge of the delegated responsibility effectively
  • whether the Senior Manager took reasonable steps to ensure that the reporting lines, whether in the UK or overseas, in relation to the firm’s activities for which he or she was responsible, were clear to staff and operated effectively
  • whether the Senior Manager took reasonable steps to satisfy himself or herself, on reasonable grounds, that, for the activities for which he or she was responsible, the firm had appropriate policies and procedures for reviewing the competence, knowledge, skills and performance of each individual member of staff to assess his or her suitability to fulfil his or her duties
  • whether the Senior Manager took reasonable steps to assess, on taking up each of his or her responsibilities, and monitor, where reasonable, the governance, operational and risk management arrangements in place for the firm’s activities for which he or she was responsible (including, where appropriate, corroborating, challenging and considering the wider implications of the information available to he or she), and whether he or she took reasonable steps to deal with any actual or suspected issues identified as a result in a timely and appropriate manner
  • whether the Senior Manager took reasonable steps to ensure an orderly transition when another Senior Manager under his or her oversight or responsibility was replaced in the performance of that function by someone else
  • whether the Senior Manager took reasonable steps to ensure an orderly transition when he or she was replaced in the performance of his or her function by someone else
  • whether the Senior Manager failed to take reasonable steps to understand and inform himself or herself about the firm’s activities for which he or she was responsible, including, but not limited to, whether he or she
    • failed to ensure adequate reporting or seek an adequate explanation of issues within a business area, whether from people within that business area, or elsewhere within or outside the firm, if he or she was not an expert in that area
    • failed to maintain an appropriate level of understanding about an issue or a responsibility that he or she delegated to an individual or individuals
    • failed to obtain independent, expert opinion where appropriate from within or outside the firm as appropriate
    • permitted the expansion or restructuring of the business without reasonably assessing the potential risks, or
    • inadequately monitored highly profitable transactions, business practices, unusual transactions, or individuals who contributed significantly to the profitability of a business area or who had significant influence over the operation of a business area
  • whether the Senior Manager took reasonable steps to ensure that, where he or she was involved in a collective decision affecting the firm’s activities for which he or she was responsible, and it was reasonable for the decision to be taken collectively, he or she informed himself or herself of the relevant matters before taking part in the decision, and exercised reasonable care, skill and diligence in contributing to it
  • whether the Senior Manager took reasonable steps to follow the firm’s procedures, where this was itself appropriate
  • how long the Senior Manager had been in role with his or her responsibilities and whether there was an orderly transition and handover when he or she took up the role and responsibilities
  • whether the Senior Manager took reasonable steps to implement (either personally or through a compliance department or other departments) adequate and appropriate systems and controls to comply with the relevant requirements and standards of the regulatory system for the activities of the firm.

The FCA’s guidance as explained in CP16/26 provides further useful clarification:

  • Findings of the Regulatory Decisions Committee, a court or a tribunal to which a Senior Manager was not privy nor party to are not binding on the Senior Manager
  • There is no threshold for the application of the duty of responsibility. The FCA will take its decisions on a case by case basis
  • Standards will not be applied retrospectively or with the benefit of hindsight
  • Senior Managers may be held responsible for the management of activities that fall outside of his or her prescribed responsibilities. The FCA will not take statements of responsibility at face value and will look behind them to check that they accurately represent Senior Managers’ management responsibilities fully
  • Allowance will be made for the fact that the steps that a Senior Manager in a non-executive role could be expected to take may differ from the steps that a Senior Manager in an executive role may be expected to take
  • Senior Managers are accountable for his or her individual contributions to collective decisions and his or her implementation insofar as they concern activities for which he or she is responsible

As set out in CP16/26, the FCA does not state in its guidance that it will take into account whether a Senior Manager has taken reasonable steps to manage competing priorities because it does not believe that it would be helpful to do so, as it does not clarify the steps reasonably expected of Senior Managers and wants to avoid giving the impression that Senior Managers will not be guilty of misconduct under the duty of responsibility merely by demonstrating that he or she was faced with competing priorities, or that it is acceptable for a busy Senior Manager to deprioritise concerns about conduct.

Conclusion

The final guidance indicates that the FCA intends to afford itself latitude when considering whether the duty of responsibility has been breached in any given case. It also indicates that the FCA intends both to look behind statements of responsibility and a firm’s management responsibilities map when determining the extent of Senior Managers’ responsibilities. The guidance therefore highlights the importance for both firms and Senior Managers in ensuring that Senior Managers’ responsibilities are accurately recorded before enforcement investigation commences and that orderly handovers of responsibilities can be evidenced when scrutinised.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.