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Senior managers gripped by the regulators’ claws

On 30 July 2014, the FCA and PRA published a joint consultation paper on the new regulatory framework for individuals, along with one on new remuneration rules.

New regulatory framework for individuals

By pointing the finger pre-emptively at a select group of individuals (the “Senior Managers”), the regulators hope that the senior managers will behave in line with their allocated responsibilities. A draconian presumption of responsibility comes with the package, which is not negotiable. Managers who could not prove that they took reasonable steps in order to prevent or stop a contravention would be held accountable. Potential criminal liability under a new offence relating to a reckless decision causing a financial institution to fail comes as a bonus, but it is expected to be rarely obtained in practice.

The Senior Managers Regime will replace the Significant Influence Function currently in place, which covered a broader range of individuals. Nonetheless, the new regime would include a “Responsibilities Map” indicating how the responsibilities are allocated between the senior managers, leaving no gap in accountability.

A new Certification Regime will be introduced, aimed at employees performing a role posing a risk of significant harm to the firm or its customers. While the FCA intends to specify an exhaustive list of “significant harm functions”, the PRA’s list will be considerably shorter.

The existing Statements of Principles and Code of Practice for Approved Persons will be replaced by Conduct Rules with a far wider application. Only the staff carrying out purely ancillary functions would be excluded.

New remuneration rules

The joint paper contains important proposals on deferral of remuneration, clawback and buy-outs. Four different alternatives are envisioned in order to address the issue of buy-outs, which have the potential to effectively neutralise the effect of claw back. When high-profile employees move from one institution to another, it is common for the new employer to buy-out the unvested awards which would be normally lost. At the same time, the employee is insulated from a potential claw back related to the previous position held. The regulators intend to develop a truly workable approach to this issue and welcome comments on the four alternatives:

  • Banning buy-outs
  • Require previous employer to maintain unvested awards, removing the business rationale for buy-outs
  • Applying malus to bought-out awards
  • Relying solely on new rules on clawback

Comments on both consultation papers must be submitted by 31 October 2014

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