Senior Managers and Certification Regime. Further food for thought June allenovery.com

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1 Senior Managers and Certification Regime Further food for thought June 2016

2 2 Senior Managers and Certification Regime Further food for thought My sincere thanks to you and your colleagues for a most enjoyable evening. From some of the discussion it seemed most parties were unsure as to whether their internal processes were sufficient or indeed over and above expectations (presenting the parallel concern of cost, management buy-in and sustainability of the assessment). I am very keen to hear more in the coming months. Allen & Overy LLP 2017

3 3 Senior Managers and Certification Regime Further food for thought POST-IMPLEMENTATION INGREDIENTS We recently hosted the latest in our series of Food for Thought dinners, during which we looked at issues that have arisen following the implementation of the Senior Managers and Certifications Regime. While reaching the implementation date on 7 March was a great achievement, we know from the queries we have received and the conversations at the dinner that there remains a lot of head-scratching over how the regime should be operated in practice. This paper summarises a number of the discussion points that have arisen so far. No doubt, there will be many more over the coming months. We plan to hold a follow-up dinner later in the year to talk about your challenges and successes throughout the first few months post-implementation, and to identify what issues continue to cause confusion. Great opportunity to frankly discuss with other firms the challenges we are all facing with the regime it is good to know we are not alone but also to think through solutions which would keep us in line with the market. DON T HOLD BACK In the meantime, please don t hold back with sending us your thoughts or queries we remain very happy to share our market and regulatory knowledge with you and by keeping the dialogue open, we can help to ensure that you and your peers stay informed and ahead of the market.

4 4 Senior Managers and Certification Regime Further food for thought OWNERSHIP AND RESOURCES Although implementation of the new regime sat with a large number of stakeholders, it seems that policing it remains firmly in the hands of HR and Compliance. This is unsurprising given that the majority of new processes are HR-driven, and that considerations of when to file a report will require Compliance input. However, it is important that the two functions remain joined up now more than ever given the significant overlap, but also that they are properly trained in the new expectations of them. Initial resources were directed primarily at the implementation of the Senior Manager aspects of the new regime. Similar resources, if not more, will be required to implement the Certification regime as the population is significantly larger. The package of reforms needed to regulate these individuals is complex and multi-dimensional EMPLOYEE VETTING/FITNESS AND PROPRIETY CHECKS A number of firms continue to express concern about the inability to carry out criminal record checks for unspent convictions for anyone other than a Senior Manager. Some firms are tackling this by requiring employees to give self-attestations that they are not aware of any matters which would give rise to concerns about their fitness and propriety, and some are building questions in their reference requests from previous employers. We are aware that this issue has been raised with the regulators but there are no proposals to change the current record-checking restrictions. Some firms also noted the difficulty of carrying out appropriate checks for Senior Managers who are located in other jurisdictions where local law does not enable you to undertake the same level of background checking or criminal record checks. Again, self-attestations will help mitigate some of the risk, but the employee could refuse to give such an attestation if local law prohibits the employer from asking for such information. In any case, any such attestation is only as reliable as the person who gives it. PITCHING THE PROCESS In terms of processes, a number of firms have implemented a new panel process to assess fitness and propriety/breaches of conduct prior to these issues being considered in a disciplinary context. Others are wrapping up such assessments into the annual appraisal process so that 360 feedback can be obtained, and, if necessary, the individual can challenge an assessment before it is finalised. It is recognised by all that consistency needs to be applied to fitness and propriety decisions to ensure fairness in application. FCA FEEDBACK ON SENIOR MANAGER DOCUMENTATION Some firms reported that there has been very little, if any, feedback on documents submitted to regulators in respect of Senior Managers. We understand that the FCA is working through Statements of Responsibility and Responsibilities Maps and intends to give feedback to firms individually for firms who have produced poor quality documents and collectively for all other firms. It is likely that it will be several months before such feedback is issued. Allen & Overy LLP 2017

