Enforcing the duty of responsibility against senior managers: the Regulators' view

The FCA and PRA have issued consultations giving guidance on how they propose to enforce the duty of responsibility against senior managers in banks – and the rest of financial services from 2018.

Under the duty of responsibility, the FCA and PRA can take action against senior managers if they are responsible for the management of any activities in their firm in relation to which

their firm contravenes a regulatory requirement, and they do not take such steps as a person in their position could reasonably be expected to take to avoid the contravention occurring

(or continuing). The duty of responsibility currently applies to persons performing senior management functions at deposit takers and PRA-designated investment firms. However the duty will apply to senior managers across the financial services sector when the senior managers and certification regime is extended from 2018.

Originally, HMT had proposed to introduce a presumption of responsibility, in which the burden of proof would have been on individuals rather than on the regulators. Following intense lobbying, HMT back-tracked and introduced the duty of responsibility instead. One significant concession that HMT made when ditching the previous plans was to specify that the burden of proof would lie with the regulators to show that a senior manager under investigation had failed to discharge their duty of responsibility. By setting out these ground rules for senior managers, the regulators have gone some way to reversing the burden of proof so that it will fall on individuals, because senior managers under investigation will need to be able to evidence how they have taken the actions and met the standards that the regulators have specified in this guidance.

The proposed guidance in the FCA's consultation paper (CP16/26)  and the PRA's consultation paper (CP34/16) set out:

• The circumstances in which the regulators will apply the duty of responsibility;
• A non-exhaustive list of considerations that may be relevant when determining whether a senior manager was responsible for the management of any of a firm's activities in relation to which a contravention of a relevant requirement by the firm occurred; and
• A non-exhaustive list of considerations the regulators will keep in mind when determining whether or not a senior manager took such steps as a person in their position could reasonably be expected to take to avoid the firm's contravention occurring or continuing.

The proposed guidance issued by the FCA, which is not prescriptive, identifies a number of matters that it will take into account when assessing whether a senior manager has taken adequate steps to avoid a firm contravention occurring, including whether the senior manager:

• exercised reasonable care when considering information available to them;
• had, or should have had, knowledge of regulatory concerns;
• acted in accordance with their statutory, common law and other legal obligations, including but not limited to, those set out in the Companies Act 2006, the FCA handbook (including
• the Code of Conduct), and the UK Corporate Governance Code;
• took reasonable steps to ensure that any delegation of their responsibilities, where this was itself reasonable, was to an appropriate person;
• ensured that reporting lines, whether in the UK or overseas, in relation to their area, were clear to staff and operated effectively;
• took reasonable steps to satisfy themselves, that, the firm had appropriate policies and procedures for reviewing the competence, knowledge, skills and performance of each individual member of staff in their area;
• took reasonable steps to ensure an orderly transition when they were replaced in the performance of their function;
• failed to take reasonable steps to understand and inform themselves about the firm’s activities for which they were responsible; and
• took reasonable steps to ensure that, where they were involved in a collective decision affecting the firm’s activities for which they were responsible, they informed themselves of the relevant matters before taking part in the decision.

Whilst the FCA and PRA have produced guidance which is consistent the PRA has listed in the proposed revisions to the PRA's supervisory statement 28/15 other factors that it proposes to take into account when assessing the conduct of senior managers including whether the senior manager:

• obtained appropriate internal management information, and critically interrogated and monitored that information;
• raised issues, reviewed issues, and followed them up with relevant staff, committees and boards;
• ensured that the firm and/or relevant area had adequate resources, and that these were appropriately deployed, including for risk and control functions; and
• had awareness of relevant external developments, including key risks.

Both consultations close to responses on 9 January 2017.