Out-Law News 2 min. read

New banking sector personal accountability rules should be extended to traders, says FCA


Algorithmic trading and client-facing staff that deal in fixed income, currency and commodity products should be brought within the scope of new rules designed to boost individual accountability in the banking sector, the Financial Conduct Authority (FCA) has said.

The regulator intends to extend its new 'certification regime' to cover all staff whose misconduct could cause significant harm to the firm or its customers. The new requirements would ensure that more junior wholesale staff and individuals who currently require FCA approval, but who are not subject to qualification requirements, would be caught by the stricter requirements once they come into force next year. Individuals with certain responsibilities over trading algorithms would also be caught.

The new certification regime will form part of a two-tier replacement for the existing approved persons regime, and will come into force on 7 March 2016. A new, more targeted, senior managers regime (SMR) and new conduct rules for all staff will also come into force on this date. The FCA and Prudential Regulation Authority (PRA) have now published their final rules, which are based on those proposed by the Parliamentary Commission on Banking Standards (PCBS) in its 2013 report on professional standards and culture.

"It will come as no surprise that the content of these rules closely reflects the original proposals by the FCA and PRA and the key elements; including Statements of Responsibility for senior management functions, banks being responsible for regularly assessing the fitness and properness of their senior managers and those within the certification regime, and banks being required to educate staff on the new conduct rules," said financial regulation expert Michael Ruck of Pinsent Masons, the law firm behind Out-Law.com.

"Only time will tell if the new regime meets the regulators' twin objective of improving culture and standards within the banking industry while making it simpler for the regulator, and other prosecutors, to take action against senior managers when a firm breach or failing is identified. This is the next step in the 'credible deterrence' agenda, with regulators and prosecutors seeking to use statements of responsibility and attestations to take action against individuals. In the meantime, the regime adds another pressure to those banks and senior managers who not only have the banking levy to deal with, but also the ever-increasing cost of compliance," he said.

The SMR will give named senior individuals in banks responsibility for certain areas of the business. Senior managers will be subject to regulatory pre-approval, although firms will be required to ensure that they have procedures in place to assess their fitness and propriety both before applying for approval, and at least annually afterwards. They will be subject to a new presumption of responsibility for any breaches in their named areas of responsibility, unless they can demonstrate that they took reasonable steps to avoid or stop that breach.

Staff subject to the certification regime will no longer need regulatory pre-approval, although firms will again be required to assess their fitness and propriety at least annually. The FCA's consultation proposes extending this regime to those in client-facing advisory roles, including "corporate finance and venture capital" clients; and to those responsible for the management or approval of new trading algorithms or material changes to existing trading algorithms.

The FCA said that it was important that "the individuals responsible for the deployment of trading algorithms are fit and proper, for example to ensure that the algorithms are adequately tested through comprehensive testing to assess their potential behaviour, in particular to ensure that they are resilient, do not contribute to disorderly markets or breach market abuse or trading venue rules".

The new conduct rules will apply to all senior managers, and to all staff covered by the certification regime, when these come into force on 7 March 2016. They will then apply to all other staff from 7 March 2017.

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