UK: FCA Consults On Extending The Senior Managers And Certification Regime To All FCA Firms (Investment Management Brief: 27 July 2017)

Last Updated: 27 July 2017
Article by David Heffron, Elizabeth Budd, Michael Lewis and Ian Warner

UK regulatory 

FCA consults on extending the Senior Managers and Certification Regime to all FCA firms

The FCA has launched its consultation paper CP17/25: Individual Accountability - Extending the Senior Managers and Certification Regime (SM&CR) to all FCA firms. Currently the SM&CR applies to UK banks, building societies, credit unions and PRA-designated investment firms (banking firms) and replaced the Approved Persons Regime. Now the FCA is replacing the Approved Persons Regime with the SM&CR in almost all financial services firms: a change which will impact on almost all firms that the FCA regulates – and, as the FCA says, "will affect everyone performing financial services roles at those institutions." The CP contains the FCA's proposals for extending the regime and some provisions that relate to the existing banking regime. 

As such a wide range of firms will be within the scope of the new SM&CR requirements the FCA is not proposing to mirror the approach it took for banking firms. Instead it intends to apply consistent principles across the sector in a regime that is "proportionate and flexible enough to accommodate the different business models and governance structures of firms." So the FCA is proposing:

  • a baseline of requirements - the 'core regime' - that will apply to every FCA solo-regulated firm and which comprises the three key elements of the SM&CR namely: the Senior Managers Regime, the Certification Regime and the Conduct Rules;
  • some extra requirements – the 'enhanced regime' - that apply only to the biggest, most complex firms (totalling under 1% of FCA solo-regulated firms) which will, for example, need Responsibilities Maps, Handover Procedures and a Senior Manager who is responsible for every area of the firm ('Overall Responsibility'); and
  • a reduced set of requirements for firms that are 'Limited Scope'.

Firms that are regulated by both the FCA and the PRA have to comply with both regulators' rules.

Most of the CP will be relevant to 'solo-regulated' firms i.e. those now within the Approved Persons Regime and not the SM&CR. The FCA provides a "Firm Checker" at page 14 in its Guide to the Regime (chapter 3 of CP17/25) to assist firms work out which type of firm they are (i.e. Limited Scope SM&CR firm, Core SM&CR firm or Enhanced SM&CR firm) and flags at the top of the substantive chapters the firms to which they apply. So, for example, chapters 4, 5 and 6 respectively the Senior Managers Regime; Certification Regime and Fit and Proper Requirements apply to all firms; chapter 8 applies to enhanced firms; chapter 9 to incoming branches of firms and chapter 10 to banking firms.

The FCA asks for feedback by 3 November 2017. It sets out its proposals for insurers separately in CP17/26 and those of the PRA are in its CP14/17.

For further information on the current SM&CR regime for banking firms, please see here.

FCA's findings from review of property funds and liquidity risks

The FCA has published its finding from its review of the suspensions of property funds and their pricing adjustments [20.07.17] after the vote to leave the European Union when some daily-dealt property funds and unit-linked funds suspended dealing in units and/or applied temporary price adjustments as assets could not be realised sufficiently quickly to meet redemption demands and because of uncertainty as to property values.  The FCA said property funds "should take external events into account as part of their planning in order to deal with potential liquidity risks". Overall findings include:

  • suspensions, deferrals and other liquidity management tools effectively prevented further escalation of market uncertainty;
  • liquidity monitoring and management varied among property funds;
  •   valuing real estate in stressed market conditions is challenging - firms are to consider how best to deal with this;
  • firms' communications about significant market events could be clearer (this included customer communications).

The FCA presented its key findings by sector identifying among other things that authorised fund managers "did not adequately plan, or have clear policies or procedures for valuing their property portfolios under stressed market conditions" the FCA said. Some unit-linked providers showed poor governance in unit-linked products, some with real estate holdings "did not appear to manage their liquidity well" according to the FCA which did not find a consistent approach to communicating with customers and noted that some unit-linked providers did not issue any communications at all. The FCA said depositaries "did not appear to have considered fully how they should fulfil their responsibilities under stressed market conditions". Meanwhile the FCA found wealth managers and financial advisers were well prepared for suspensions, had diversified portfolios so suspensions made little impact on clients although not all firms had considered how suspensions would impact their model portfolios, and were still including daily-dealt property funds in portfolios to diversify assets.

Now the FCA expects all firms affected by the suspension or fair value pricing adjustments to review how they managed the event, including by examining their policies and procedures and the improvements they can make. The FCA will consider its findings along with responses to its Illiquid Assets and Open-ended Investment Funds discussion paper (DP17/1) which was open for comment until 8 May 2017 and the FCA will publish a Feedback Statement in due course. Read more on the background to DP17/1 here.

