The Senior Managers’ and Certification Regime (SMCR) which has regulated banks, PRA investment firms and some insurers since March 2016 and which will now be rolled out to other FCA authorised firms, probably in the second half of 2018 now, has as its purpose to ensure that senior managers, being those that have (significant) influence over the running and performance of regulated businesses, are held both responsible and accountable for the performance and governance of the regulated business.
Under the SMCR, it is the regulated business that becomes a new mini regulator because it is up to the business itself to decide whether or not a particular employee is fit and proper to carry out a regulated function.
There are certain consequences that flow from this change; most importantly, it is the regulated business as the employer of the senior manager that can decide – for example, following a disciplinary investigation and hearing – that the senior manager is no longer fit to perform a regulated function and thereby deprive that senior manager of his or her livelihood. With this in mind, the question arises: Should senior managers, facing disciplinary charges that amount to gross misconduct or otherwise may result in them being found to be no longer fit to perform regulated functions under the SMCR, be entitled to legal representation?
Current state of the law
The question of whether employees can be legally represented in disciplinary hearings was considered by the Supreme Court in the case of R (on the application of G) v the Governors of X School [2011] UK SC30 (“G’s Case”).
In that case, an assistant music teacher faced allegations of sexual misconduct with a 15 year old work experience student. If the allegations were proved, the assistant was certain to lose his position on the grounds of gross misconduct and/or breach of trust and he would also have his name reported to the Independent Safeguarding Authority (ISA) to decide whether he should be placed on the Statutory Register, kept pursuant to the Safeguarding Vulnerable Groups Act 2006, as someone who is unsuitable to work with children; such a listing would result in his losing his profession/livelihood.
Employees facing disciplinary hearings have the right to be accompanied by a work colleague or a trade union official – the Employment Relations Act 1999, as amended. Furthermore, the 2009 ACAS Code of Practice on disciplinary (and grievance) procedures and hearings, gives more detailed guidance and arguably expands the statutory right. However, neither the 1999 Act, nor the 2009 ACAS Code goes so far as to suggest that employees should be entitled to legal representation at disciplinary hearings.
Also relevant to this debate is the European Convention on Human Rights, in particular Article 6, being the right to a fair hearing.
G’s Case
In G’s case, G was suspended pending disciplinary proceedings and a separate police investigation was also started. On advice, G refused to attend any disciplinary investigative meetings until the criminal investigation was concluded (invoking the rule against self-incrimination). G also asked to be legally represented at the disciplinary hearing. This was refused, so G attended the hearing but remained silent throughout. G was dismissed for gross misconduct/breach of trust, appealed against his dismissal and again asked to be legally represented. He also commenced to judicial review proceedings for breach of his Article 6 rights.
G succeeded in the High Court, which ordered that the disciplinary case against him be reheard by a differently constituted disciplinary committee of the school and that G should be allowed legal representation. The school appealed to the Court of Appeal, which upheld the High Court’s decision. The school appealed again to the Supreme Court.
The Supreme Court focussed on whether it would be: either the school’s decision to dismiss G or that of the ISA to place G on its Register that would cause G long term harm i.e.: the loss of his right to work with children.
The arguments
G argued that the outcome of the school’s disciplinary procedure, at which he was not legally represented, would result in the school’s referral of the matter to the ISA and the findings made against him by the school would have a significant effect/influence on the ISA’s proceedings and decision. Accordingly, he argued that he should be entitled to legal representation at both the disciplinary stage, before the school’s governors, and in relation to the ISA proceedings.
The Supreme Court considered the ISA’s procedure, which provided for an independent assessment of the evidence against G. The Court also noted that ISA caseworkers could request information or evidence from other authorities to assist with its decision making.
Accordingly, the Supreme Court held, by a majority, that the ISA procedure was sufficiently separate/independent from that of the school’s internal disciplinary procedures so as to be satisfied that the school’s decision to dismiss G would not adversely affect/contaminate the ISA’s process. Also, and importantly, the Court drew the distinction between the school’s disciplinary procedure, which could only result in G losing his job with the school, so the decision of itself would not affect his long term employability and the ISA’s procedure, which could result in G being prevented from working with children and so lose his ability to work as a teacher. The Court concluded that, under Article 6, G could only be entitled to legal representation before the school’s governors if their decision could be said to have a powerful influence over any decision to be made by the ISA. This was not the case. The ISA had its own independent processes, so G was not entitled to legal representation at the disciplinary hearing before the school’s governors.
Contrast the position under SMCR
As noted above, under the SMCR, it is the regulated financial business that becomes the mini regulator. It is for the business to certify relevant staff as fit and proper.
If a certified employee faces a disciplinary hearing for alleged misconduct (e.g.: dishonesty, misuse of alcohol or other drugs) that could allow the regulated business to conclude that he/she is not fit and proper so as to dismisses him or her for gross misconduct, it will be for the regulated business itself to inform the FCA that it has withdrawn certification. Furthermore, the regulated business is obliged to provide a detailed regulatory reference in relation to the senior manager’s conduct and behaviour, going back six years. This now means that it is impossible for the senior manager’s dismissal to be swept under the carpet by use of a formal Settlement Agreement.
In these circumstances, it is the senior manager’s employer, the regulated financial services business, that, as part of an internal disciplinary investigation and hearing, effectively holds the senior manager’s career/livelihood in its hands. Although, in some cases, the factual background to the withdrawal of fit and proper certification could result in separate disciplinary action by the FCA, there is no requirement for the FCA to act and in some cases no power for it to act (e.g.: if there is no alleged breach of the conduct rules).
Conclusion
In accordance with the principles outlined by the Supreme Court in G’s case, as it is the regulated firm’s actions that will effectively be the death knell for the individual’s career in the financial services sector, firms should prepare themselves for requests from senior managers that they have legal representation during any internal disciplinary processes.