Included in The RMA Journal, May 2016 | Copyright 2016 by RMA In the UK, the Parliamentary Commission on Banking Standards, which was established in the wake of the Libor scandal, attributes the sector’s failings to flaws at the heart of its culture. The commission’s key proposals - in its report 'Changing Banking for Good' - have resulted in a new senior managers regime and whistleblowing rules that come into force this year. https://www.brownejacobson.com/about-us/news-and-media/published-articles/2016/03/will-the-UK-financial-sector-be-changed-for-good-this-year

1. The RMA Journal May 2016 | Copyright 2016 by RMA30
Will the U.K. Financial Sector
Be Changed
for Good This Year?
OperationalRisk

2. May 2016 The RMA Journal 31
By Raymond Silverstein
and Catriona Lothian
• A new licensing regime underpinned
by banking standards rules to ensure
that those who can do serious harm are
subject to the full range of enforcement
powers.
These recommendations were imple-
mented in March in the form of the Finan-
cial Conduct Authority’s Senior Managers
Regime and Certification Regime, and the
Prudential Regulation Authority’s (PRA)
Senior Insurance Managers Regime, to-
gether with complementary new rules on
whistleblowing.
The changes will apply directly to U.K.
deposit takers (banks, building societ-
ies, credit unions, and PRA-designated
investment firms) with assets of £250
million or greater, and to insurers and
reinsurers subject to the Solvency II di-
rective. The new rules are also intended to
influence the wider sector, taking effect as
non-binding guidance for all other firms
regulated by the FCA or PRA.
Senior Managers Regime and
Certification Regime
Senior Managers Regime
The Senior Managers Regime covers
every individual on the board of every
relevant firm. For larger, more complex
firms, the regulators expect that the layer
of executives below the board will also
be within scope.
Shutterstock.com
Seventeen senior management func-
tions (SMFs) are specified, and firms will
have to ensure they assess the fitness and
propriety of staff who will hold SMFs be-
fore seeking approval by the regulators
and at least annually thereafter. Thirty
prescribed responsibilities are covered by
the FCA and PRA rules, including chief
risk function, head of internal audit, and
compliance oversight, and accountabil-
ity for each one must be assigned to an
individual holding an SMF.
However, the 30 prescribed responsi-
bilities do not constitute a comprehensive
list. Firms are expected to ensure that
they have complete lists of their activi-
ties and that responsibility for each is
assigned appropriately. Applications for
approval to hold an SMF must be accom-
panied by a statement of responsibilities
for each candidate, as well as a manage-
ment responsibilities map showing that
all responsibilities are covered.
Senior managers should be cautious
about sharing responsibility for a particu-
lar area, as the regulators will consider all
SMF managers sharing a responsibility to
be jointly responsible if there is any con-
travention of regulatory requirements.
Certification Regime
The Certification Regime applies to
other staff who could pose a risk of
significant harm to a firm or any of its
customers (for example, staff who give
investment advice or submit benchmark
rates). The FCA and PRA have set out
a list of “significant harm” functions.
These staff will not be preapproved by
regulators, but firms will be required to
assess and certify their fitness and propri-
ety on an ongoing basis. The regulators
anticipate that many firms will build the
The banking sector worldwide continues
to be plagued by scandal and wrongdo-
ing, record-breaking regulatory fines, and
widespread criticism of its risk culture.
“Banker bashing” is an enduring staple
of comedy shows and pub discussions,
and blame for the financial crisis is often
laid at the door of the banking industry.
In the U.K., the Parliamentary Com-
mission on Banking Standards, which
was established in the wake of the Libor
scandal, attributes the sector’s failings
to flaws at the heart of its culture. The
commission’s key proposals—in its report
“Changing Banking for Good”—have re-
sulted in a new senior managers regime
and whistleblowing rules that come into
force this year.
The chairman of the commission has
stated the following:
“Risks and rewards in banking have
been out of kilter. Given the misalignment
of incentives, it should be no surprise that
deep lapses in banking standards have been
commonplace.
“A lack of personal responsibility has
been commonplace throughout the indus-
try. Senior figures have continued to shelter
behind an accountability firewall.
“High standards will strengthen Britain
as a global financial center.”
The commission made two impor-
tant recommendations for increasing
accountability:
• The introduction of a new “Senior Per-
sons Regime,” to replace the Approved
Persons Regime, for the purpose of
ensuring that key responsibilities are
assigned to specific senior individuals
so they can be held fully accountable
for their decisions and the standards
of their banks.
The introduction of
banking standards
rules in the u.k., as
recommended by the
Parliamentary Com-
mission on Banking
Standards, is being
carried out in the form
of new conduct rules.

