Every Senior Manager has a Duty of Responsibility under the Financial Services and Markets Act 2000, which means that if a firm breaches one of the FCA’s (Financial Conduct Authority) many requirements, the Senior Manager responsible for that area could very well be held accountable if they failed to take reasonable steps to prevent or stop the breach.
The Duty of Responsibility is designed to enshrine the move to individual accountability. But how?
The Duty of Responsibility permits the FCA to take enforcement action against a Senior Manager Function (SMF) where it can demonstrate that:
- misconduct occurred within the Senior Manager’s firm
- at the time of the misconduct (or during any part of it), the Senior Manager was responsible for the management of any of the firm’s activities in relation to which the misconduct occurred
- the Senior Manager did not take reasonable steps to avoid the misconduct occurring or continuing.
Where the FCA wishes to take enforcement action against a SMF, the burden of proof in respect of each of these elements rests with the FCA. Regulatory action can range from suspensions to monetary penalties depending on the severity of the breach. In certain circumstances the FCA will take action against both the relevant SMF/s and the firm itself.
For detailed review; the FCA explained in its July 2018 policy statement Final Guidance: the Duty of Responsibility for insurers and FCA solo-regulated firms, the guidance at 6.2.9-E of DEPP (the Decision Procedure and Penalties Manual) provides a lengthy and expressly non-exhaustive list of considerations that the FCA will take into account in assessing whether a SMF’s actions were reasonable in all the circumstances.
Demonstrating reasonable steps as a Senior Manager
Despite the apparent breadth of reasonable steps and the multitude of decisions that could be taken, a Senior Manager’s initial consideration should be proportionality. A Senior Manager in a relatively small financial services firm will not be able to, and arguably will not be expected to, take certain actions by virtue of the resources available to them. A Senior Manager should therefore take stock of the resources, capacity and capabilities at hand as soon as possible to assist them in understanding the confines within which they are working.
Following this assessment a Senior Manager can then begin to take steps, where needed, that are not only reasonable but appropriate and proportional to the area of the business for which they hold responsibility. A Senior Manager may wish to consider, depending on specific circumstances, taking some of the following measures:
- For incoming Senior Managers, reading the outgoing Senior Manager’s handover note can be a quick way of getting an early impression of the challenges and potential issues pertinent to the business area.
- Effectively challenging and scrutinising key decisions made by the Senior Manager’s team will help to show that the business area is not run unthinkingly. Offering a considered opinion on matters is an important step in showing that the decision-making process has been thoroughly thought through.
- The plethora of Management Information (MI) can be unhelpful, but understanding which parts are relevant to the business area and prioritising them can be an effective way of capturing potential issues before they crystallise into something far worse. SMFs should be proactively reviewing relevant MI to help inform decision-making.
- SMCR and the concept of individual accountability does not negate or diminish the need to delegate but equally, it does not absolve any SMF when the delegated task creates issues or control weaknesses. Where delegation is used, the SMF should maintain oversight of the task(s). This can include periodically set meetings, daily updates, logs or reports. Any delegation should be done in a clear manner so that there is no ambiguity as to which members of the team hold certain actions, tasks and deliverables and where the reporting lines exist.
- Visibility of other business areas, which the SMF may not necessarily be responsible for, can be a useful way of understanding pertinent risks to the business as a whole. Working in a collaborative manner with other departments and SMFs can help identify issues (before they escalate) and potential solutions. A second pair of eyes can offer an objective view on matters and assist in deciding what further steps should be taken.
- Independent assessment and appraisal can “benchmark” the status of the firm from a governance, risk and compliance perspective, don’t rely on retained services to do this automatically: often a fresh view can pay dividends.
- A SMF should be prepared to escalate issues to other business areas, the relevant governance committees and, if the severity of the issue warrants, to board level.
- All SMFs should be proactive in managing and escalating any resource and capability issues within their business area. If the lack of employees or gaps in knowledge is hindering their ability to effectively manage and mitigate risk, this will often prevent the SMF from taking reasonable steps.
This guide is only an aide memoire and intended for information only for anyone appraising the documentation needed in an audit/compliance check. It is not to be considered as direct advice or intended to replace specific 1 to 1 engagement with your compliance and risk professional.
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