Growing a Workforce in a Regulated Environment

Voiceover : Welcome to Fintech Focus, Skadden's podcast for Fintech industry professionals. The global regulatory and legal updates you need, start now. Joe Kamyar : Hi and welcome back to Fintech Focus. You've got myself again, Joe Kamyar, and today I'm joined by Seb Barling, who's both partner and head of our financial regulatory practice here in London.

Sebastian Barling : Thanks, Joe. Very happy to be here. Joe Kamyar : And we've also got Damian Babic, he's counsel in the London Employment Practice. Damian, thanks for joining.

Damian Babic : Hi Joe, great to be joining you both. Joe Kamyar : So plan for today, we thought we'd look at how growth stage FinTechs manage their rapidly growing workforces within their regulatory environment. And in particular, I think today's focus is going to be both on the onboarding of senior hires, as well as some of the key issues to consider during the period of their employment. Sebastian Barling : That's right.

And I think before starting, it's worth flagging that good governance and culture have always been a core focus of regulators in the UK, particularly given its reliance on less prescriptive principle-led regulation. As such, both the recruitment and conduct of senior hires is something that regulators see as essential in allowing firms to deliver in these areas. And we've seen a lot of developments in this area over the last decade, which looks set to continue. Joe Kamyar : Agreed.

So let's take things chronologically and start by looking at the point of hire. So lots of listeners will be familiar with the senior managers and certification regime as well as the conduct rules. And so Seb, perhaps you could outline who those rules apply to in this context. Sebastian Barling : Yeah, sure.

But first of all, some background. The SMCR came into force in 2016 originally for banks and other large institutions as a mechanism for addressing recent government failings, including from the GFC. The regime was viewed as a success, and subsequently extended in various degrees to cover other firms authorized under the financial services and markets Acts 2000. So it's worth noting that currently the regime doesn't apply to payments or other e-money institutions not authorized under that piece of legislation.

: I say currently as we're awaiting some imminent publications from the Treasury and the UK regulators on the SMCR. Certainly the expectation is that this will not result in significant transformation of the regime, given that is well liked by regulators. But one likely outcome is an extension of the regime to payments in e-money firms, as well as exchanges and other financial market infrastructure providers. As such, the regime will either already be applicable to firms in the FinTech sector or is likely to become relevant in due course.

Joe Kamyar : So if you are in scape, how's that going to impact the process for onboarding senior hires? Sebastian Barling : So the headline issue for senior hires is if an individual is undertaking a senior management function, that individual will need to be approved by the FCA, and potentially by the PRA for dual regulated firms. This is going to apply to all executive directors, heads of senior business lines and compliance officers. : The application for approval will need to be made by the firm in question, and they will need to demonstrate to the relevant regulator that the individual is fit and proper, more on this later, for their role.

Firms will need to submit a comprehensive packet of information to the regulator for each senior manager, including an application form, CV, background check, and a statement of responsibility outlining all details of the applicant's intended role. All of this can take some time to pull together, and will require close cooperation between the individual and the applicant firm. : Once submitted, the regulator will have up to 90 days to review before deciding to approve it, potentially with conditions, inviting a firm to withdraw the application, or rejecting it.

As part of this process, we often see particularly senior individuals, i.e. the CEO, called for interview by their regulators in respect to their application. : So the key takeaway here is that FinTech firms need to build in adequate time for these approvals to be obtained.

This is a process we've helped numerous clients with over the years. There's also a need to ensure that this process is reflected in any employment documentation. : Damian, what should employers be thinking about? Damian Babic : Well, the most important consideration, Seb, is that all of the employment documentation, including any offer documentation and the employment agreement itself, should be clearly stated to be conditional on all applicable regulatory approvals being obtained in order for the employee to perform their particular function.

Now, this is also important in giving the employer the contractual right to terminate employment if these approvals are not obtained. : So given the high level of cooperation between the employer and the individual that's needed in submitting the relevant applications that you've outlined, it's also worth including this in the employment agreement, and an express contractual obligation on the employee to cooperate with both the employer and the regulator when working through this process.

Joe Kamyar : Yeah, and Seb, what expectations do regulators have on the employing firms from the point of hire onwards? Sebastian Barling : So first of all, it's worth saying that the regulatory expectations would apply in addition to any contractual employment requirements, and that these regulatory expectations can't be contracted out of. So they're here to stay. Let's focus on two regulatory topics that senior managers will need to focus on.

: The first is the code of conduct. The UK regulators impose a code of conduct on broadly all employees in FSMA authorized firms. This looks a little motherhood and apple pie. It requires individuals to comply with six rules.

Namely, to act with integrity, to act with due skill care and diligence, to be open and cooperative with regulators, to treat customers fairly, to observe proper standards of market conduct. And then there's the new consumer duty rule. You have to deliver good outcomes for retail customers where that's relevant. Senior managers will need to comply with these rules, but in addition will also be subject to four additional senior manager conduct rules.

: These go further than the conduct rules above and require a senior manager to take reasonable steps in respect of one, controlling effectively the business for which they're responsible. Two, ensuring the business they're responsible for complies with all regulatory requirements, and three, ensuring that any delegation is to an appropriate person and overseen effectively. : And then there's also the senior manager conduct rule that requires the senior manager to disclose any information of which the FCA or PRA would reasonably expect notice.

