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Global Directors and Officers Beware - extra-territorial reach of the UK Senior Managers & Certification Regime1

Financial, Executive and Professional Risks (FINEX)

October 10, 2019

It should not come as a surprise to those working in the financial services industry in the United Kingdom that the Financial Conduct Authority (“FCA”) is focusing its enforcement attention on senior individuals.

As at the end of last year the FCA was investigating 58 individuals, a marked increase year on year. And nearly half of those investigations are focused on alleged failures in culture and governance under the Senior Managers & Certification Regime (“SM&CR”).2

The first phase of the SM&CR came into force in respect of certain parts of the industry in the UK in March 2016 and industry wide implementation will be completed in December this year, with the last tranche – including asset managers (of which more below) – falling within its remit with effect from 9 December 2019. The regime is designed to impose personal accountability upon those working in and, especially running, financial institutions. There is no territorial limit to the Senior Manager regime, so the regime may apply to senior individuals working outside the UK as well as those operating within the UK.

Since implementation of the SM&CR began across the industry, insurance brokers have been reviewing and making changes to clients’ Directors’ and Officers’ Liability (“D&O”) policies. Primarily this is to ensure the policy will cover all such individuals who fall within the scope of the SM&CR in the way the policyholder requires. The regime also brings into focus questions such as: when is cover under the D&O policy triggered (and is that soon enough to provide senior individuals with the comfort they require), and are the policy limits sufficient to address the potential costs and exposure associated with the heightened focus on individual accountability by the UK regulator, and other regulators globally.

Background to date

In June 2013 the Commission on Banking Standards published its final report “Changing Banking for Good” and recommended, amongst other things:3

  1. A new Senior Persons Regime (replacing the Approved Persons Regime) to ensure that the most important responsibilities are assigned to specific, senior individuals so they can be held fully accountable for their decisions and the standards of their organisations in these areas.
  2. Certification Regime: A new licensing regime underpinned by Banking Standards Rules to ensure those who can do serious harm are subject to the full range of enforcement powers.
  3. Conduct Rules: A new criminal offence for senior persons of reckless misconduct in the management of a bank, carrying a custodial sentence.

The new rules provide that “A firm must ensure at all times one or more of its Senior Management Function (“SMF”) managers have overall responsibility for each of the activities, business areas and management functions of the firm” (SYSC 4.7.8R). Both the FCA and the Prudential Regulatory Authority (“PRA”) have specified functions that fall within the regime. These roles include the members of the board and individuals who hold key roles, such as chairs of risk, audit and remuneration and those responsible for compliance and anti-money laundering. Individuals carrying out each of these functions must be pre-approved by the regulator(s), must comply with the Conduct Rules and are subject to:4

  1. A duty of responsibility – to take reasonable steps to prevent a regulatory breach.
  2. A duty to be open and cooperative with the regulator(s) and proactively disclose any information of which the regulator(s) would reasonably expect notice.

To ensure that responsibilities are clear and to create a level of personal accountability (and thereby facilitating the enforcement process), enhanced firms are required to supply a responsibilities map which sets out the allocation of responsibilities and how the firm is governed. This sits alongside each individual performing a SMF, having a statement of his or her responsibilities. As such, in theory, no key role (or responsibility) will fall between the gaps. This concept is bolstered by the obligation on a senior manager, before relinquishing his or her responsibilities, to prepare a handover document setting out how the role and responsibilities have been fulfilled and providing information and material that would be relevant to anyone taking over the role. In short, the regime forces firms and individuals to create documentation on which the enforcement teams may later rely.

It is also important to note that many senior individuals who do not fall within the Senior Managers’ regime will likely nonetheless fall within the Certification Regime. This requires firms themselves to assess the fitness and propriety of employees in roles which could pose a risk of significant harm to the firm or any of its customers.

In March 2017, a year into the regime having been implemented for Banks, the FCA noted that changes had been put in place to ensure that individual responsibility was at the heart of how firms conduct themselves and that these responsibilities are being taken “more seriously.”5 A similar approach has been adopted by regulators around globe: by way of example in Hong Kong the Manager in Charge Regime and in Australia the Banking Executive Accountability Regime, whilst regimes have also been proposed in Ireland and Singapore. In the meantime, as we have noted above the FCA is proactively working through its commitment to commence enforcement proceedings against individuals. In May 2018 the FCA and PRA jointly fined the CEO of a large retail Bank for failing to act with due skill care and diligence.

