Financial Services Brexit video series – Impact on senior managers’ regime

Charlotte Henry, Partner, Financial Services

We have to assume for now that it is a hard Brexit i.e. firms operating here will not have access to a cross-border passport to be able to do business cross-border and likewise into the UK.

There are obviously numerous impacts that we could talk about but there are three that I am going to focus on in this particular video. The first one relates to firms moving between senior manager regimes, the second one is on operational impacts and finally just a quick word on enforcement, the ability of the regulator to enforce what they like to against non-UK senior managers.

So turning to the first one, clearly one of the impacts of Brexit on the senior manager's regime is that firms may find that they are moving between particular regimes. If we take banks for example, as a first example, banks at the moment are into different regime depending if they are an EEA branch or a third country branch. But with Brexit, as we call know the PRA has required firms to have to reauthorise either as a third country branch or subsidiarise in some exceptional cases. So where that is the case, firms will find themselves going from a very light touch FCA regime where there are only a couple of senior manager functions identified, no prescribed responsibilities, very little operational requirements into the full remit of a third country bank branch. We know that this comes with a lot of senior manager functions that will have to be identified. Firms are going to have to have much more fuller management responsibilities maps. The no gaps principle will apply meaning that the firms will have to look across all of their operations and make sure that at least one or more senior manager has overall responsibility for those areas. Now this obviously comes with other impacts as well, in particular governance, and with that we know that firms are going to have to relook at their existing governance structures, particularly the ones that are here locally. The PRA has said that they do expect there to be a certain level of local governance here in the UK. What that that means in practice, there isn't any one size fits all approach but firms will have to relook at that and look to bringing onshore some of the governance.

There is also territorial implications, so firms looking at the scope of their certification staff that are going to be caught also the contact staff etc and how that might impact.

For non-banks, so for those that are going to be in scope of the regime come 2019 at the earliest with the extension of the regime to senior managers and those firms. Firms at the moment, if they are conducting purely cross-border business from outside the EU into the EU through a services passport are going to be at the moment exempt from the regime, or at least that is the FCA's latest consultation on that particular point. However come Brexit that won't be possible because they won't be able to conduct cross-border business into the UK, so those firms are unlikely to be exempt and will either have to set up a branch here or subsidiarise and therefore they will then be into the FCA's extended scope of SMR [senior managers regime] either as a core firm or an enhanced firm and again those come with additional senior manager obligations etc.

So there is going to be an impact on firms regardless of what activity they conduct and regardless of whether they go in from the UK out into Europe or vice versa in terms of that.

Operationally there is going to be an impact on the regime as well from Brexit. So if we think about all the different activities that a firm does, currently firms potentially have a passport into Europe, if they do lots of cross-border business, and that may have to be relooked at post Brexit. When it is relooked at if we continue on with this particular example, firms may need to think about how they are doing that business cross-border, are they relying on an exemption, a tolerated market practice, are they able to do informal or formal dual-hatting role i.e. piggy backing off another group entity's permissions when they are going into that particular territory to do business. Where that is the case because firms here in the UK are subject to the senior managers regime, have the no-gaps principle, senior managers may want there to be a lot more governance and oversight and systems and controls over how the firm is doing business and how employees that are going abroad are being controlled, and the checks on what they say, what they do, so it’s not triggering the requirements.

So operationally we can see that Brexit is going to have a big impact on those senior managers that are taking reasonable steps in relation to their overall responsibility.

And finally enforcement. It has been a bit of a market topic lately, about whether or not Brexit will make it more difficult for the regulators here to enforce any type of regulatory measure they would like to take against a senior manager or even call them to come and have an interview and that is something that we think also will need to be picked up and relooked at post Brexit. It may require the FCA or the PRA to liaise with a foreign regulator to get cooperation in relation to a non-UK senior manager that is within scope. It may also require other measures as well and that at the moment is unknown.

Well thank you very much for listening to this particular video and we look forward to seeing the next one.