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Employment and Financial Services Quarterly Update - May 2018

  • United Kingdom
  • Employment law
  • Financial institutions


News Update


FS Public Register

The FCA has set out in broad terms its proposals to include certification staff and other important individuals on the Public Register. The FCA plans to consult in summer 2018 on policy proposals.

BSB supporting guidance on implementing the certification regime and the BSB’s F&P assessment principles

The BSB has published:

  • Supporting guidance on implementing the certification regime
  • Supporting guidance to the BSB’s F&P assessment principles

Our briefing on the guidance can be read here.

SMCR implementation

The FCA has advised that implementation of the extension of the SMCR to FCA solo-regulated firms is expected to come into effect in mid to late 2019. Policy statements are expected in summer 2018. For insurers, implementation of the extended regime will be 10 December 2018.


FCA: speech on withdrawal by Andrew Bailey

Andrew Bailey, Chief Executive of the FCA, has given a speech on Brexit transition and financial regulation. Bailey places emphasis on the importance of the transition or implementation period. A key issue is the need for continuing authorisation for firms which are undertaking cross-border business between the UK and the EU and for which their passporting rights would be lost on the UK leaving the EU. The best mitigation of risks in this case would be an agreement between the UK and the EU on the treatment of existing contracts which would enable firms to perform regulated activities.

Bailey’s speech can be read here.

PRA letter on firms’ preparations for the UK’s withdrawal from the EU

Sam Woods, deputy governor of the PRA, has written to firms on their preparations for withdrawal from the EU. The Bank of England welcomes the transition period until the end of 2020 and has made clear that it would be difficult, ahead of March 2019, for all firms to have completed all necessary steps to mitigate the risks to the provision of financial services in the EU and UK.

Woods’ letter can be read here.

Investment Association: Brexit and asset management

The Investment Association has published a document calling for a broad and special partnership between the UK and the EU, ‘Beyond Brexit: a new partnership with the EU for the asset management industry’. The paper sets out the IA’s priorities for the next phase of the Brexit negotiations.

You can read the IA’s paper here.

Conduct and Culture

Banking Standards Board Annual Review 2017/2018

The Banking Standards Board has published its annual review for 2017/18. In 2017, the BSB conducted the largest ever survey of behaviour, competence and culture. The review summarises the key findings of the survey. The BSB’s research provides evidence to suggest that:

  • People are more likely to believe that their organisation lives its values if they observe their firm doing the same and where they see the firm acting in the interests of its customers or clients
  • Employees’ perceptions of whether they and their colleagues are treated fairly and with respect are strongly associated with their wellbeing
  • While some employees do not speak up because they fear negative consequences, a belief that nothing will be done to address their concerns is an equally important barrier

Transforming culture in financial services

The FCA has published a discussion paper on ‘transforming culture in financial services’.

The discussion paper consists of a collection of 28 essays and is intended to provide a basis for further debate. No formal feedback is requested.

The keynote is that there is no ‘one size fits all’ approach. However the FCA emphasises that two fundamental concepts underpin its thinking about culture and regulation. The first is that regulation has to hold the individual as well as the firm to account. The second is that leaders can manage culture even if they cannot measure it very well. The FCA emphasises that firms’ culture is a priority for the FCA. From start-ups to large firms clear accountability is fundamental.

The essayists also consider the role played by incentives and management and how the industry can drive forward healthy culture change.

The discussion paper can be read here.

FCA Business Plan 2018/19

The FCA has published its business plan. Of note to employment practitioners is the priority given to firms’ culture and governance. The FCA states that it expects firms to be able to demonstrate that their purpose, leadership, governance arrangements and approach to rewarding and managing staff do not lead to avoidable or unnecessary harm to customers. This should be a collaborative effort driven forward by staff at all levels. This approach applies irrespective of firm size and the FCA expects individuals to be accountable for their actions.
The FCA states that it will not attempt to measure or assess culture directly. It will seek to form judgements as to whether the drivers of behaviour they are interested in as a regulator are driving appropriate behaviours which are unlikely to cause harm. This includes looking at firms’ remuneration practices and the number of whistleblowing cases the FCA receives to determine the effectiveness of firms’ internal processes and whether they meet FCA expectations.
On remuneration the FCA states that it will take a broader look at all firms’ remuneration arrangements in 2018/19 to identify the potential or actual harm from remuneration schemes of firms that are not subject to the Remuneration Codes.

The business plan can be read here: 

The PRA has also published its business plan which states that it will continue to review firms’ governance arrangements in areas such as remuneration practices and corporate governance at board level. The PRA’s business plan can be read here.

