The media’s main focus has, understandably, been on senior managers and the controversial ‘reverse burden of proof’, which was repealed even before it came into force. However, in my view, the regime will also have a significant impact in a much more mundane area, namely the training of staff on the new Conduct Rules. Time is running out for firms to ensure that they are complying with much tougher legal and regulatory requirements.
Beyond Senior Managers: Who will the new Conduct Rules apply to?
The training obligations on firms affected by the Senior Managers and Certified Persons regime are certainly onerous, especially for the larger banks and PRA-authorised investment firms. In order to appreciate the magnitude of the burden, it is necessary to understand the full scope of the new Conduct Rules. In effect, they will apply to almost all bank employees other than those whose roles are purely administrative (e.g. secretaries, print room workers and receptionists). Crucially, the rules apply to a much wider population than just Senior Managers and so-called ‘Significant Harm’ staff.
In the case of larger banks and PRA-authorised investment firms, the new Conduct Rules will apply to literally thousands of people - many of them for the first time. For example, lawyers and compliance managers have never had to be pre-approved by the regulator (save for the MLRO and the person who carries out the ‘Compliance Oversight’ controlled function). Under the new regime, whilst few, if any, lawyers or compliance staff will come within the definition of Senior Manager, or even Significant Harm Function, they will nevertheless all be subject to exactly the same personal regulatory duties as someone who performs a role which poses a risk of significant harm to the firm or its customers.
This is best illustrated by one of the new conduct rules which has no equivalent in the current Statements of Principle for Approved Persons. Conduct Rule 4 imposes an obligation on individuals to pay due regard to the interests of customers and treat them fairly. Accordingly, all bank staff (save for those with purely administrative roles) will need to understand what the regulator expects in this regard. Since this duty extends to certain people who don’t deal directly with customers, a ‘systems and controls’ breach or a case of widespread mis-selling could potentially expose a wide range of individuals to enforcement sanctions. This could include anyone who designs products, non-customer-facing complaint handlers and even lawyers and compliance staff involved in the creation of policies and procedures and compliance monitoring. If an individual who is involved in a breach by the firm is able to show that they did not fully appreciate what was required of them, this could have serious ramifications for the firm if it has failed to provide suitable training.
What does this mean in terms of training?
From 7 March 2016, relevant firms are under a statutory duty to:
(a) Notify all their staff who are subject to the Conduct Rules that the rules apply to them; and
(b) Take all reasonable steps to ensure that affected staff understand how the rules apply to them.
It is this latter requirement that is so important. Firms will need to consider carefully what constitutes suitable training for each category of employee. Having done so, they will need to ask how they can be reasonably satisfied that all of the people it has trained properly understand their obligations. The regulators have made clear that having a broad understanding of the various rules is not sufficient: those subject to the rules must have a “deeper understanding of the practical application of the specific rules which are relevant to their work”.
Thus, for example, traders may need additional, tailored training on what are “proper standards of market conduct” in the particular markets on which they trade. In many wholesale markets, such as fixed income, currency and commodities, standards of market practice are often not well understood, as acknowledged by the Fair and Effective Markets Review and the establishment of a new FICC Market Standards Board.
Will CBT “cut the mustard”?
Currently, many firms rely quite heavily on computer-based training in a number of areas. In future, they may need to run much more tailored courses for smaller groups of people. It is essential that the course materials include realistic scenarios that those individuals may face in their day-to-day work.
The FCA has made clear that the aim of the new regime is to “hold individuals working at all levels in banks and other relevant firms to appropriate standards of conduct”. Given that every bank employee, no matter how junior - and even some contractors - can be “knowingly concerned” in a breach by the firm, many firms are going to have to raise their game substantially on the conduct training front.
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