Money managers operating in the U.K. are not only having to enhance the scrutiny and assessment of their employees based on behavior inside and outside the office as the result of a new conduct regulation, they're also having to set their own criteria against which to judge staff.
The enhanced regulation is supposed to bring more accountability to those running client money by weeding out bad behavior and ensuring that the U.K. Financial Conduct Authority is kept up to date with the professional and personal conduct of money management executives. But the non-specific nature of what constitutes bad behavior — which is open to interpretation by individual money management firms rather than being defined by the regulator — could lead to a "witch hunt," with employees potentially fired for "crazy reasons," one source at a law firm warned, asking not to be identified.
In a revamp of corporate conduct rules under the Senior Managers and Certification Regime — implemented fully in March to cover all FCA-regulated firms after a delay because of the COVID-19 pandemic — U.K. money managers now have to monitor executives who have significant influence over the management of client money more closely.
The regulation, which extends requirements that have applied to bankers for years, stem from the global financial crisis, which led U.K. watchdogs to demand that firms better scrutinize their employees in order to start rebuilding trust in the financial services industry.
Since 2019, firms have had to name a senior manager or managers — someone who performs senior management functions as determined by the FCA and who may also be held personally responsible for any breach of regulatory rules at the firm. By March 31, senior managers of money management firms have had to identify and certify — on an annual basis — staff such as portfolio managers, analysts and other employees considered by firms to be risk takers, as being "fit and proper" to invest client money.
The enhanced rules put more pressure on individuals to disclose any potential issues with their conduct. But they also mean that, while money managers have always been expected to make sure their staff are behaving properly in the workplace — particularly when it comes to running assets — they're now also having to vouch for an employee's conduct outside of work, going so far as deciding whether minor offenses such as receiving a speeding ticket warrants decertification. That decision is deferred to the firm's internal compliance team and then could be escalated to an internal panel, which decides whether the FCA needs to know about any potential red flags in the company.