Strengthening Accountability in UK Branches of Overseas Banks

Written on 27 Aug 2015

On 13 August 2015, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) published near final rules confirming how the senior managers and certification regime (SMR) will apply to UK branches of overseas banks. The rules are intended to make it easier for firms and regulators to hold individuals to account and to improve conduct at all levels across the industry.

For an overview of the main feature of the SMR, see our previous blog here. Secondary legislation implementing these rules is expected to be finalised in autumn 2015, however, we do not expect any significant changes to the rules going forward.

The precise application of the SMR depends on whether the UK branch is headquartered in the EEA (an EEA branch) or outside the EEA (a non-EEA branch). This is because, in the case of EEA branches, certain regulatory matters are reserved to the home state regulator pursuant to the relevant single market directive. The rules do not apply to firms which do not have a branch in the UK.

  • For Senior Managers (SM) in both EEA and non-EEA branches (incoming branches) the criminal offence of “recklessly causing a bank to fail” will not apply. This is unlikely to represent a material change, as it is understood that the circumstances in which a provision is likely to be relied upon by the regulators are very narrow indeed.
  • The “presumption of responsibility” applicable to SMs will apply equally to incoming branches. This means that where there has been a regulatory breach in an area for which an SM is responsible, there will be a presumption that the SM is guilty of regulatory misconduct, unless the SM can show that they took reasonable steps to avoid the contravention.
  • Incoming branches will also be bound by the obligation to seek regulatory references in respect of new hires. However, the regulators acknowledge that employers may find it difficult to obtain regulatory references from previous employers based abroad and, therefore, cannot guarantee that they will receive all the information they request. In these circumstances, incoming branches will be expected to consider whether the information which they do obtain is sufficient enough to demonstrate that the relevant individual is fit and proper. It is expected that further guidance on this will be provided in the autumn once the regulator has completed its specific consultation on regulatory references.
  • The regulators have also clarified that there is no legal requirement for any firm or incoming branch to undertake criminal checks on their prospective employees. Nonetheless, it is open to banks to undertake such checks where they have the legal right to do so and they are carried out with the consent of the job applicant.
  • For EEA branches, the conduct rules will only apply to matters that are within the UK’s scope of responsibilities as host state regulator. For non-EEA branches, the conduct rules apply to individuals that are based in the UK or are dealing with a UK client.
  • The time limit in which firms are required to notify the regulator of an actual or suspected breach of the conduct rules by an SM will remain 7 calendar days. Some incoming branches had voiced concerns that this short time frame could cause particular difficulties for overseas branches working across different time zones. However, the regulators remain committed to the 7 day time frame across the board.
  • The requirements in the SMR in relation to handover arrangements will not apply to EEA branches.
  • Whilst all incoming branches need to prepare a responsibilities map, EEA branches are only required to provide information which was not included in their passporting information (that is the information provided in the Program of Operations when an EEA branch “passports” into the UK) or where that information has changed since the passporting information was submitted. For non-EEA branches, there are 12 prescribed responsibilities which should be allocated as part of a responsibilities map.

If your firm is affected by these proposed rules then you will need to ensure that you are ready for them coming into force on 7 March 2016. We are running a number of workshops in the autumn to assist our clients to prepare for the implementation date.