“The U.K.’s financial services regulator has scrapped a move that would have meant that as well as seeing the watchdog push the responsibility for certifying the suitability of key people other than “senior managers” onto the firms themselves, would also have seen these individuals being kept off the regulator’s Financial Services Register—or even removed in some cases.”
The Financial Conduct Authority (FCA) had thought that the move would save itself money, give firms more leeway about how they identified key staff for certification, and be a winning formula, but an FCA spokesperson has admitted that “the industry thinks otherwise.”
The FCA and the Prudential Regulation Authority (PRA), the U.K.’s dual financial regulators, currently maintain a public Financial Services Register of the firms they regulate and the individuals they have approved (and the roles and duties they have been approved for) as part of the Senior Managers and Certification Regime (SMCR).
The SMCR came into force for banks on 7 March 2016 and was designed to make individuals at regulated firms more accountable for their conduct and compliance. The senior managers’ regime requires firms to assign responsibility for certain areas of the business to named senior individuals who are approved by the regulator. These individuals, who represent “core” senior management functions, appear on the Financial Services Register, and include the likes of CEOs, executives, and heads of compliance.
Other individuals that are deemed to have a “significant impact” on the firm’s operations and the integrity of the market but do not qualify as “senior managers,” however, are part of the regulators’ certification scheme. These are employees who are identified and nominated by the firms themselves, but whose details are not currently included on the Financial Services Register. Their suitability for the role needs to be assessed every year—but not by the FCA.
Last July, the FCA published a consultation paper called Individual Accountability: Extending the Senior Managers & Certification Regime to all FCA firms, which proposed to extend the SMCR to all regulated firms (it currently applies to banks, building societies, credit unions, and PRA-designated investment firms—insurers and brokers will be included later this year).
“The FCA must clarify precisely what values constitute an ‘important individual’ and it how it plans on robustly demarcating who is worthy of inclusion in the Register. There is no room for confusion regarding which individuals should be assessed internally and which by the FCA in lieu of them being included in the Register.”
Jeffrey Davidson, Founder and Managing Director, Honeycomb Forensic Accounting
Even if the scope of the regime is widened, however, under the July proposals the FCA would still only approve the senior managers in each of these firms. Responsibility for assessing the fitness and propriety of other individuals who could have a significant (and harmful) impact on how the firms operated—including non-executives, traders, portfolio managers, and financial advisers—would remain with the firms themselves, and the details of these individuals would not be part of the Financial Services Register.
“We want the regime to be as simple as practicable for firms to understand and implement, and for us to regulate,” said the FCA in its consultation. “The objective of the certification regime is to reinforce that firms, rather than the regulator, are responsible for ensuring their staff are fit and proper. This also means that the people subject to the certification regime will not appear on the FCA Register,” it added.
Critics derided the proposals as being weak, however, and claimed that they would reduce public trust in financial services firms rather than enhance it. Experts point out that while the SMCR would be broadened, the Financial Services Register would still only feature details of a select number of individuals deemed important enough to be included. This has led to fears that most people who slip under the definition of “senior manager”—but who can still wield great influence and can cause potential harm—would avoid appropriate regulatory scrutiny, and the public would not be aware of who they are, what experience they have, or their suitability for the role.
On 26 February—following “extensive feedback” from the industry and MPs—the FCA changed tack, and has now said that it will consult on proposals to make information available on a wider range of individuals at authorised firms.
Taking stock of the Financial Services Register’s flaws
The FCA Financial Services Register has recently come in for criticism following evidence that British Steel pension scheme members were persuaded by independent financial advisors (IFAs)—or “scammed” by “sharks” and “vultures,” according to MPs—into transferring their defined benefit pension pots into less suitable schemes at great cost and little reward, following the former owner’s (Tata Steel) announcement that it could not afford to run the scheme.
Both pension scheme members and trustees complained that the FS Register was too difficult to understand and that it was not clear on whether the people who the regulator had approved were actually suitable to provide advice on the products or services they were selling or find out if they had been suspended.
Trade bodies have also slammed the Register. The Personal Investment Management & Financial Advice Association (PIMFA) criticised it for its “inadequate” search facility and excessive use of “regulatory jargon” in the Register entries.
PIMFA also criticised the information provided on individual advisers, saying that “a consumer seeking advice on a DB transfer would not know from the Register if their adviser was authorised and permitted by their firm to provide this service.” One pension scheme member said that the steelworkers did not trust the FCA Register, partly because “many advisers who act in a scurrilous manner” appeared on it.
Members of Parliament have questioned the Register’s ease of use. The cross-party Works and Pension Committee found that suspensions from the Register are not routinely publicised and that the Register’s layout meant that it is not immediately apparent that a firm’s permissions have been restricted.
In evidence to the committee, even the FCA was unable to readily list the firms from the Register that had been subjected to DB advice restrictions. Consequently, the FCA has said that it plans to issue an update soon on its work to improve the Register’s usability.
In a statement, the regulator said: “The FCA [has] received substantial feedback on the public value of the FCA maintaining a central public record of certification employees and other important individuals in firms regulated by the FCA who will no longer appear on the FS Register. This includes non-executive directors, financial advisers, traders, and portfolio managers.”
The FCA has said that it will consult by summer 2018 on new policy proposals to address this feedback, but adds that “it is not clear” when the proposals might become a reality.
The regulator’s decision to have a rethink has met with more approval than its original consultation, it seems. Industry bodies like the Alternative Investment Management Association (AIMA) and the Managed Funds Association (MFA) have asked the FCA to consider ways of maintaining a central record, as it helps firms to verify the employment history of new employees. Meanwhile, the Chartered Institute for Securities and Investment (CISI) has said it would be “damaging” for firms and the public “to be denied this single, reliable source of information.”
Others have expressed concerns that the Financial Services Register is only as good as the information in it. Jacqui Hatfield, owner and partner at law firm Orrick, says that “the Register will only be useful up to a point” if it no longer contains information about people performing customer-facing functions (such as wealth managers and financial advisers), and their disciplinary records. Eugen Neagu, head of financial planning at financial advisory firm Montfort, says that by not including certified people on the Register, there is a higher risk of “phoenixing”—whereby financial advisers who have previously delivered bad advice, or who have ripped off consumers, simply join other firms and slip under the radar because they will no longer be on the FS Register.
Several experts believe that the FCA will need to thoroughly review the approach it wants to take with regards to the SMCR. “William Granger, a partner at law firm Charles Russell Speechlys, says that without a central register a self-certification approach may result in a lack of consensus and industry understand-ing about what firms need to publish themselves about those certified, thereby leading to greater confusion, more costs to firms, damaged market integrity, and potentially more complexity.”
Jeffrey Davidson, founder and managing director of Honeycomb Forensic Accounting, also believes that the FCA’s “shift toward individual accountability and corporate self-regulation will have a dramatic impact on how and by exactly whom conduct is monitored.”
“The FCA must clarify precisely what values constitute an ‘important individual,’ and how it plans on robustly demarcating who is worthy of inclusion in the Register,” says Davidson. “There is no room for confusion regarding which individuals should be assessed internally and which by the FCA in lieu of them being included in the Register.”
One lawyer believes that the feedback—which he thinks has taken the regulator by surprise—may lead to plans to improve the Financial Services Register.
“Hopefully any new consultation will enable the FCA to come up with a solution that better enables firms and/or individuals seeking to engage with the financial services industry to ascertain who they should engage with,” says Michael Ruck, senior associate in the financial services regulation team at law firm Pinsent Masons. “This may require a shift in the FCA’s approach from the Register being a factual log to a more qualitative record.”