BSB statement of principles for strengthening professionalism: the role of the firm

The Banking Standards Board has published its ‘statement of principles for strengthening professionalism: the role of the firm’, which are intended to help firms consider their own internal practices. The principles define professionalism in banking as referring to the attitudes, judgements and high standards of behaviour, knowledge and skill expected of individuals working in banking. The principles support both the letter and spirit of regulation, particularly initiatives such as the SMCR.

You can read the statement of principles here.

Performance management in consumer credit firms

The FCA has published its final rules (PS18/7) on staff incentives, remuneration and performance management in consumer credit firms.

The FCA has also published non-Handbook guidance to provide more detailed help to consumer credit firms when implementing the final rules. Most respondents to consultation were positive about the non-Handbook guidance, which is largely unchanged from the version consulted on.

Affected firms must be compliant with the new rules by 1 October 2018.

The non-Handbook guidance is not intended to be a prescriptive list and the FCA’s approach remains proportionate: there is no one-size-fits-all approach (‘the proportionality provision’).

The FCA notes in its response to consultation that whilst the guidance is specific to consumer credit firms, any retail financial firm may find the guidance useful.

A summary of the rules and guidance can be read here.

Financial Stability Board: Strengthening governance frameworks

 The Financial Stability Board has published a report with a toolkit for firms to help mitigate misconduct risk.

The FSB makes recommendations about the global financial system and seeks to strengthen financial systems. Its recommendations are aimed at systemically important firms. Its decisions are not binding but it aims at raising the bar for good conduct.

In the report the FSB identifies 19 tools for firms and national authorities to

 - mitigate cultural drivers of misconduct

 - strengthen individual responsibility and accountability

 - address the ‘rolling bad apples’ phenomenon.

The report’s recommendations make useful general reading for firms. For example, with regard to addressing the rolling bad apples phenomenon it recommends that firms:

 - communicate conduct expectations early and consistently in recruitment and hiring processes

 - enhance interviewing techniques

 - leverage multiple sources of available information before hiring

 - reassess employee conduct regularly

 - conduct exit interviews

 The report raises interesting points about the cultural drivers of misconduct and governance frameworks and can be read here.


Women in Finance Charter

The government has published the latest figures on the Women in Finance Charter, which now has 205 signatories.
The first annual review into the Charter has also been published, showing that 78% of the first cohort of signatories either increased or maintained the proportion of women in senior management in the reporting period.
Also attached is analysis of Charter signatory data carried out by New Financial. This shows there is a big range in ambition among signatories and clear differences by sector.
New Financial disclose the following:

  • Incorporating gender diversity targets into bonus awards or as part of a balanced scorecard approach are the most common way of linking targets to managers’ pay
  • A fifth of signatories have already met or exceeded their targets
  • Two thirds of signatories name men as accountable executive for diversity and inclusion, as suggested by Jayne Anne Gadhia (so that diversity is not seen as a ‘women’s problem’)

The review also sets out 10 suggested actions to achieve targets, including female leadership training, examining hiring practices and improving flexible working. You can read the latest information here.

IA writes to FTSE 350 companies on gender diversity targets

The Investment Association and the Hampton-Alexander Review have written to 35 FTSE 350 companies with low female representation at leadership level, calling for change. They have singled out 14 companies in the FTSE 100 who have been asked to explain their poor gender balance and to explain what steps they are taking to move towards the targets set out in the Hampton-Alexander Review.

Read here.

Women in Finance summit: keynote speech

Megan Butler, FCA Director or Supervision delivered the keynote speech at the Women in Finance summit. Butler emphasised that diversity is a key supervisory issue for the FCA. Importantly, she noted that over the past year the industry’s approach to gender has changed. She put this down to the continuing success of the Women in Finance Charter, publication of the gender pay gap data and the MeToo movement. At the same time, she highlighted that only around 13% of FCA-approved individuals in trading firms are women (16% in investment management).   

Butler argued that when a team includes women, its collective intelligence rises. She explained why and how the regulators are encouraging diversity and how to achieve this. As she noted, ‘there is more to do’ as illustrated by the event at the President’s Club. She concluded, ‘what I would genuinely love is that when I walk into a meeting with senior industry representatives, I am not the only woman in the room’.  The transcript of Ms Butler’s speech can be read here.

Gender pay gap reporting

There has been widespread media coverage of gender pay gap reporting as companies raced to meet the April deadline.

