Summary

Dame Hackitt’s report on Review of Building Regulations and Safety presented to the Parliament in May 2018 by the Secretary of State for Housing, Communities and Local Government highlighted that there is ambiguity over where responsibility lies, exacerbated by a level of fragmentation within the industry, and precluding robust ownership of accountability. Similar issues on lack of accountability of senior managers were identified by the final enquiry report on the failure of Carillion by the Work & Pensions and BEIS select committees. The changes made by the financial services industry may offer some guidance to the infrastructure sector and this paper summarises the highlights of the progress made in the financial services sector.

Lessons from the Financial Services Sector

Background

The Senior Managers & Certification Regime (SM&CR) is the implementation by financial services regulatory authorities which were the key recommendations of the Parliamentary Commission on Banking Standards (PCBS). The PCBS was established to “consider and report on professional standards and culture of the UK banking sector”. Its conclusions reflected the political and public anger following the financial crisis.

SM&CR is considerably more than a normal regulatory initiative, and its intention was to re-cast the culture of financial services firms and their relationship with the regulators. This explains why many of its measures are far-reaching and intrusive covering over 50,000-plus firms. It also, in part, explains why the SM&CR is now being applied to almost all regulated firms.

In summary, a regulated firm must produce the following:
• Statement of responsibilities: Every Senior Manager will need to have a Statement of Responsibilities (SoR), setting out his or her role and responsibilities. This is submitted to the regulator and must be updated with any significant changes. These will need to be clear and tightly worded, with no overlap between different senior management functions.
• Handover Procedures: Handover procedures will need to make sure that people who are becoming Senior Managers have all the information and material that they could reasonably expect in order to do their job. This places an onus on the outgoing Senior Manager Function (SMF) holders and the firm to provide an up-to-date summary of the situation in the relevant area(s) of responsibility. The handover pack will also act as a record of an outgoing SMF’s declaration of the state-of-play which, if found to be lacking, will be held up as evidence.
• Duty of Responsibility: Given the proposed increased accountability of individuals that is the main driver of the SM&CR, the SMF holders will need to take greater care in documenting their actions and the reasoning behind them.
• Fit and Proper requirements: Firms will need to apply the fit and proper test to all holders of SMFs and Certification functions, and to any non-executive directors who are not SMFs. A criminal records check should be carried out by the Firm as part of the application to appoint a person for a senior manager function. The assessment should be on a continuing basis and will need to be formalised at least annually. The FCA proposes using the existing requirements for the fit and proper assessment. These are detailed in current FCA rules, but should cover at least the following areas:
o Whether that person has obtained a required/relevant qualification
o The on-going training records of that person
o The competence of that person to perform that role
o personal characteristics of that person.

The Certification Regime
The certification regime is divided into different types of Firms:
Enhanced: The criteria for being part of the Enhanced regime have been designed to capture only the largest, most complex solo-regulated firms, those that the regulator believes carry the greatest potential risk to their objectives. The regulator believes there are only about 350 firms, although this number is likely to rise over time.
Core Firms: Firms in the Core regime have a significantly smaller number of mandated SMFs than Enhanced firms, possibly as few as five. They will be subject to limited SM&CR. This is a significant attempt to make the SM&CR more proportionate.
Limited: The criteria for being a Limited regime firm are largely based on what types of activity the firm undertakes. This regime is intended to cover firms that are currently subject to a limited application of regulatory activities, and these firms will need to have only a small number of SMFs, between one and three depending on the type of firm. However, firms in the Limited regime are still subject to the full Certification regime and Conduct Rules, and many of the Fit and Proper requirements.

The Certification Functions
The following functions are considered as falling within the SM&CR: For example
• Significant management function
• Functions subject to qualifications
• Material risk takers
• Manager or supervisor of a certified function
Generally, all members of the Board (including Non Executive Diectors) and Heads of Support Functions are covered by this regulation.

Conduct Rules
The regulator has also specified new conduct rules to senior managers and individuals. The senior manager ‘conduct’ rules reiterate responsibilities for effective controls, regulatory compliance, delegation and disclosure. The individual conduct rules specify acting with integrity, due skill and care, open and cooperation with regulators etc. A firm must have an effective system to monitor breach of these rules.

Criminal offence
The Act state that senior managers may be prosecuted by the regulator for taking a decision that causes their firm to fail if the senior manager must have been aware of a risk that its implementation would cause the firm to fail.

Conclusion and relevance to the Construction Sector

Any system of accountability should follow principles of proportionality, simplicity and flexibility. The Construction (Design and Management) (CDM) regulations 2015 places emphasis on the principal contractors and designers to have an important role in managing health and safety risks during the construction phase. They must demonstrate that they have the skills, knowledge, experience and, where relevant, organisational capability to carry out this work.
We believe that this should go further at project level and at firm level. The responsibilities for senior managers should extend to the lifetime of the asset and should be documented accordingly.

The aim of a regulatory regime should be to reinforce the governance structures which are already in place. Such a framework would fail if the tone of the top does not clearly communicate culture, roles and responsibilities.

Such a system will fail if there no cross-party support to implement new regulatory regime. The professional bodies in the construction sector need to raise their game to improve the current assurance and training regimes to make such as initiative a success. It is likely that there will be cost implications to firms and end customers, but we believe that this will mitigate the risk of ‘race to the bottom’ of the construction sector.