Any private equity firm with a regulated presence in the UK will be familiar with the Financial Conduct Authority’s (FCA) “Approved Persons” rules. These rules are supposed to ensure that regulated firms only employ people in senior roles who have the necessary attributes for their job, and those senior personnel must be approved by the FCA and are listed on its public register. But, in December this year, that system is radically changing. The Senior Managers and Certification Regime will soon apply to most asset managers – and many firms are now trying to understand how big that change will be.
It is quite clear what lies behind the change: the FCA wants a relatively small number of senior individuals to be personally accountable for the firm’s regulated activity. In aggregate, their responsibilities will cover all aspects of the firm’s regulated business and the FCA will know who to hold to account if there is a failure. The FCA will be able to take action against a named individual if a regulatory breach occurs, either on the grounds of poor personal conduct (such as lack of integrity) or on the grounds that the relevant named individual did not take reasonable steps to prevent the breach from occurring. The regulator hopes this will lead to a culture change, with a greater focus on regulatory compliance led by senior business leaders. Indeed, it has already brought a successful action against a senior manager in the banking sector, where the new regime is already in place – Jes Staley, Chief Executive of Barclays Bank, was sanctioned for his conduct in trying to discover the identity of a whistleblower.
Other senior members of staff, many of whom are currently Approved Persons, will be subject to a separate certification regime. The regulated firm (in place of the FCA) will need to approve such people – broadly, any “material risk takers” or individuals performing a controlled function – and certify their competence and conduct. The firm has to do this on recruitment and annually, and is expected to undertake background checks and regulatory referencing. The new regime is further bolstered by a five-point Code of Conduct, which will apply to almost all staff, and will need to be communicated across the firm.
It is clear why the FCA wants to focus on the nebulous, but vital, question of an organisation’s culture. It’s a topical subject in all discussions about corporate governance, and rightly so. It is quite clear that all of the policies and procedures in the world are not worth the paper they are printed on if senior management implicitly encourage staff on the ground to ignore them. It may be debatable whether the FCA’s plan to impose direct responsibility on a relatively small group of senior individuals will have an impact on a firm’s culture, but it might focus a few minds – and, indeed, some compliance heads might feel that it will help them to get buy-in from decision-makers.
But there is also a cost/benefit question about the reforms. The regime may be well-suited to banks and insurers, who have been living with it since March 2016 – but smaller owner-managed firms, and investment advisers that are subsidiaries of larger non-UK organisations, might well argue that it is an unnecessary upheaval. They may also be scratching their heads about how certain aspects of the rules apply to them. For example: which of the partners in the firm ought to be identified as “senior managers”? Should overall responsibility for compliance be allocated to senior managers or shared between them and compliance heads? Which deal professionals are within the certification regime, and who can safely be omitted? How much training do junior staff need to have on the Code of Conduct, and how often should it be repeated?
To some extent, of course, answers to these and similar questions are determined by the specificities of the firm in question. And, to be fair, the FCA has been trying to help firms, by taking a sensible approach to the way the rules are applied to smaller firms, grandfathering certain individuals who are currently Approved Persons, making clear that new posts need not be created, and issuing helpful guidance. For most firms, the upheaval should not be huge.
Nevertheless, all UK-regulated private fund managers and advisers will have some work to do this year. Only time will tell whether that work delivers a commensurate benefit.