: Now the second topic to focus on is on annual certification. Senior managers and other material risk-takers in a firm will be subject to an annual certification process whereby their continuing suitability for the role is assessed. This is effectively a rerun of the fit and proper assessment a senior manager would've gone through an appointment, and will involve a firm looking at the following three criteria. An individual's honesty, integrity, and reputation, their competence and capability, and their financial soundness.

: We won't go through each of these limbs now in the interest of time, but the key point is that any FinTech senior manager will be subject to an ongoing assessment that they remain suitable for their role. And this is going to be particularly relevant in more fluid organizations where roles can change quickly, or headcount may be limited and responsibility allocated narrowly. Joe Kamyar : So I guess a real challenge for many FinTechs is that their high grade strategies come very often with rapid increase in headcount, as we've discussed over a potentially relatively short period of time as they're scaling up their businesses.

And so clearly the frameworks, policies, procedures, and support functions would ideally all need to develop alongside that. But obviously that's easier said than done. And certainly from an M&A lawyer's perspective, when we're doing our due diligence exercise and targets, it's a pretty common theme. : See growth and headcount and front office functions to essentially far outstrip any padding out of many of the necessary support functions.

So your HR teams, legal compliance, so on. So this can mean that firms don't have, for example, a consistent approach to dealing with disciplinary and other HR issues, and other key risks flowing from that. : So Damian, it'd be great to get your thoughts on how this can be managed in practice and what are some of the key employment law considerations that grade stage FinTech should be mindful of? Damian Babic : Yeah, you're right, Joe.

There's a number of key things for employers in these types of businesses to consider, and that's particularly on hiring. So most importantly, employees with more than two years service, they're protected from being unfairly dismissed. And what does that mean? Well, that means that in order to dismiss fairly, an employer must have a fair reason to dismiss the employee.

And fair reasons are limited to a handful of categories, and those include things like capability, conduct, or redundancy. But also the employer's got to follow a fair process when dismissing, and the precise process to follow really depends on the reason for the dismissal, and the individual circumstances. : So for example, when carrying out an investigation into potential misconduct and determining whether or not to take disciplinary action, the employer's got to balance the rights and interests of the person who's accused.

So that includes giving that employee the chance to make their case and defend themselves, with any potential victim of the behavior that's the subject of the investigation, and any potential disciplinary process. : Now, given the protections that employees have in the workplace, that makes it even more important to have robust hiring and vetting procedures in place before offers are made. And that's to ensure that management time and cost is not wasted later on in the process when managing someone out of the business.

: Now to complicate this whole picture further, the new government has proposed to remove the two-year qualifying period for unfair dismissal, which would mean that all employees have unfair dismissal rights from day one of employment. Now, while we suspect that employers may still be able to use probationary periods to make it easier to dismiss employees really early on in the employment relationship, what we don't know is how far it'd be possible to use these types of levers under the new rules.

: So as a result, onboarding procedures are going to be more important than ever in ensuring the suitability of a candidate before their employment even commences. Now, what does that mean for the business? Well, if an employee is unfairly dismissed than they're entitled to compensation of the lower of 12 months pay and 115,115 pounds plus a basic award that's calculated on the employee's age, tenure and weekly pay. And weekly pay is capped at 700 pounds.

: Now the compensatory award is calculated based on the actual losses that an employee incurs as a result of their dismissal, and the employee is under a duty to mitigate those losses, so they would have to seek alternative employment on an equivalent rate of pay. Joe Kamyar : Again, Seb, how does that all interplay with the applicable regulatory requirements? Sebastian Barling : Well, we'll talk about the regulatory considerations in respect of levers as part of a separate session.

But in terms of regulatory disciplinary action, which can be imposed on senior managers, there are a few key points worth flagging. : First of all, regulators can bring action directly against senior managers themselves, in respect of (inter alia) breaches of the conduct rules. So there is potential personal liability here. Whilst it's normally brought in conjunction with an action against a firm, this does not necessarily have to be the case.

And disciplinary actions can be imposed, include public censure, fines calculated by reference to compensation, and a prohibition from holding senior management roles in the future. And individuals cannot be insured against fines for policy reasons, but they can be insured against the cost of defending any actions. : This means that all senior managers need to take their obligations seriously, and we often work with clients in putting in place regular bespoke training to ensure they understand this.

Risks can be particularly acute in FinTechs or other high growth companies where underlying business could increase faster than this underlying governance and control framework, potentially leaving senior managers exposed. But that all are safe for now given time. : There is a lot on this topic which we haven't touched on, and where there is some nuance. For example, the impact on NEDs, the treatments of branches, and overseas employees.

Joe Kamyar : Right, well, on that note, let's call it there. Sounds like we've got at least one more podcast to go on this topic. : So Seb, Damian, thank you for your time. Really appreciate both your inputs, and thank you to everyone for listening.

See you next time. Voiceover : Thank you for joining us on FinTech Focus. If you enjoyed this conversation, be sure to subscribe in your favorite podcast app so you don't miss any future conversations. Additional information about Skadden can be found@skadden.

com.