Maria Miller, chair of the Commons Women and Equalities Committee stated that companies that failed to file their gender pay gap data before the deadline should face tough sanctions (around 1500 companies failed to comply). Rebecca Hilsenrath, chief executive of the Equalities and Human Rights Commission has also stated that the EHRC will soon start enforcement against employers that have not complied (although it remains unclear whether the EHRC has legal authority to do so).

For most financial institutions, the focus will be less on enforcement and more on how to tackle the gender pay gaps within their organisations (the finance sector reported a gender pay gap of 35.6%).

Read more here, and here.


Supplementary guidance to the FSB Principles and standards on sound compensation practices

The Financial Stability Board has published its final version of its supplementary guidance to the Principles and Standards on sound compensation practices, aimed at addressing misconduct risk. This guidance is aimed at significant financial institutions and provides firms and supervisors with a framework to consider how compensation practices and tools, such as in-year bonus adjustments, malus or clawback can be used to reduce misconduct risk and address misconduct incidents. ‘Significant financial institutions’ are those institutions that are considered significant for the purposes of the FSB Principles and Standards. The Principles and Standards are especially critical for large, systemically important banks.

The guidance does not establish additional principles or standards beyond those set out in the FSB Principles and Standards published in 2009.

Read the guidance here.

Other developments

FCA/ICO joint update on GDPR

The FCA and the Information Commissioner’s Office have published a joint update on the General Data Protection Regulation, which will apply in the UK from 25 May 2018.

The FCA does not believe that the GDPR imposes requirements which are incompatible with the rules in the FCA Handbook. Compliance with the GDPR is a Board responsibility and firms must be able to demonstrate the steps they have taken to comply.

The FCA and the ICO are working together to prepare for the GDPR. The FCA will also consider compliance with the GDPR under their rules, e.g. the requirements in SYSC.

You can read the update here.

Separately, Lloyd’s Market Association has published market guidance on the duty of confidentiality. The guidance provides a summary of the common law duty of confidentiality, trade secrets, data protection rules, legal privilege, regulatory rules, contractual obligations under employment contracts and non-disclosure agreements and individual personal liability.

The guidance can be read here.

FCA approach to enforcement

The FCA has published its ‘Mission: Our Approach to Enforcement’, which gives clarity on its approach to support the information set out in the enforcement guide.

The FCA emphasises that not all breaches of its rules constitute serious misconduct and many breaches can be remedied elsewhere without the need for enforcement action. The FCA also states that it has started a review of its penalties policy and will publish a consultation paper later this year. It is also working on a fuller review of the Enforcement Guide and aims to publish a consultation paper in 2019.

Bring Your Own Devices (BYOD)

On 3 January 2018 a rule on using own devices for work (SYSC 10A.1.7 of the FCA Handbook) was brought into force, as follows:

‘A firm must take all reasonable steps to prevent an employee or contractor from making, sending, or receiving relevant telephone conversations and electronic communications on privately-owned equipment which the firm is unable to record or copy’.

The rule applies to the following firms: a UK MiFID investment firm, a full-scope UK AIFM, a small authorised UK AIFM, an incoming EEA AIFM, a UCITS management company, a MiFIID optional exemption firm, an EEA MiFID investment firm or third country investment firm or a firm that carries on specified trading activities. Such a firm must carry out specified activities (such as dealing or managing investments) in investments.

The FCA also obliges such firms to take ‘all reasonable steps’ to ensure that communications made by its employees or contractors are recorded where these relate to specified activities.

This provision is intended to reflect Article 16(7) of MiFID II but in fact gold plates this provision since Article 16(7) is limited to investment firms.

The effect appears to be that employees working for these firms are prohibited from using their own devices for work or external communications. This of course has an impact on BYOD policies and flexible working arrangements in these firms. Some affected firms have raised concerns about the rule which applies irrespective of size.

In its response to concerns, the FCA stated ‘individuals can bring their own device, but firms should take all reasonable steps to prevent an employee or contractor from making, sending, or receiving relevant telephone conversations and electronic communications on privately owned equipment which the firm is unable to record a copy’.

Case Update

Hincks v Sense Network Ltd [2018] EWHC 533

This case concerns the giving of a reference and will be of significance to financial institutions giving regulatory references.

