The Duty of Responsibility and demonstrating reasonable steps

14th November 2019

This briefing is part of a series in which we explore some of the practical considerations and realities for solo-regulated firms in light of the incoming Senior Managers and Certification Regime.

The introduction of the Senior Managers and Certification Regime (SMCR) on 9 December 2019 for Financial Conduct Authority (FCA) solo-regulated firms will bring with it the Duty of Responsibility and, by extension, the need for individuals holding a Senior Management Function (Senior Managers) to take reasonable steps.

The FCA’s comprehensive Guide for FCA solo-regulated firms sets out further detail. Many of the sections in that guidance contain helpful “Things to consider” bullet points. Firms should also consult the FCA’s dedicated webpage for solo-regulated firms.

The Duty of Responsibility

Every Senior Manager has a Duty of Responsibility under the Financial Services and Markets Act 2000, which means that if a firm breaches one of the FCA’s requirements, the Senior Manager responsible for that area could be held accountable if they failed to take reasonable steps to prevent or stop the breach. The Duty of Responsibility is designed to enshrine the shift to individual accountability.

Each Senior Manager must clearly understand the remit of the business area that they are responsible for. This will, in part, be achieved through clear Statements of Responsibilities and, if required, Responsibilities Maps. The onus, however, should be on the Senior Manager to satisfy his or herself that they have sufficient seniority throughout their area of responsibility should the need arise for action to be taken.

What are reasonable steps?

Inaction, just as much as action, can lead to culpability and it is therefore sensible that Senior Managers not only take reasonable steps but also that they are able to effectively demonstrate how and why they acted in a particular way should the need arise. The then Chief Executive of the FCA, Martin Wheatley, commented in a March 2015 speech that “for senior managers, most of the steps you’d expect them to take appear common-sense, frankly. Behave with integrity; delegate appropriately; make sure you understand your business area; and comply with common law, existing rules and legal obligations” when discussing the FCA’s initiatives in enhancing individual accountability.

While Martin Wheatley’s comments provide some insight as to regulator expectations, unsurprisingly the FCA does not provide exact clarification on what may constitute reasonable steps. The term is left deliberately flexible and non-prescriptive. What is reasonable will depend on the context and will vary according to the facts of each individual case. Clearly every scenario will be different depending on the size of firm and type of business, the particular responsibilities of that Senior Manager and the nature of the issue, or potential issue, at hand. As the FCA explained in its July 2018 policy statement Final Guidance: the Duty of Responsibility for insurers and FCA solo-regulated firms, the guidance at 6.2.9-E of DEPP (the Decision Procedure and Penalties Manual) provides a lengthy and expressly non-exhaustive list of considerations that the FCA will take into account in assessing whether a Senior Manager’s actions were reasonable in all the circumstances.

Regulatory action

The Duty of Responsibility permits the FCA to take enforcement action against a Senior Manager where it can demonstrate that:

• misconduct occurred within the Senior Manager’s firm
• at the time of the misconduct (or during any part of it), the Senior Manager was responsible for the management of any of the firm’s activities in relation to which the misconduct occurred
• the Senior Manager did not take reasonable steps to avoid the misconduct occurring or continuing.

Where the FCA wishes to take enforcement action against a Senior Manager, the burden of proof in respect of each of these elements rests with the FCA. Regulatory action can range from suspensions to monetary penalties depending on the severity of the breach. In certain circumstances the FCA will take action against both the relevant Senior Manager(s) and the firm itself.

Demonstrating reasonable steps as a Senior Manager

Despite the breadth of reasonable steps and the multitude of decisions that could be taken, a Senior Manager’s initial consideration should be proportionality. A Senior Manager in a relatively small financial services firm will not be able to, and arguably will not be expected to, take certain actions by virtue of the resources available to them. A Senior Manager should therefore take stock of the resources, capacity and capabilities at hand as soon as possible to assist them in understanding the confines within which they are working.

Following this assessment a Senior Manager can then begin to take steps, where needed, that are not only reasonable but appropriate and proportional to the area of the business for which they hold responsibility. A Senior Manager may wish to consider, depending on specific circumstances, taking some of the following measures:

• For incoming Senior Managers, reading the outgoing Senior Manager’s handover note can be a quick way of getting an early impression of the challenges and potential issues pertinent to the business area.
• Effectively challenging and scrutinising key decisions made by the Senior Manager’s team will help to show that the business area is not run unthinkingly. Offering a considered opinion on matters is an important step in showing that the decision-making process has been thoroughly thought through.
• The abundance of Management Information (MI) can be unhelpful, but understanding which parts are relevant to the business area can be an effective way of capturing potential issues before they crystallise into something far worse. Senior Managers should be proactively reviewing relevant MI to help inform decision-making.
• SMCR and the concept of individual accountability does not do away with the need to delegate but it equally does not absolve a Senior Manager when the delegated task creates issues. Where delegation occurs, the Senior Manager should maintain oversight of the task(s). This can include periodically set meetings, daily updates or reports. Any delegation should be done in a clear manner so that there is no ambiguity as to which members of the team hold certain actions, tasks and deliverables and where the reporting lines exist.
• Visibility of other business areas, which the Senior Manager may not necessarily be responsible for, can be a useful way of understanding pertinent risks to the business as a whole. Working in a collaborative manner with other departments and Senior Managers can help identify issues (before they escalate) and potential solutions. A second pair of eyes can offer an objective view on matters and assist in deciding what further steps should be taken.
• A Senior Manager should be prepared to escalate issues to other business areas, the relevant governance committees and, if the severity of the issue warrants, to board level.
• Senior Managers should be proactive in managing and escalating resource and capability issues within their business area. If the lack of employees or gaps in knowledge is hindering the Senior Manager’s ability to effectively manage and mitigate risk, this will often prevent the individual from taking reasonable steps.

How Walker Morris can help

We have extensive experience of assisting both firms and individuals to effectively navigate the requirements of SMCR and, previously, the Approved Persons Regime. Please contact Jeanette if you require any assistance in developing your policies, processes and procedures, or you require any insight or guidance on how your Senior Manager population can best take reasonable steps so that they, and you, can stay on the right side of the FCA.