UK: Regulatory References And The SMCR: Heading Into Extra Time

Last Updated: 15 February 2016
Article by Daniel Lewsey

Most Read Contributor in UK, August 2017

On 4 February 2016 the FCA issued Policy Statement (PS) PS16/3 entitled 'Strengthening accountability in banking'.  Although predominantly focused on final rules extending the forthcoming Certification Regime (CR) to wholesale market activities, the PS also provided an update on the regulatory reference proposals previously outlined in the joint FCA/PRA Consultation Paper issued in October 2015.  The proposals focus on the risk posed to consumers and to market integrity if individuals with a history of questionable conduct, or so-called "bad apples", are able to move from one regulated entity to another, without their new employer being aware of any historic conduct issues.

The FCA, after analysing the feedback it had received, has considered it appropriate to delay finalising the regulatory reference proposals until after the commencement of the Senior Managers and Certification Regime (SMCR).  The FCA intends to issue a further publication in the summer of 2016 and, in the interim, has stated that it will extend existing referencing requirements to SMCR firms, ensuring that the existing obligation to provide a reference for roles requiring regulatory pre-approval will also apply at commencement.  Under the existing regime, firms are required to provide a reference as soon as reasonably practicable and which provides relevant information of which it is aware, including details of any outstanding liabilities from commission payments; of any outstanding or upheld complaints; and of any information which may impact on a firm's assessment of an individual's fitness and propriety.

A chance to line up your defence

The delay in implementing the regulatory reference proposals and the deadline of 7 March 2017 to issue the first certificates under the CR, presents firms with a good opportunity to take stock; to consider further the operational and legal complexities presented by the regulators' proposals; and to review and test the processes they have put in place.

Senior managers who will assume oversight responsibility for their firm's compliance with the SMCR should also take this time to satisfy themselves that relevant policies and procedures are adequate; that any management information produced will provide them with adequate oversight of the SMCR; to ensure any decision-making structures in place are fit for purpose; and, perhaps most importantly, to ensure they have line of sight in respect of any key decisions that need to be made, both at the recruitment stage and when an existing employee is facing, or could potentially face, disciplinary action.

Following commencement the regulators are likely to scrutinise how the SMCR has been implemented.  Our team of regulatory and conduct experts have highlighted the following key areas that may help firms in their preparations:

  • Policies and procedures should reflect that any regulatory reference received, which calls into question, or has the potential to call into question, an individual's fitness and propriety, should be flagged up to allow the individual's fitness to be subject to further scrutiny.
  • Firms should seek to satisfy themselves that HR / onboarding staff are adequately trained, or have access to expert help, when faced with regulatory references that may contain information of a regulatory or technical nature.  This will help staff to understand the nature of any adverse disclosures made in a regulatory reference and to understand the relevance and potential impact that the adverse disclosure may have.
  • Regulators will expect firms to have clear decision-making procedures in place when considering the impact of an adverse disclosure.  Regulators will also expect to see evidence that these procedures were followed, including a record of decisions made alongside the underlying rationale for decisions made.
  • Under SMCR, firms will have an obligation to annually review and certify certain individuals' ongoing fitness and propriety. However, procedures should also be in place to cover the eventuality that an individual's ongoing fitness is called into question before the next review date; for example, in the event that an individual faces the prospect of a conviction or faces disciplinary action as a result of a breach of the Conduct Rules.  Regulators will expect procedures in place to be reviewed regularly to ensure they remain appropriate.

Senior managers with accountability for overseeing their firm's implementation of SMCR should expect to be subject to significant regulatory scrutiny.  Senior managers need to ensure they can demonstrate that they have taken reasonable steps to introduce the necessary controls and processes to allow the SMCR to operate effectively within the firm. These reasonable steps will vary from firm to firm, but senior managers should be delegating to appropriate individuals; retaining oversight through regular and relevant management information; ensuring key decisions are recorded; and regularly reviewing and updating controls. 

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.

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