Mr Hincks, an independent financial advisor employed by Cooperative Independent Financial Solutions, was required to obtain pre-approval for advice and sales. CIFS had authority to conduct activities regulated by the FCA by acting as an appointed representative for Sense Network. In breach of the pre-approval requirement and another administrative requirement, Mr Hincks was suspended. Mr Hincks again sold an investment in breach of the pre-approval process and his authority was terminated. Sense referred to these and related matters in a reference. Mr Hincks brought a claim against Sense for negligent misstatement on the basis that where negative opinions were based on an investigation and its conclusions, the reference-giver had to be satisfied that the investigation had been reasonably conducted and procedurally fair. Mr Hincks argued that the reference gave a misleading impression.

The High Court disagreed that the reference writer should be expected to assess the fairness of an earlier investigation. The standard of care that should be exercised would vary from case to case but should comprise the following:

  • To conduct an objective and rigorous appraisal of facts and opinion
  • To take reasonable care to be satisfied that the facts set out in the reference were accurate and true and there was a proper and legitimate basis for any opinion expressed
  • To take reasonable care that the reference was fair by not misleading either by reason of what is not included or by implication, nuance or innuendo

There may be cases when the duty must go beyond the guidance above: for example, if there were clear errors on the material available to the reference writer or if information casts doubt on the reliability or integrity of the facts or opinions in the material. The guidance in this case is helpful for employers who may have to provide regulatory references years after an individual has left employment and underlines the importance of keeping proper records and documentation.

Daniels & Another v Lloyds Bank plc & Another [2018] EWHC 660

In this case Mr Daniels and Mr Tate sought summary judgment on claims against Lloyds Bank plc (the Bank) in relation to ‘Integration Awards’ under the Bank’s LTIP plan.

The Bank introduced a LTIP in 2006 linking shares to an improvement in the Bank’s performance. The LTIP was amended several times, significantly in 2012, introducing Rule 6.4 to reflect the changing regulatory landscape. Rule 6.4 provided for a downwards adjustment in the number of shares awarded if in their discretion the Bank determined that the performance of the Company or Group etc. and the conduct, capability or performance of the individual justified an adjustment.

Clause 6.4 had been introduced by virtue of rule 17.1 which provided that the Committee could at any time change the Plan in any way. Rules 17.2 and 17.3 provided that changes to the advantage of participants had to be approved by the company in general meeting, that minor changes to benefit the administration of the plan to comply with or take account of any proposed or existing legislation need not be approved by the company in general meeting and the Committee could give written notice of any changes to any participant.

Prior to 2012 the employee participants’ entitlement to a conditional award depended solely on satisfying the performance conditions; neither the remuneration committee nor any other body at the Bank had the discretion to refuse to honour a conditional award if the performance condition had been satisfied.

In April and May 2009 the Bank made conditional awards of shares under the LTIP. The Bank advised the individuals that they had been granted awards under the LTIP, subject to the satisfaction of the performance conditions. A certificate was issued stating receipt of shares was conditional on meeting the performance conditions.

The remuneration committee then determined that the performance conditions had been satisfied.

A full Board meeting thereafter determined that there was little appetite to reward directors who had been pivotal in the decision to acquire HBOS. The Board on this basis resolved not to honour the Integration Awards in relation to Mr Daniels and Mr Tate.

The High Court noted that this was a case where a broad power to alter a party’s contractual rights to its detriment was in question. Reading rule 17 by itself and also reading it against the broader context of the LTIP rules, the court did not consider that its purpose was directed to the alteration of Awards but rather to alterations (probably of a minor nature) to the structure and administration of the plan. The answer reached was also supported by the various authorities on which Daniels and Tate relied, all of which were essentially saying that when an approach produces a result which lacks sense or completely recasts the obligations under the original contract, the clause which purports to do this should not generally be read in that sense. The court concluded that Rule 17 did not bestow a power or discretion to alter the rules as was done by the addition of rule 6.4

The court went on to find that in any event, a determination as to satisfaction of the performance conditions was taken and the shares had vested. Rule 6.4 would therefore never have arisen even if it had been validly introduced, because no adjustment was made at the relevant time.

The case report can be read here.

Morris-Garner v One Step [2018] UKSC 20

The Supreme Court has ruled in Morris-Garner v One Step (a claim concerning breach of restrictive covenants in a sale agreement) that Wrotham Park damages could not be claimed on the facts in this case.

This is the first time that Wrotham Park damages have been considered by the Supreme Court and the decision provides some clarity as to the circumstances in which damages for breach of contract can be assessed by reference to the sum that a claimant could hypothetically have received in return for releasing the defendant from an obligation that they failed to perform. It also narrows down the cases in which such damages may be claimed and arguably limits substantially the possibility of Wrotham Park damages being awarded in cases concerning breaches of restrictive covenants in an employment context.

A full case summary can be read here.

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