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Annual Review 2017/2018

INDIVIDUAL ACCOUNTABILITY; THE CERTIFICATION REGIME WORKING GROUP

The challenge of developing a culture of accountability and responsibility rather than of blame, has been one of the BSB’s three work themes over the past year, as described earlier in this review. Creating such a culture is also central to the Senior Managers and Certification Regime (SMCR), which aims ‘to reduce harm to consumers and strengthen market integrity by making individuals more accountable for their conduct and competence’17

While the Senior Managers Regime seeks to ensure that the most senior managers within firms have clear responsibilities and are accountable to the regulators, the Certification Regime gives firms the responsibility of certifying that employees in other high-risk roles are fit and proper to perform those functions. Working with firms to help them implement the Certification Regime in an effective and positive way, has been an important area of the BSB’s work and will remain so in 2018.

The BSB Certification Regime Working Group

The Certification Regime not only places new responsibilities on firms; it also provides them with an opportunity to raise standards across the sector and promote good outcomes for customers, members, clients and wider society. In our Annual Review 2016/2017 18, we described the Certification Regime Working Group (Working Group) that the BSB had established to help firms realise that opportunity. In February 2017, and informed by the Working Group’s discussions and a public consultation, the BSB published its first Statement of Good Practice on assessing fitness and propriety (F&P) alongside more detailed supporting guidance. This good practice guidance pooled the experience of BSB member firms and provided a reference point for firms when considering their own practices.19

Participation in the Working Group allows member firms to share their experience of implementing the Certification Regime. This can including the regime’s interaction in practice with both existing internal processes (such as disciplinary and recruitment processes, professional development and appraisals) and external responsibilities (including regulatory references, regulatory interactions, and — for international groups — communication between jurisdictions). The Working Group also enables discussion of some of the issues encountered by firms when assessing the F&P of those individuals performing high risk roles20 and determining whether to certify them as fit and proper. Membership has grown from 13 firms at the time of the Working Group’s establishment to 24 in March 2018, and members have told us that they have found it valuable in helping them implement both the letter and the spirit of the Certification Regime as effectively as possible.

Developing approaches to dealing with certification risks and issues

Over the course of developing our first Statement of Good Practice on assessing the F&P of certified staff, many member firms and others told us that they would find it helpful to consider the decision-making process in more detail. Working Group members have said that, to date, the majority of F&P decisions have been straightforward. There will, however, always be a small number of cases which are not, and member firms also told us that they would find it helpful to have a common lexicon of what might constitute good practice for making decisions about whether to issue a certificate following an F&P assessment.

Responding to this, and to help firms in cases where they need to consider F&P more frequently than annually, we published further Supporting Guidance in February 2018, available here  This guidance relates to the 2017 Statement of Good Practice, and to the specific principles within this about establishing pass/fail criteria and evidencing the F&P assessment. It focuses on the decision-making process that firms undertake in assessing F&P, especially in case that are not straightforward.

This latest guidance develops the concepts of certification risks and certification issues. A certification risk is defined as a situation that, should it materialise, could call into question an individual’s F&P. A certification issue, on the other hand, is a situation that has materialised and is calling into question an individual’s F&P.

By highlighting risks as well as issues, firms are encouraged to consider whether there are any broader factors that may have an impact on an individual’s F&P. Should an issue call into question an individual’s F&P, firms should also consider the organisational context in which this arose, and whether this suggests broader risks or issues that the firm needs to address.

This guidance also encourages firms as far as possible to:

  • determine how best an individual can maintain their F&P between assessments;
  • identify, as part of the regular F&P assessment cycle, any risks that might call into question an individual’s F&P and seek to mitigate them; and
  • consider how to remediate issues that do call into question an individual’s F&P, however these arise.

This approach is important in encouraging firms and individuals to think about their F&P on a continuing basis (potentially contributing to promoting professionalism – see previous section of this Review). F&P assessment must be conducted at least annually and for many people the annual assessment may be sufficient. Certified individuals, however, need to remain conscious of their F&P on an ongoing basis, and firms may need to assess individuals more frequently if necessary.

Regulatory references

A further aspect of the regulatory regime is the requirement to provide regulatory references for employees going into certified roles. Regulatory references are connected with a number of practical issues around implementing the Certification Regime21 as it is the point at which a firm needs to pass on information about an individual’s F&P to another firm. Member firms have therefore said that they would like to explore some of the challenges this presents.

Firms perform two roles in respect of regulatory references. They provide regulatory references, passing on information about individuals to other firms (information that would be unlikely to be obtained elsewhere), and they receive regulatory references as part of the assessment of an individual’s F&P when that person joins a firm or is new to a role. Irrespective of whether a firm is a provider or receiver of regulator references in any given situation, however, it may face challenges relating to:

  • consistency – ensuring that references are consistent both in terms of the quality and types of information provided across the firm, and between firms, so that receiving firms can have confidence that the appropriate range of information has been considered for inclusion by the providing firm;
  • fairness – what is it fair to the individual to include or exclude? When, for example, a disciplinary process has not been completed, how much information should be included in a reference by the providing firm? Fairness is also relevant in the context of firms receiving regulatory references for use as part of a recruitment process as the information needs to be interpreted in a way that is fair to the individual, rather than used simply to screen out applicants; and
  • proportionality – acting proportionately when fulfilling the requirements of the regime, especially in terms of taking reasonable steps to identify and verify relevant information, and when considering issues raised by regulatory references and updates.