5 5 CONDUCT BREACHES What amounts to a conduct breach will continue to be a vexing question until further guidance is received from the regulators on what they are really interested in investigating. For example, although the regulators have highlighted that they would expect to hear about findings of bullying, it is unlikely that they will think of bullying in a broad employment context and instead will only expect to hear about instances that have resulted in concerns about integrity being reported, eg where a manager s conduct has resulted in individuals feeling unable to speak up. EMPLOYMENT TRIBUNAL PERSPECTIVE We discussed how Employment Tribunals might assess the question of fitness and propriety. Would they look at whether, in reaching a decision to dismiss on the basis that the individual cannot be certified as fit and proper, the employer acted within the range of reasonable responses, or would some other test apply? Based on the cases we have run (including the most recent ones in relation to FX litigation) we believe the Tribunal will look at whether the employer has acted within the range of reasonable responses in determining that someone is no longer fit and proper. This is an issue which will be relevant in respect of both liability and remedy. Consistency of treatment will be important too Tribunals will be interested in how other employees have been treated in similar circumstances, so firms should be prepared in case information about other employees may need to be disclosed; they will need to be able to produce contemporaneous evidence in support of their decisions. This is why the establishment of an oversight committee would be sensible when making determinations on fitness and propriety, given the potentially serious impact on the individual s career. DISCIPLINARY CONSIDERATIONS It is equally important that when coming to a decision during a disciplinary process, a manager forms a view on whether an employee (even if they are being dismissed for a matter which does not amount to a conduct breach) remains fit and proper to perform their role. This will assist in circumstances where a firm is unsuccessful in defending an unfair dismissal claim and the employee seeks reinstatement being able to argue that reinstatement is not practicable in light of the fitness and propriety finding will help avoid both the practical and financial consequences of such a remedy. REFERENCES While we are still waiting for the regulators to confirm their position on references, some firms are already stepping up what they are asking of each other. We understand that the FCA has approached at least two employment-specialist QCs to give opinions on their proposals, which are due to be released this summer. This remains a hot topic and further clarity will be welcomed. Claimant lawyers are already considering the possibility that the new regime on references is likely to lead to more claims of negligent misstatement. The author of a reference owes a common law duty of care to both the recipient and the individual who is the subject matter of the reference, to provide a reference that is true, accurate and not misleading. As firms will need to place greater reliance on references for recruitment decisions, and as firms will be required to provide references for ex-employees, there is a need for guidelines which are supported by management information processes which can guarantee that the reference is accurate and not misleading. The tricky areas will be where employees depart part-way through investigations, or where misconduct is discovered subsequent to the provision of a reference.

6 6 Senior Managers and Certification Regime Further food for thought SENIOR MANAGER DEPARTURES As firms will know, when changes need to be made as a result of a Senior Manager leaving or changing roles, firms can request a 90-day grace period from the regulator to finalise their governance documents. However it appears that the regulator is not applying this grace period with consistency. One client was given 90 days whereas another was refused a grace period, with the result that the departing Senior Manager had to withdraw his resignation until such time as the firm was ready to appoint his successor Having a robust leavers process and longer notice periods may assist to alleviate this risk, but this scenario highlights the different approaches that can be taken by the regulator notwithstanding the similarity in circumstances and therefore the potential difficulty in establishing a consistent approach. SENIOR MANAGER INDEMNITIES/LEGAL FEES A number of firms have agreed to provide Senior Managers with indemnities to address their concerns about future liability. This is unsurprising in the current regulatory landscape, although firms have not been so forthcoming in terms of paying for Senior Managers to have independent legal advice on their obligations under the regime, preferring instead to train managers and address their queries internally for consistency purposes. DOCUMENT RETENTION It is advisable to retain documents for years after a Senior Manager has left and/or after a reportable incident. This is because the regulators have six years in which to investigate a matter from the date on which they find out about it, and not from the date on which it happened. Many firms have already changed their document retention programmes to address this GC OR NOT TO BE? The regulators continue to debate whether General Counsels should be Senior Managers. None of the firms we have spoken to have taken this approach to date given the concern about how a GC would balance their regulatory obligations with the fact that their advice to the firm will be protected by legal privilege. However, although GCs will be regulated by the Solicitors Regulatory Authority, it would seem that the regulators remain very keen to bring them into scope. THE GOOD NEWS It is not all a headache. A number of firms are very positive about the introduction of the regime, the renewed focus it has provided and the way in which the relevant teams are working together to ensure it is being operated effectively. Their view is that, once employees have received sufficient information to understand and feel comfortable about their obligations, they are not seeing too much change in terms of their day jobs. For them, it is business as usual, but with a clearer governance structure and better communication. Allen & Overy LLP 2017

7 7 CONTACTS Sarah Henchoz Partner Employment Mark Mansell Partner Employment Robbie Sinclair Senior Associate Employment Sheila Fahy PSL Counsel Employment Tel Tel Tel Tel It was an excellent format, very well run, and I found it really interesting (and surprisingly enjoyable) to discuss SMR issues with sector peers.

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