3. The RMA Journal May 2016 | Copyright 2016 by RMA32
• No employee is performing any SMF
without having been certified as fit and
proper to do so (the deadline for firms
to issue certificates is March 7, 2017).
• For all certified persons, references
have been requested from past employ-
ers covering six years of employment
and criminal record checks have been
obtained for senior managers.
• Employees subject to the conduct rules
have received training on how the rules
relate to their role (by March 7, 2016, if
they are SMFs or certified individuals,
or by March 7, 2017, if they are other
staff).
• Existing employment contracts ac-
curately reflect employees’ areas of
responsibilities. If necessary, set out
contractual requirements for individu-
als as a result of the new regime (for
example, if an individual is required
to observe certain conduct rules).
• Compliance manuals and other rel-
evant internal documents are updated
to reflect the changes to the regime
(for example, board and committee
structures should be set out clearly).
The following processes must be in place:
• Reporting breaches of conduct rules
to the regulators in accordance with
any reporting requirements.
certification procedure into their annual
performance reviews.
The introduction of banking stan-
dards rules, as recommended by the
Parliamentary Commission on Banking
Standards, is being carried out in the
form of new conduct rules. The con-
duct rules are high level and reflect the
standards expected of staff who work in
relevant firms. They apply from March
7, 2016, to persons within scope of the
Senior Managers Regime and the Cer-
tification Regime, and to other staff at
relevant firms within the scope of the
regime from March 7, 2017.
Suggested Actions for Firms
• All individuals holding SMFs or se-
nior insurance management func-
tions (SIMFs) are being grandfathered
into the new regime (the deadline for
grandfathering forms was February 8,
2016); new holders’ applications must
be submitted (the deadline was March
7, 2016) with appropriate statements
of responsibility.
• All relevant prescribed responsibilities
(and any other responsibilities relevant
to the business) have been allocated
to at least one SMF or SIMF and the
individual is a nonexecutive director
where required.
• The board confirming annually that
there are no gaps in the allocation-
of-responsibilities maps and that they
reflect any change in structure.
• Carrying out annual fitness and pro-
priety assessments of certified indi-
viduals—for example, as part of their
existing annual review.
Senior Insurance Managers Regime
The PRA is introducing a parallel Senior
Insurance Managers Regime, which aims
to improve the accountability of insurers
and reinsurers that fall within the scope
of the Solvency II directive. It also came
into force on March 7, 2016, and requires
firms to do the following:
1. Maintain a governance map setting out
the firm’s management structure and
allocation of responsibilities.
2. Allocate certain responsibilities to
those holding a SIMF.
3. Produce a scope of responsibilities for
each senior manager holding a SIMF.
4. Ensure compliance with a new set
of conduct standards for senior
individuals.
Firms are also required to assess the
fitness and propriety of senior insurance
managers, but no certification of staff is
required.
Her Majesty’s Treasury has stated that
the Senior Insurance Managers Regime
already incorporates the substantive prin-
ciples of the Senior Managers Regime and
Certification Regime and paves the way
for the application of those regimes to
insurers, which is planned for 2018.
New Criminal Offense
The new regimes, in concert with a new
criminal offense for senior managers un-
der section 36 of the Banking Reform Act,
seek to change the whole environment of
the banking sector, from the top echelons
down. The criminal offense relates to deci-
sions taken by senior managers of banks,
building societies, and PRA-regulated
investment firms that cause a financial
institution to fail. The offense will apply
in relation to a decision that causes a fi-
nancial institution to fail for conduct that
takes place on or after March 7, 2016.
The regulators see
whistleblowers as instrumental
in the drive to improve accountability
and tackle the existing risk culture.

4. May 2016 The RMA Journal 33
8.Include a term in all settlement agree-
ments to the effect that nothing in the
agreement prevents the worker from
making a protected disclosure.
Having considered whether to intro-
duce a positive obligation to whistleblow,
the regulators decided against it. Howev-
er, approved persons will still be subject
to the obligation to deal in an open and
honest manner with their regulator.
Definitions
A “whistleblower” is defined as any
person who has disclosed, or intends to
disclose, a reportable concern to a firm, or
to the FCA or the PRA, or in accordance
with the Employment Rights Act 1996.
A “reportable concern” is a concern
held by any person in relation to the ac-
tivities of a firm, including the following:
• Anything that would be the subject
matter of a protected disclosure as
defined in the act, including breaches
of rules.
• A breach of the firm’s policies and
procedures.
• Behavior that harms or is likely to
harm the reputation or financial well-
being of the firm.
These definitions are significantly
broader than those found in the Employ-
ment Rights Act 1996. Now many more
people may be considered whistleblow-
ers—including interns, contractors, and
even those employed by third parties,
such as suppliers or competitors.
Many firms responded to the FCA’s
consultation on the new rules with con-
cern that widening the definitions in this
way runs the risk of firms channeling
concerns through their whistleblowing
service that would be better handled
elsewhere. The respondents worried that
the rules would undermine other internal
New Rules on Whistleblowing
The Parliamentary Commission on Bank-
ing Standards expressed its shock that
so many people turned a blind eye to
misbehavior. It concluded the following:
“The financial sector must undergo a sig-
nificant shift in cultural attitudes towards
whistleblowing, from it being viewed with
distrust and hostility to one being recognized
asanessentialelementofaneffectivecompli-
ance and audit regime.”
Obstructive attitudes to whistleblowing
were also identified in research conducted
in the financial sector by Public Concern at
Work, the whistleblowing charity. In 60%
of cases, whistleblowers reported receiving
no response from management, either pos-
itive or negative. Of the remaining 40%,
42% of whistleblowers were dismissed
after raising their concerns (compared to
24% across all industries), and 21% were
disciplined, rising to 28% the second time
a concern was raised. Trust in employers
was found to be in short supply, as almost
one in five whistleblowers went straight
to the external regulators.
The regulators see whistleblowers as
instrumental in the drive to improve ac-
countability and tackle the existing risk
culture. Under the new rules, relevant
firms are required to do the following:
1. Appoint a “whistleblowers’ champion.”
2.Put internal whistleblowing arrange-
ments in place that can handle all types
of disclosure from all types of persons.
3.Provide training and development on
whistleblowing, including for all U.K.-
based employees, all managers of U.K.-
based employees wherever the manager
is based, and all employees responsible
for operating the firm’s internal whistle-
blowing arrangement.
4.Tell U.K.-based employees about the
FCA and PRA whistleblowing services.
5.Require its appointed representatives
and tied agents to tell their U.K.-based
employees about the FCA whistle-
blowing service.
6. Inform the FCA if it loses an employ-
menttribunalcasewithawhistleblower.
7.Present a report on whistleblowing to
its board at least annually.