FCA publishes Insurance Distribution Directive Implementation Consultation Paper II

The FCA published its Insurance Distribution Directive (IDD) implementation consultation paper II [24.07.17] (CP17/23). This follows CP17/7 and contains the FCA's further proposals for implementing the IDD, which replaces the Insurance Mediation Directive. The IDD seeks to improve consumer protection when purchasing life and general insurance as well as insurance-based investment products (IBIPs). Among other proposals for FCA rule changes, the new CP includes proposals for life insurance businesses including on information requirements and additional requirements applicable to distributing IBIPs in a number of areas: a firm's general obligations; information disclosure to customers; inducements; suitability and appropriateness. The FCA seeks comments on the new consultation by 20 October 2017. It intends to publish a Policy Statement in December 2017. The FCA will also, separately, consult on its remaining proposals for implementing the IDD which include those relating to the Level 2 delegated acts and any changes to the Handbook resulting from HM Treasury's consultation on implementing the IDD, so the FCA expects its further consultation to be issued while CP17/23 is still open for comment.

FCA publishes terms of reference for Investment Platforms Market Study

The FCA has published its Terms of Reference for its investment platforms Market Study [17.07.17]. The Terms establish the scope and topics the FCA will review. The FCA is not formally consulting on the Terms of Reference but welcomes feedback by 8 September 2017.

FCA issues forms for passporting under MiFID II

The FCA has updated its page on passporting under MiFID II, [17.7.17] which includes forms to apply for a passport. For cross border services passports the deadline for submitting notifications to the FCA for a passport to take effect on 3 January 2018 is 2 December 2017. For an establishment passport the FCA reminds firms to submit notifications to them as soon as possible after the MiFID II passporting gateway opens on 31 July 2017, as MiFID II gives home state national competent authorities 3 months to assess these notifications followed by a period of at most 2 months from when the home state national competent authority transmits the notification to the host state national competent authority, before the passport becomes effective. The FCA clarifies that passport notifications should only be submitted once the firm has confirmation that its MiFID II authorisation or variation of permission application has been processed.

FCA reminds firms to have MiFID II contingency plans if they did not apply for their MiFID II authorisation or variation of permission by 3 July 2017

The FCA reminded firms [25.07.17] that if they have not yet submitted a complete application for authorisation or variation of permission in respect of MiFID II, then they are to do so without delay. The FCA will determine complete applications within 6 months: but cannot now guarantee to do so by 3 January 2018 for those submitted after the 3 July 2017 deadline. Firms that missed the FCA's 3 July 2017 cut-off date are therefore expected by the FCA to have contingency plans in place, in case they do not have their MiFID II permissions, as from 3 January 2018 firms can only carry on activities that require authorisation under MiFID II if they have the required regulatory permissions. 

FCA publishes MDP entity portal page

The FCA published its page on the Market Data Processor (MDP) system. The MDP will receive MiFID II market data from UK financial industry and non-UK EEA financial market participants. The link for registering a MDP Administrator User account is on the page.

FCA publishes its July Regulation round-up

The FCA has published its Regulation round-up for July 2017 [20.07.17]. This includes assessing suitability workshops, Q&A round table and one-to-one surgeries the FCA will run in October as part of their Live & Local programme.

FCA's Annual Public Meeting 2017

The FCA held its annual Public Meeting [18.07.17]. The video and transcript are available here

EU regulatory 

ESMA consults on Draft Guidelines on Aspects of the MiFID II Suitability Requirements

ESMA published [13.07.17] draft guidelines on certain aspects of the MiFID II suitability requirements. ESMA emphasises the importance of the suitability assessment for protecting investors and its application to any type of investment advice – whether or not it is independent - and to portfolio management. The Consultation Paper includes 13 questions, including some on technological changes such as robo-advice and to address behavioural finance findings. The proposals for the new draft guidelines confirm and broaden the existing guidelines from 2012. Consultation responses are to be submitted to ESMA by 13 October 2017. ESMA proposes to publish a final report in Q1/2 of 2018 – after MiFID II comes into effect.  

ESMA updates AIFMD and UCITS Q&A

ESMA updated its Q&A on the AIFMD [11.07.17] to include Q&A on how AIFMs convert the total value of AUM into Euro; where an AIF purchases a loan in the secondary market, how it measures its exposure in relation to that loan; and the currency in which the NAV of the AIF should be reported in relation to question 53 of the consolidated reporting template. (See questions 65, 81 and 82 respectively in Section III: Reporting to national competent authorities under Articles 3, 24 and 42).

