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Employment and Financial Services Quarterly Update

  • United Kingdom
  • Employment law
  • Financial institutions

01-11-2017

News Update

SMCR

Since the publication of consultation papers in July 2017 proposing the extension of the senior managers and certification regime across much of the financial services and insurance sectors, the focus has been on how the regulatory landscape will look after extension and on the review that must be taken by firms that will come into scope to assess their systems and processes in advance of the proposed changes.

Read our briefing on the consultation papers

BSB certification guidance – F&P risks

The Banking Standards Board has launched a consultation on supporting guidance to help firms identify and deal with risks and issues when assessing fitness and propriety. Consultation closed on 29 September 2017. The draft guidance is intended to help firms making certification decisions, especially where the issues are not clear-cut.

Read the draft guidance

Brexit

Sam Woods calls for Brexit transition deal by Christmas

Sam Woods, deputy governor of the Bank of England, has called for an agreement with the EU setting out transitional arrangements for financial services to be in place by Christmas.

Read more here

Separately, the House of Lords EU Select Committee has launched an inquiry (‘Brexit: deal or no deal?’) which will examine the key components of any implementation or transition period.

Consultation closed on 26 October 2017. The prime minister Theresa May has stated that Britain will accept the jurisdiction of the European Court of Justice and EU rules during any transition period.

Read more here

Conduct and Culture

The stakeholder’s voice in board meetings

The Investment Association and the governance institute ICSA have provided guidance on stakeholder engagement. This is a practical industry-led initiative aimed at helping companies reflect on their current engagement practices and consider further improvements. The guidance, which was welcomed by the government in its recent announcement on corporate governance reform, identifies ten principles to guide the way boards approach these issues. These include: identifying key stakeholders; the composition of the board and development of directors; the way in which boards receive and process information; designing appropriate engagement mechanisms; and reporting and feedback to shareholders and stakeholders.

The guidance is set against the background of the government’s steps to strengthen stakeholder engagement (set out below).

The guidance is expected to be of use to all sizes of company and irrespective of sector.

Read the guidance here

Diversity

FCA publishes data on progress toward diversity targets

In the spirit of leading by example, the FCA has published information on the progress it is making towards achieving its diversity targets and details of its gender pay gap. It has set a target of 45% of its senior management team identifying as female by 2020 and 50% by 2025.

On the gender pay gap, the FCA’s mean gap is 19.28% and the median gap is 20.91%.

The FCA has also set a target of 8% of its senior leadership team identifying as Black Asian Minority Ethnic (BAME) by 2020 and 13% by 2025.

The FCA will report again in 2018.

Read more here

Christopher Woolard speech on diversity

Christopher Woolard, the FCA’s executive director of strategy and competition, has delivered a speech at the LGBT in the Financial Services Industry Summit, at which he sets out the FCA’s position on the benefits of inclusion.

Read more here

Other developments

Mental health in financial services

Poppy Jaman, CEO of Mental Health First Aid England (MHFA), has written about mental health in the City, noting that jobs in financial services are 44% more likely to lead to stress-related illnesses than the average UK job. Ms Jaman urges a culture change in attitudes towards mental health and recommends employers to offer mental health training.

Together with Business in the Community, MHFA has launched the Mental Health at Work Report 2017

MHFA has also launched a ‘Workplace Wellbeing Toolkit’ which sets out a strategic step by step process to achieve organisational change in this area.

Case Update

In this section, we highlight three cases which, whilst not directly involving financial services, address issues which are common themes in this sector.

Agoreyo v London Borough of Lambeth [2017] EWHC 2019

Given the risk that may be posed by a senior manager who is suspected of misconduct it is not uncommon for firms to suspend a senior manager pending an investigation. However suspension is not free of complication.

In Agoreyo v London Borough of Lambeth a teacher was suspended and resigned on the same day following allegations of her having used unnecessary force with two children. The suspension letter stated: ‘the suspension is a neutral action and is not a disciplinary sanction. The purpose of the sanction is to allow the investigation to be conducted fairly’. Ms Agoreyo brought a claim for breach of contract in the county court.

The High Court held on appeal that suspension should not be the default option and should only be used where there is no reasonable alternative. As noted in Mezey v South West London and St George’s Health Trust [2007] ‘suspension changes the status quo from work to no work, and it inevitably casts a shadow over the employee’s competence’. This is particularly so in the case of a highly trained professional.

In this case, therefore, the suspension constituted a repudiatory act that entitled the teacher to resign and claim constructive dismissal.

Read the case report here

Watson v Watchfinder Ltd [2017] EWHC 1275

This case concerns an application for specific performance of a share option agreement between three individuals and the company Watchfinder. The agreement provided that the option could only be exercised with the consent of the majority of Watchfinder’s board of directors. No consent was given despite other conditions having been met.

The High Court held that it could not have been the intention of the parties that Watchfinder should have an unconditional right of veto. If it were, then the option would be meaningless as it would have been entirely within the gift of Watchfinder.

The court went on to find that the exercise of the veto was subject to an implied term not to exercise it unreasonably, capriciously or arbitrarily. The directors should have followed a proper process for the decision, taking into account material factors and not taking into account irrelevant ones. The court referred to this as the ‘Braganza duty’ following the Supreme Court’s decision in Braganza v BP Shipping [2015].

