UK: Financial Regulators Consult On Extension Of Senior Managers And Certification Regime

Last Updated: 28 July 2017
Article by Michael Ruck and Steven Cochrane

The UK's financial regulators have promised a "consistent and proportionate" regulatory framework as they consult on proposals for the extension of individual accountability rules.

The Financial Conduct Authority (FCA) has proposed a tiered approach to applying the Senior Managers and Certification Regime (SM&CR) across the wider financial sector, as set out in its consultation on the proposals. Both the FCA and the Prudential Regulation Authority (PRA) are also consulting on extending the rules to insurers and reinsurers, which are currently covered by the PRA's Senior Insurance Managers Regime (SIMR) and a revised version of the FCA's Approved Persons Regime (APR).

It is proposed that the SM&CR, which currently applies to deposit-taking banks, be extended to almost all other firms regulated by the FCA at a date to be set by the UK Treasury, expected for some time in 2018. It will replace the current APR for those firms and change how individuals working in financial services are regulated, according to the FCA.

The UK government announced its intention to extend the SM&CR to all regulated firms in October 2015.

"Whilst at the time this seemed to many presumptive in relation to the potential success of the SM&CR, as introduced initially to banks and a small number of other firms, the FCA and PRA have considered the regime to have been a success," said financial regulation expert Michael Ruck of Pinsent Masons, the law firm behind Out-Law.com. "John Griffith-Jones, the outgoing FCA chairman, recently referred to the SM&CR as the most significant single matter dealt with by the FCA in the last four years, during his introduction to the FCA annual public meeting. The extension of the SM&CR is therefore not surprising for many reasons."

"The key for those firms to which the regime is being extended is to learn from the lessons of those firms to which the regime already applies and to get to grips with the guidance already issued by the FCA and PRA in relation to the SM&CR. Firms will need to carefully consider their corporate and management structures, the roles of those within the current senior management and how the SM&CR can be applied to the firm in a proportionate and appropriate manner," he said.

The SM&CR formed part of the UK government's programme of banking reform following the financial crisis of 2008. The Senior Managers Regime (SMR) is designed to make it easier for the regulators to hold senior individuals within banks personally accountable for failings on their watch, and requires firms to assign responsibility for certain areas of the business to named senior individuals. The Certification Regime (CR) requires firms to assess the fitness and propriety of staff in certain roles.

The extended regime proposed by the FCA separately from its proposals for insurers comes in three parts. First, it will apply five simple 'conduct rules' to almost all financial services staff at FCA authorised firms, requiring them to act with integrity; and with due care, skill and diligence; to be open and cooperate with regulators; to pay due regard to customer interests and treat them fairly; and to observe proper standards of market conduct.

The second aspect of the new regime will be the new rules for senior managers, who will have to be approved by the FCA and appear on the FCA register, which currently lists 'approved persons'. Thirdly, firms will be required to certify individuals who are not senior managers, but whose jobs significantly impact customers or firms, for their fitness, skill and propriety at least once a year. These individuals will no longer appear on the FCA register.

The FCA is proposing applying a 'baseline' of requirements, which it will call the 'core regime', to all FCA solo-regulated firms. The largest and most complex firms will be subject to some additional requirements, under an 'enhanced regime'. These will include requirements to make sure that there is a senior manager with 'overall responsibility' for every area of their firm, and to develop responsibilities maps and handover procedures. There will be a reduced set of FCA requirements for 'limited scope firms', which will typically have fewer senior management functions than firms in the core regime.

The PRA has proposed a two-tier approach to extending the SM&CR to insurers. Tougher rules will apply to 'Solvency II' insurers, including the Society of Lloyd's and Lloyd's management agents and third country insurers and reinsurers, as well as to insurance special purpose vehicles and large-non directive firms (NDFs). Proportionate rules will be applied to smaller NDFs.

Extending the SM&CR to insurers will "align more closely the individual ... accountability regimes for banking and insurance, while continuing to respect the different business models in the two sectors". It will also mean that a wider range of insurance staff are covered by the rules. Senior insurance managers will continue to be governed by a version of the SMR which will now include the same 'statutory duty of responsibility' as senior managers at banks. This will enable the PRA to hold the senior manager to account if a breach of a regulatory requirement takes place in their area of responsibility and the senior manager failed to take reasonable steps to prevent or stop the breach.

Financial services expert Alexis Roberts of Pinsent Masons said: "All FCA-regulated insurers that are subject to its Approved Persons Regime (APR) need to read these consultations carefully. The proposed changes are not a case of 'one size fits all', a streamlined approach is proposed for smaller entities, therefore firms can focus on the parts specific to them. To be welcomed is the FCA's commitment to principles of simplicity and proportionality where it will likely not be necessary for individuals to apply for new approvals as senior managers where these approvals have already been obtained under the APR."

"Insurer employees not in senior roles will also be interested in reading the consultations as one of the most significant changes proposed is the introduction of a certification regime for those whose role, although not senior, means they could pose a risk of 'significant harm' to the firm or its customers. This could include client dealing, material risk taking, or roles subject to qualification requirements," said Roberts. "Although these roles will not require approval under the new regime, firms will need to check and confirm that employees are fit and proper to perform these roles. The consultation will close in early November and the new rules will not come into force until a date set by the FCA next year however insurers would be well advised to consider the proposed changes now given the new SM&CR will completely replace the APR."

Once the extended regime is in force, insurers will be required to annually assess and certify the 'fitness and propriety' of their employees in roles capable of causing 'significant harm' to the firm or its customers. All 'key function holders' and 'material risk-takers' at large insurers will then be subject to the conduct rules.

"Insurers are in a unique and arguably unenviable position, in the sense that they have already implemented SIMR," said financial services expert Steven Cochrane of Pinsent Masons. "However, while key function holders and senior insurance managers are already subject to a similar regime, the changes will mean that the accountability regime penetrates further down into the organisation. Large insurers will need to grapple with how the two regimes dovetail in practice."

The consultations close on 3 November 2017.

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