We are working with members of the Certification Regime Working Group to develop a set of principles for firms on providing and using regulatory references. We expect to consult on these principles over the course of 2018.

  1. The requirements around regulatory references also apply to those approved under the Senior Managers Regime.
The experiences of member firms, two years on

March 2018 marks the second year in which firms regulated by the FCA and PRA must attest that all their certified staff are fit and proper to perform their roles. Through its Working Group, the BSB has during this time been developing its own knowledge and understanding of the experiences of member firms in implementing the Certification Regime and maintaining their regulatory obligations.

The proposed extension of the regime to all firms authorised under the Financial Services and Markets Act22 will increase the size of the certified population significantly. This provides the financial services sector with the chance to take the initiative, individually and collectively, to raise standards. One means of facilitating and, where appropriate, encouraging consistency of approach, is the identification of good practice. We have therefore provided in Box D an overview of some of the issues that member firms have identified and been addressing in implementing the Certification Regime23, and hope that others will be able to draw helpful lessons from this work.

  1. CP17/25 Individual accountability – extending the Senior Managers and Certification Regime to all FCA firms: https://www.fca.org.uk/publications/consultation-papers/cp17-25-individual-accountability-extending-smcr
  2. The BSB’s response to the FCA and PRA consultations on extending the SMCR also sets out some key reflections: https://www.bankingstandardsboard.org.uk/bsb-responds-to-fca-consultation-individual-accountability-extending-the-senior-managers-certification-regime-to-all-fca-firms/
Box D: Experience of implementing the Certification Regime; general observations of BSB member firms

Firms find F&P decisions easier to make where there is clear evidence available; credit reference checks, for example, are routinely used to provide evidence of financial soundness. While not of itself surprising, this can potentially raise questions of fairness, e.g. if an individual’s F&P is more likely to be called into question on a less serious issue for which the evidence is relatively straightforward, than on a more serious issue for which the evidence is less clear-cut or harder to obtain.

The regulatory regime has, in many firms? been aligned with existing processes to help integrate F&P assessments into business as usual. The disciplinary process is for many firms central to implementing the Certification Regime, because it is a well-understood process that provides clear decisions and avenues for appeal. There are, however, issues that can arise outside the disciplinary process that may not be captured and relying on disciplinary processes can cause considerable uncertainty if they are left incomplete. Firms are also increasingly considering how to ensure that the appeals process functions appropriately, especially when there are both disciplinary and F&P decisions that could be appealed.

Firms use a range of approaches to manage and remediate F&P issues, ranging in gravity from assessing F&P more frequently than annually, to dismissal. Firms are using? a variety of options in these circumstances, including imposing additional supervision, putting in place a further review of an individual’s F&P during the year, or reducing the scope of an individual’s role.

A particularly challenging situation for many firms is when an individual is not considered fit and proper, but the action taken in response would normally fall short of dismissal. Two (in theory, straightforward) options in this context would be to demote the individual or to place them in another, different, role. These may not, however, be realistic for smaller firms; and even in larger firms, reallocating someone in this way – given the likely severity of the issue – may not be in line with the firm’s internal redeployment policies. Firms are tending therefore to be more inclined either to try to remediate an issue while the individual is retained within the same role (albeit potentially reduced in scope or with additional controls built around it), or to resort to dismissal.

The particular challenges faced by international firms

The BSB’s discussions about the international challenges of implementing the Certification Regime have allowed member firms to work collectively on issues, including those that may not be fully resolvable in the short term. These discussions have also informed our engagement with the Financial Stability Board in its work on governance, as well as our wider engagement internationally.

One of the principles in our 2017 Statement of Good Practice concerned assessing F&P as part of a global group. The particular challenges faced by international firms relate primarily to the complexity of sharing information required for regulatory purposes across different jurisdictions, but include also other practical implications of applying the regulatory regime to employees outside the UK.

Again, the work of the Certification Regime Working Group has generated a number of observations and insights that other financial services firms may find helpful; these are contained in Box E:

Box E Experience of implementing the Certification Regime; additional observations of international BSB member firms

Due diligence and availability of information vary considerably across jurisdictions, depending on what may be legally obtained or used in any given jurisdiction. The five most common areas of variation relate to criminal records checks, credit reference checks, self-declarations, the legal basis for third party suppliers to collect information, and the culture of disclosure.

Some firms that have identified individuals outside the UK as being in scope of the SMCR, have also found in this an opportunity to review existing reporting structures. (This mirrors developments following the introduction of the Senior Managers Regime, where the responsibilities mapping requirement encouraged firms to think about whether, for example, individuals with a large number of direct reports could reasonably provide the level of oversight required by the regime.)

Some member firms have found that linking F&P requirements to the standards of conduct and competence that the firm would expect of any employee, has helped communicate understanding of the requirements of the SMCR in general but particularly to those affected while in other jurisdictions.

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