Implementation for asset managers – don’t forget extra territoriality.

Asset managers are preparing as we speak for the implementation of the regime in December 2019. Senior Managers (wherever they are based) need to be identified and their roles and responsibilities documented and agreed with the FCA.

In the course of these preparations asset managers should not forget that the mere fact that the SM&CR finds its origins in the activities of the UK Commission on Banking Standards does not mean that its reach and thus the threat of enforcement proceedings, is confined to the UK. Individuals who perform specified SMFs, whether based in the UK or overseas, will be caught by the regime and will be well advised therefore to ensure that they are involved in and understand the implementation of the regime. It is perhaps worth noting the example of a decision notice and fine issued in December 2018 in relation to the branch manager of an overseas bank: whilst this individual was based in the UK he was not, it seems, sufficiently au fait with the UK rules. The FCA said:

Although he was entitled to delegate the day-to-day operational management…, he remained responsible for ensuring that these systems and controls were properly established and maintained.6

It is not difficult to imagine that an overseas based senior manager based outside the UK might fall into the same trap.

Where the role of an individual falls short of being a senior manager, they may nonetheless undertake activities which could pose significant harm to the firm or its customers. As such they must now be identified as falling within the Certification Regime and must be subjected to internal assessment as to their fitness and propriety. The Certification Regime does have territorial limitation and is broadly applicable to UK based individuals. That said if an individual deals with UK based clients or is a material risk taker (under the UK remuneration code) the regime may well apply. As such firms need to take care in assessing the roles and responsibilities of overseas colleagues as they start the fitness and propriety process.

Directors’ and Officers’ Liability (“D&O”) Insurance

Having worked with banks and insurers as they have implemented and started to live with the SM&CR, we recommend speaking to your contact at Willis Towers Watson at an early stage to make sure that your D&O policy is amended as required to take account of the regime and the possibility of being subject to enforcement proceedings.

This may include:

  • Considering the scope of the definition of “Insured Persons”, and ensuring it covers the correct group individuals. The following questions form a guide:
    • Which individuals would you like to have the benefit of management liability indemnity from the insurance market?
    • Do you wish to protect those authorised to perform Designated Senior Management Functions?
    • Do you wish to protect (other) employees beyond Directors and Officers – and, if so only, if they have management or supervisory responsibility?
    • Do you wish to protect employees who are fulfilling Certificated Functions and if so all, or only certain categories, such as “material risk takers.”7
  • Possibly considering the option of ring-fencing some Side A cover (which provides cover for individuals directly in the event the company cannot or will not indemnify them). This will provide individuals with protection in the event the policy limits are exhausted by claims which the company can indemnify or securities claims against the company (if this cover has been purchased).
  • Re-visiting the scope of cover afforded by “Investigation Costs”, and ensuring the cover is sufficiently broad, and the threshold for triggering cover is not too stringent.
  • Considering so called “Pre-Investigation costs”.

In our experience, taking independent legal advice at a very early stage, and well before enforcement, can significantly improve the outcome for a senior individual facing the prospect of a regulatory investigation. As such, insurance cover for the legal cost of pre-investigation work is key. It is a feature of a D&O policy that cover for investigation costs (and pre-investigation costs) is triggered by an external source e.g. receipt of a formal notice from the regulator, and does not cover “business as usual” interactions with the regulator. In practice this may leave a senior individual feeling exposed long before the D&O policy is triggered.

To address these concerns, Willis Towers Watson has developed a policy which provides cover for a senior individual’s legal costs before cover under a traditional D&O policy is triggered. This is referred to as a LEAP policy (Legal Expenses Additional Protection) and can be purchased by a company on behalf of its senior individuals. This type of cover can be triggered by a senior individual’s subjective assessment that they require legal advice and will provide protection for senior individuals in connection with all dealings with regulators and investigatory authorities worldwide.


Global Head of FINEX Financial Institutions Claims Advocacy & TPL

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