Delegation: what does “good” look like
Delegation is a cornerstone of good management and the effective functioning of financial institutions. It is also an instrumental part of how Senior Managers discharge their regulatory responsibilities. There is no denying that COVID-19 and the shift to ‘working from home’ has made the oversight of delegated responsibilities more challenging for Senior Managers. However, far from relaxing delegation requirements, regulators still expect firms to have robust supervision and oversight arrangements in place. In this post, we explore how a Senior Manager can test whether their delegation functions effectively in practice and meets the regulators’ expectations.
The regulators’ expectations
Under the Senior Managers and Certification Regime (SMCR), Senior Managers are not expected to have expertise across all areas for which they hold regulatory accountability and may delegate to other individuals. Nevertheless, Senior Managers are expected to take “reasonable steps” to ensure that any delegation of their responsibilities is to an appropriate person and that the delegation is properly overseen and carried out, and risk regulatory action if they fail to do so.
However, delegation is not a regulatory concept and very little guidance exists on what ‘good’ delegation looks like. It has therefore largely been left to firms and Senior Managers to design their own governance and oversight frameworks and ensure that they work effectively in practice.
Senior Managers should consider three overarching questions when thinking about their delegation arrangements:
- What responsibilities are you delegating?
- Are you delegating to an appropriate person?
- Are you effectively overseeing that delegation?
What responsibilities are you delegating?
The regulators require that all Senior Managers have Statements of Responsibility which clearly and accurately describe the activities for which the Senior Manager has regulatory responsibility. Relevant activities of the financial services firm should be appropriately apportioned among the Senior Manager population and any overlap or splitting of responsibilities should be clearly described in the relevant Statements of Responsibility.
Where a Senior Manager delegates day-to-day responsibility for any aspect of their regulatory responsibility, it is imperative that such delegation is clearly documented and understood, which is likely to go beyond what’s recorded in the Senior Manager’s own Statement of Responsibility. Regulators might expect direct reports of Senior Managers to have role profiles which are agreed by both the Senior Manager and the delegate and clearly describe the activities for which day-to-day responsibility has been delegated. Other documentation may be needed to evidence delegation of responsibilities, such as structure charts or responsibility matrices. Written acknowledgement of the delegation and regular communication with delegates are good practice to ensure the exact scope of roles and delegated responsibilities is clear.
As with all SMCR documentation, delegation documentation should be regularly reviewed and kept up-to-date. Particularly in times of stress or crisis, this will help Senior Managers ensure they have a complete and accurate understanding of how they are discharging their regulatory responsibilities in order to quickly respond and adapt to the changing needs of their organisation.
Are you delegating to an appropriate person?
Senior Managers should only delegate to individuals who have appropriate competencies including knowledge and skills, and training and experience. The regulators may call upon a Senior Manager to demonstrate that they have ‘reasonable grounds’ for believing that any delegation is to an appropriate person. It is therefore crucial to carefully consider whether delegates have appropriate competencies and to be satisfied that the delegate has both the capacity and competence to manage any delegated responsibility.
The competencies of delegates should be kept under regular review, particularly where there are changes to staff or to delegated responsibilities. Senior Managers may need to delegate to people they know less well or in areas in which the Senior Manager themself has less experience. In such cases, it is good practice to seek reassurance that their delegation remains appropriate, for example by investing in training / upskilling, changing the responsibilities being delegated, or adapting oversight mechanisms.
Senior Managers are responsible for ensuring that they have delegated regulatory responsibilities to appropriate people and that issues are addressed at the appropriate level. This requires ongoing and proactive testing of how the delegation is functioning in practice, and how well their delegates are carrying out their delegated responsibilities.
Are you effectively overseeing that delegation?
Senior Managers must ensure that appropriate mechanisms are in place to effectively oversee the delegation of regulatory responsibilities. At its most basic level, this is about ensuring delegates are properly supervised and monitored, issues are appropriately escalated to the Senior Manager, and that regular reviews of delegated responsibilities are carried out. Appropriate oversight mechanisms will vary according to the nature and complexity of the function / business area for which the Senior Manager has responsibility and the matters delegated, but may include reporting lines/ escalation mechanisms, meetings with delegates / teams, formal governance or committee structures, MI, and / or the performance management process.
What is important in practice is that there is a clear (and ideally documented) information flow to enable the Senior Manager to have timely sight of issues arising in areas where they have delegated their regulatory responsibilities. For example, when assessing how oversight mechanisms are functioning in practice, Senior Managers might consider whether and how they are made aware of the following:
- breaches, near-misses, or other risk incidents;
- any non-standard or ‘out of risk’ business, clients, etc;
- any new commercial developments – whether new business/products that are being launched, systems upgrades etc;
- any regulatory communications (UK or otherwise) relevant to the business area;
- employee compliance issues within the function; and
- HR / resourcing issues.
Finally, Senior Managers should critically assess their own role in ensuring that the delegation is working effectively. Is the Senior Manager confident that they are maintaining an appropriate understanding of the function / business area? How are they responding to issues escalated by delegates and are they ensuring appropriate action is taken? Has ‘trust but verify’ become simply ‘trust’ with little meaningful challenge?
Consideration of the above is a dynamic, not static, process taking into account the changing nature of the regulatory landscape and working environment due to COVID-19 and beyond. As workforces begin to return to work under potentially modified working conditions, Senior Managers should consider how reporting and escalation may differ when in the office, as opposed to ‘working from home’ and what could be done to account for this? Has the risk-profile of the function / business area changed in a ‘working from home’ vs ‘at the office’ context? Are formal governance structures still functioning effectively and is MI still fit-for-purpose? These are just some of the questions a Senior Manager might ask as they consider how well their delegation functions in practice in ever-evolving circumstances.
What ‘good’ looks like
‘Good’ delegation will be unique to each Senior Manager. Below are some general questions that Senior Managers can ask to test the quality of their delegation and to set themselves up for success.
What responsibilities are you delegating?
- Do clear role profiles (or other documents) exist for my delegates?
- When were they last reviewed and how are they kept updated?
- Are responsibilities allocated and apportioned appropriately?
- Are there any conflicts between delegates different responsibilities?
Are you delegating to an appropriate person?
- Is the delegate competent to perform the role?
- Does the delegate have enough capacity to carry out their responsibilities?
- Are these any concerns about past performance?
- Is it appropriate to rely on a contractor / third party / affiliate to discharge the delegated responsibility?
Are you effectively overseeing the delegation?
- What steps are necessary to ensure my delegates are properly supervised and monitored?
- Have established clear reporting lines and are these documented?
- What escalation procedures are in place for the delegate to report issues to me? Are written escalation protocols required?
- Do delegates understand what is required of them and receive effective and timely training?
- Am I meeting with the delegate enough?
- Am I receiving MI frequently and is it sufficient for me to make a qualitative assessment of key trends, risks and systemic problems?
- Do I receive information on the activity form alternative sources (e.g. governance fora)?
- How am I scrutinising the information received from delegates?
- What authority do I have over delegates' performance appraisals remuneration and misconduct?
How we can help
We advise many financial services firms on a range of issues relating to internal reporting and senior management oversight through board/executive effectiveness reviews, ‘Reasonable Steps’ assurance reviews and governance benchmarking reviews, among other mandates. Given the relative lack of regulatory guidance in this area, our experience advising firms in the context of pre-enforcement and enforcement actions gives us a unique insight into common pitfalls and the regulators’ approach, and provides us with the tools necessary to assess and recommend improvements to the delegation frameworks used by Senior Managers. If you would like to find out more about how Linklaters can help you, please feel to get in touch with any of the key contacts listed.