ESMA updated its Q&A on the UCITS Directive [11.07.17] on whether the 40% limit in Article 52(2) UCITS Directive applies to index-tracking UCITS that are subject to Article 53 UCITS (Question 5 Issuer Concentration Section I General); and on whether the independence requirements in Article 24(2) UCITS V Level 2 are fulfilled by certain persons (Question 1: Group links, independence and cooling-off periods in Section VIII Independence of management boards and supervisory functions).

ESMA updates MiFID II and MiFIR Investor Protection and Intermediaries Q&A

ESMA updated [10.07.17] its MiFID II and MiFIR Q&A on investor protection and intermediaries topics. Two new Q&A address: best execution (Question 15): whether RTS 27 reporting requirements apply to Securities  Financing Transactions; and recording telephone conversations and electronic communications (Question 12): whether record keeping requirements apply only when, through a given channel, the execution and transmission of the order is allowed in addition to its reception and transmission.


ESMA's sector-specific opinions on relocating from the UK into the EU27

ESMA issued [13.07.17] three opinions containing its sector-specific principles for relocation of entities, activities and functions from the UK to the EU27. The opinions relate to investment firms, investment management and secondary markets. They follow on from the 'cross-sectoral opinion' on relocation from the UK ESMA issued in May 2017 (read more here).

The three opinions are addressed to the national competent authorities (NCAs) but are also relevant to market participants seeking to relocate. The investment firms and investment management opinions interpret 'relocation' broadly so as to cover an entity seeking authorisation for the first time in the EU27, an entity that exists in the EU27 that restructures which, for investment firms can be by way of acquisition of an existing investment firm and, in both opinions, includes where there is an "increase in the number of personnel" resulting from the transfer of activities and functions from a UK entity. 

Investment management opinion: sets out principles based on the objectives and provisions of the UCITS Directive and the AIFMD applied to the relocation of entities, activities and functions into the EU27 after the UK leaves the EU. It supplements the cross-sectoral opinion specifically regarding authorisation; governance and internal control; delegation and supervision. It assumes the UK will be a third country after it withdraws from the EU. Authorised entities include authorised UCITS management companies, self-managed investment companies and authorised AIFMs which are referred to as 'authorised entities' although NCAs will also need to consider EuVECA, EuSEF, ELTIF and MMF. Some key points on the three topics addressed include:


  • requirements in the UCITS and AIFM Directives are to be satisfied in full with relocating UK entities going through the same authorisation procedure subject to the same standards as other applicants;
  • no provision for reliance on previous or existing authorisations in other Member States or third countries;
  • no transitional provisions;
  • NCAs are to verify how "any (in particular non-EU) shareholders or members with qualifying holdings" are likely to influence the management of the entity and its compliance with EU investment management legislation;
  • NCAs are to scrutinise applications to make sure that the choice of Member State into which to relocate is driven by "objective factors (and not by regulatory arbitrage)".

governance and internal control:

  • authorised entities are to have "effective governance structures and internal control mechanisms" with the conduct of the entity decided by at least two Senior Managers. NCAs should not rely on this minimum number and should "request appropriate and sufficiently sophisticated governance structures (beyond the two minimum Senior Managers)" if, for example, authorised entities are of significant size, pursue complex investment strategies and/or invest in a range of different assets or geographies;
  • head office and registered office are to be in the same Member State;
  • for white label businesses authorised in the EU27, NCAs that supervise them are to give "special consideration" to any significant increases to their businesses over a short time resulting from the UK withdrawing from the EU, which may create additional, operational risks requiring more sophisticated governance and internal control, additional human and technical resources and are to check such entities comply with applicable delegation requirements - particularly as to substance (see below);


  • authorised entities to have policies and procedures compliant with relevant investment management legislation at all times; 
  • the need for objective reasons for delegation includes that NCAs are to assess the due diligence used to select a group entity delegate so as to be satisfied of the objective reasons for doing so; 
  • specific requirements for NCAs delegating portfolio management or risk management activities to non-EU entities; 
  • the substance provision says "authorised entities should not delegate investment management functions to an extent that exceeds by a substantial margin the investment management functions performed internally." This is to be carried out "in relation to and at the level of each individual fund and not in relation to a group of funds". 

Investment firms opinion: among other requirements ESMA notes that after the UK withdraws from the EU outsourcing of portfolio management functions to UK entities will only be permitted if the conditions in Article 32 of the MiFID II Delegated Regulation are met. These include the requirement that cooperation arrangements between NCAs and the UK competent authorities are in place. Current outsourcing arrangements with UK service providers will need to be reassessed and NCAs are to raise awareness of this. NCAs are also to "carefully monitor" third-country firms carrying out investment services or activities for EU clients using the MiFID II/MiFIR third-country regime and whether the "clients' own exclusive initiative" exemption is being misused by firms.  

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