On consideration of all the facts, the court held that discretion had not been exercised meaningfully in accordance with the Braganza duty and specific performance was granted.

Whilst this case concerns a commercial contract rather than one between employer and employee, it serves as a reminder that when exercising the right to withhold consent note should be taken of the reasons for doing so, i.e. focus is on the process. Consideration should be given to all material factors, both in favour and against the giving of consent. The key issue with applying the Braganza duty is that where there may be a variety of outcomes there is ‘little scope for intensive scrutiny of the decision making process’. This means that the Braganza principle is hard for employees to apply in the context of bonuses as there are a variety of outcomes which could be reached.

Read the case report here

Royal Mail Ltd v Jhuti [2017] EWCA Civ 1632

The Court of Appeal has reversed the EAT’s decision in this whistleblowing case.

In this case, Ms Jhuti’s line manager Mr Widmer (motivated by a protected disclosure made by Ms Jhuti) deliberately misled the investigating officer Ms Vickers leading to Ms Vickers’s dismissal of Ms Jhuti for poor performance.

Ms Jhuti had raised concerns about certain workplace irregularities with Mr Widmer who pressurised her to withdraw her allegations. Over the following months he criticised her performance, leading to a decision to be made about her future. This responsibility was given to Ms Vickers, who had had no previous involvement with Ms Jhuti. Ms Vickers dismissed Ms Jhuti for her unsatisfactory performance but also referred to Ms Jhuti’s allegations. The issue was whether her dismissal was tainted by the protected disclosure.

The EAT held that both the reason and the motivation of the line manager and the decision maker had to be taken into account and could be attributed to the employer.

The Court of Appeal reversed this decision. It held that in determining the reason for the dismissal the employment tribunal is only obliged to consider the mental processes of the person authorised to (and who did) take the decision to dismiss (being the mind of the employer). The court suggested that, in cases of manipulation, the position might be different if it were the CEO who had deliberately manipulated the dismissal decision.

Read the case report here

Looking ahead

We set out below a summary of important dates in the pipeline for financial institutions.

Q3/4 2017 The PRA will publish final rules and forms relating to chapter 4, consultation CP8/17 setting out consequential changes to senior manager forms (Q3). The consultation included proposals to strengthen governance by requiring Solvency II insurers and large non-directive firms to encourage board diversity (Q4)
4 October 2017 Hearing date in Court of Appeal for appeal in Kilraine v London Borough of Lambeth. The EAT considered the issue of whether a disclosure was simply an allegation and not a disclosure of ‘information’ as required by law. The EAT also noted that a suspension usually constitutes a detriment extending over the period of the disciplinary suspension although in this case a tribunal reached a different conclusion. The decision is awaited.
31 October 2017 Reporting window closes for notifying the FCA of breaches of conduct rules for ‘other’ conduct rules staff (Form H: https://handbook.fca.org.uk/form/sup/SUP_15_ann_7R_Form_H_20160307.pdf)
3 November 2017 Deadline for responses to the consultation papers (FCA CP17/25, CP17/26 and PRA CP14/17) on extending the SMCR
12 November 2017 Changes to PRA senior management functions SMF 6 and SMF 24 and prescribed responsibilities come into force (see PRA PS12/17) See: http://www.bankofengland.co.uk/pra/Documents/publications/ps/2017/ps1217app1.pdf)
14/15 November 2017 The appeal in Roberts v Wilsons solicitors is due to be heard in the Court of Appeal. The EAT held that a limited liability partnership (LLP) member who is a worker and protected by the whistleblowing legislation can claim compensation for post-termination losses even if lawfully expelled as a member, provided that he demonstrates that such losses are attributable to earlier unlawful detrimental treatment. The fact that the expulsion was not claimed as a detriment under the whistleblowing legislation did not prevent Mr Roberts from claiming compensation for continuing detriment after he ceased to be a member of the LLP
End 2017

Final guidance from the Financial Stability Board (FSB) on sound compensation practices. This is supplementary guidance to the FSB principles and standards on sound compensation practices, published in 2009.

Consultation closed on 30 August 2017 and can be read here

End 2017 Financial Reporting Council consultation on review of the corporate governance code
Summer/Autumn 2018 Policy statements expected to be published on extension of SMCR
30 June 2018 Joint EBA/ESMA guidelines to assess the suitability of management body members and key function holders will apply to competent authorities and to institutions. The previous Guidelines will be withdrawn
Late 2018 Extension of SMCR to all FSMA-authorised firms – date to be confirmed by HM Treasury
Date to be confirmed Responses to BSB consultation on guidance and publication of final guidance on certification. Read the draft guidance
FCA feedback on DP16/4 (role of legal counsel) and possible policy proposals. In the meantime, firms are referred to this FCA statement

Read our last Quarterly briefing with a round up of recent developments

Recent briefings

Modern slavery reporting: coming around again amidst rising expectations
Ethnic diversity on UK boards
Changes to the termination payments legislation
Quarterly UK employment update

For more briefings, visit www.eversheds-sutherland.com

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