It is well known that the FCA is readying itself to roll-out the Senior Managers and Certification Regime (SMCR) to all authorised firms. The goal of the SMCR reforms is to increase levels of actual and perceived accountability. A version of SMCR has applied to banks since March 2016.

It is expected that a staged roll-out will commence later this year and be completed in 2019. Whilst the final rules are not in effect yet, firms not currently in the SMCR regime should engage now with the prospective changes to ensure that their house is in order.

This note explains some features of SMCR and the FCA's recent consultations, to help firms understand what is to come.

The Consultations.

In July 2017, the FCA set out (in CP17/25) for the first time its substantive proposals as to how the wider roll-out of SMCR would operate. In very broad terms, the regime proposed is substantially similar to the SMCR that already applies to banks. It includes the replacement of the current Approved Persons Regime (APR) with a tri-partite regime of Senior Managers holding defined Senior Management Functions (SMF); certified staff whose "fitness and propriety" is assessed by the authorised firm itself (rather than the FCA); and a wider constituency of non-ancillary staff not subject to the requirement of being "fit and proper" but subject to new Conduct Rules.

Importantly, it was proposed by the FCA in July 2017 that the precise application of the new rules would depend upon the categorisation of firms (in broad terms based on size) into any of 'Limited Scope', 'Core' and 'Enhanced'. The precise criteria are set out in this FCA flow chart:

Firms should determine now which categorisation they will fall under. Additionally, many firms may wish to opt to "act-up" to a different categorisation and this will also require careful thought.

Transition to SMCR for 'Core' and 'Limited Scope' firms.

The FCA has prepared "function mapping" tables that will serve as a useful first stop for Core and Limited Scope firms, engaging with what they will need to do to transition their senior management teams into SMCR .

It will be recalled that SMCR, as it applies to banks, requires all SMF holders to sign up to a Statement of Responsibility (SoR). The SoR is fundamental both to the FCA's overarching goal with SMCR of enhanced accountability, and to the new Duty of Responsibility (DoR) (see below). The FCA proposes that SoRs will need to be prepared for new SMF holders at Limited Scope and Core Firms, but need not actually be submitted to the FCA for approval. This will substantially lighten the administrative burden on the FCA, although the risk of defective SoRs going without check until it is "too late" is increased (for example if a case is brought in terms of the DoR – see below). Again, firms are encouraged to take advice on the preparation of its SoRs.

The FCA also recognises that the transition to the Certification regime may take some time for firms. As such, certified individuals will only have to be certified by firms as "fit and proper" 12 months after implementation and annually thereafter. This will allow Core and Limited Scope firms a longer window to make the necessary changes to its systems, controls, policies and contracts.

Implementation for 'Enhanced Firms'.

The FCA's proposal is that Enhanced Firms will similarly benefit from "grandfathering" where there is a direct correlation of roles (see above). However, the FCA wishes to be notified of this and to receive SoR and Responsibilities Maps (a requirement that only Enhanced Firms are likely to be subject to) before the "grandfathering" takes place. Those taking on new roles will be required to submit an SMCR Form A in the usual fashion or Form E if they are approved under the APR and they are changing roles.

Again, firms should look at the "function mapping" tables in the Consultation papers .

The delayed implementation of the Certification regime and the application of the Conduct Rules to non-ancillary staff summarised above, will also apply to Enhanced Firms.

The Duty of Responsibility.

The FCA proposes that the DoR will apply to all new SMF holders as it applies to those existing SMF holders at banks. The DoR is another key part of the FCA's overall goal of delivering increased levels of accountability. It is engaged in respect of senior managers where there is an adverse finding by the FCA in an area for which the senior manager was responsible. It is intended to provide the FCA with a new weapon for its armoury to bring about more effective individual accountability.

The FCA proposes that the existing guidance regarding the application of DoR applies without amendment to all SMF holders.

Next steps.

The window for the consultations on transitional provisions closes at the end of February 2018 and the FCA's aspiration is to finalise its approach, both in terms of the new rules and the transitional provisions, in the summer of 2018. The final implementation dates are not yet clear but the latest information from the FCA suggests that transitioning will take place between late 2018 and mid to late 2019.

All firms captured by the wider SMCR roll-out will be required to plan and implement significant changes, both in order to ensure compliance with the final transitional provisions and to ensure on-going compliance with the new SMCR. This will, no doubt, necessitate systemic reforms that will need to be carefully planned in advance. Firms within complex group structures and partnerships are likely to require particularly careful planning and thought. As such, whilst the timescales are relatively generous, firms would be well advised to start their planning processes if they have not already done so.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.