5. The RMA Journal May 2016 | Copyright 2016 by RMA34
whistleblowers’ champion (the title is
not obligatory), although a firm that
does not have a non-executive director
is not expected to appoint one just for
this purpose. An insurer must appoint a
director or senior manager as its whistle-
blowers’ champion.
The whistleblowers’ champion should
have a level of authority and indepen-
dence within the firm and access to
resources and information sufficient to
carry out that responsibility. However,
this person need not have a day-to-day
operational role handling disclosures
from whistleblowers. In addition, he or
she may be based anywhere, provided the
function can be performed effectively.
A firm must allocate to the whistle-
blowers’ champion the responsibility
for ensuring and overseeing the integ-
rity, independence, and effectiveness of
the firm’s policies and procedures on
whistleblowing, including those intend-
ed to protect whistleblowers from being
victimized because they have disclosed
reportable concerns.
Timings
The whistleblowing rules will come
into force on September 7, 2016.
The responsibilities of the whistle-
blowers’ champion include oversight of
escalation arrangements—for example,
grievance and customer complaints
procedures.
The FCA has stated that not all issues
or concerns need be dealt with by the
whistleblowing service; there are other
escalation routes more appropriate for
some situations. However, “if mainstream
escalation routes have been exhausted or in-
effective, the whistleblowing arrangements
will remain as a last resort.”
Accordingly, firms should consider
introducing a stage for every issue or
concern to be reviewed shortly after its
receipt for the purpose of allocating it to
the appropriate procedure. Differentiat-
ing between a grievance and a report-
able concern, for example, will often be
a difficult judgment call. Choosing the
“wrong” procedure could cause serious
problems for a firm. Channeling griev-
ances through the whistleblowing ser-
vice, for defensive or other reasons, is
not recommended and would probably
swamp the resources of the service.
It remains to be seen what the FCA had
in mind when it stated that whistleblow-
ing arrangements remain as a last resort.
Whistleblowers’ Champion
The FCA expects that a firm will ap-
point a non-executive director as its
the firm’s transition to its new arrange-
ments for whistleblowing which began
March 7, 2016, the date the new regimes
came into force.
The FCA will consult on the applica-
tion of these rules to U.K. branches of
overseas banks. Once the rules have
been in effect long enough for the FCA
to assess their effectiveness, the regulator
will consider whether to extend the new
regimes and apply similar whistleblower
requirements to other firms it regulates,
such as stockbrokers, mortgage brokers,
insurance brokers, investment firms, and
consumer credit firms.
Suggested Actions for Firms
• Ensure that a whistleblowers’ cham-
pion has been appointed (the deadline
was March 7, 2016).
• Allocate to the whistleblowers’ cham-
pion the responsibilities referred to.
• Give the whistleblowers’ champion
access to appropriate resources, in-
cluding independent legal advice, to
ensure meeting the September 7, 2016,
deadline.
• Introduce a stage to allocate a concern
or issue to the appropriate procedure
shortly after it is received.
The Accountability and Whistleblow-
ing Instrument 2015, the legal instrument
used to introduce the new whistleblowing
rules, will pose a major challenge to many
firms given the sector’s unhappy history
in this area, but that is rather the point.
Changing the risk culture of the bank-
ing sector is a Herculean task for regula-
tors and firms alike, but this year could
be the turning point.
Raymond Silverstein is head of employment at
Browne Jacobson LLP in London and works with the
firm’s Financial Services Group. He can be reached at
raymond.silverstein@brownejacobson.com. Catriona
Lothian is a solicitor in the Financial Services Group
at Browne Jacobson LLP and has advised financial
services firms of all sizes on regulatory matters. She
was formerly an enforcement lawyer at the Financial
Conduct Authority. She can be reached at catriona.
lothian@brownejacobson.com.
The whistleblowers’
champion should have a level of
authority and independence within the firm
and access to resources and information
sufficient to carry out that responsibility.