UK: The Extension Of The Senior Managers And Certification Regime To All Financial Services Firms

On 26 July, the FCA launched a consultation paper regarding the extension of the Senior Managers and Certification Regime ("SMCR") to all authorised financial services firms, replacing the Approved Persons Regime (FCA CP17-15).

SMCR was introduced on 7 March 2016 for the banking sector and was based on the recommendations of the Parliamentary Commission for Banking Standards' for improving professional standards and culture within the UK banking industry. The Bank of England and Financial Services Act 2016 introduced amendments to FSMA 2000 which will bring all authorised firms within the scope of SMCR. This extension will come into effect next year.

The FCA is seeking to introduce a proportionate and flexible approach to the extension of SMCR to all firms, in recognition of the wide range of different business models and governance structures in the industry. In order to achieve this, the FCA is proposing the introduction of a 'core' regime, an 'enhanced' regime and a 'limited scope' regime.

A. CORE REGIME

A core set of requirements will apply to all FCA regulated firms (except 'limited scope' firms). These include:

The Senior Managers Regime:

  • The introduction of Senior Management Functions ("SMFs"), which the most senior people in firms must be pre-approved by the FCA to perform (whether they are in the UK or overseas). The list of SMF functions is shorter than the list of CFs in the existing Approved Persons Regime (for example, CF30 (Customer Function) is not an SMF under SMCR).
  • Some SMFs will be mandatory (e.g. SMF16, Compliance Oversight), with each firm required to have somebody pre-approved in this position. For other SMFs, firms will only be required to have an SMF if they have somebody fulfilling that role.
  • All SMFs must have Statements of Responsibilities setting out the areas for which they are personally accountable. In practice, this is intended to make it easier for the FCA to identify who is responsible when a regulatory breach occurs.
  • SMFs will also be subject to a 'duty of responsibility', which means they are required to take the steps that it is reasonable for a person in that position to take, to prevent a regulatory breach from occurring. We mention this for completeness but, in our view, the 'duty of responsibility' is redundant as it adds nothing to in practice the regulatory duties that SMF holders already have as a result of the Conduct Rules referred to below.
  • The introduction of new 'prescribed responsibilities', each of which must be allocated to an SMF holder within the firm.

The Certification Regime:

  • The introduction of certification requirements that apply to all staff that are not SMF holders, but who pose a risk of significant harm to the firm or any of its customers. Such individuals do not need to be pre-approved by the FCA, but firms will be required to identify such staff and certify them as fit and proper to perform their roles, both upon recruitment and at least annually thereafter. These requirements will only be applicable to staff based in the UK, or those dealing with UK clients (with the exception of material risk takers).

Introduction of new Conduct Rules:

  • This is a very significant change for the staff of authorised firms, who have never before been accountable directly to the regulators for their personal conduct (unless they have previously been Approved Persons). The new COCON rules will apply to all employees (apart from certain administrative staff e.g. secretaries), which is perhaps the biggest change from the Approved Persons Regime.
  • There will be two tiers of Conduct Rules: the first tier will apply to all conduct rules staff; and second tier will apply only to SMF holders. Firms will be required to provide training to ensure that staff subject to the Conduct Rules understand the applicable rules, and what these mean in practice for their particular roles.
  • The FCA will be able to take enforcement action against employees if they breach the Conduct Rules. In addition, firms must notify the FCA if formal disciplinary action is taken against an employee where the disciplinary action relates to any action, failure to act, or circumstance that amounts to a breach of any Conduct Rule.

B. ENHANCED REGIME

In addition to the core requirements, there will be more onerous rules applying to a small number of firms, whose size and complexity the FCA considers could pose a greater risk of harm to consumers or the market. Based on the draft criteria in the Consultation Paper, the FCA has currently identified around 350 such firms, but the FCA has warned that it may also require some firms that do not meet the draft criteria to comply with the enhanced regime.

'Enhanced regime' firms will need to:

  • Allocate additional prescribed responsibilities to SMF holders;
  • Ensure there are SMF holders with overall responsibility for each area, business activity and management function of the Firm;
  • Produce a Management Responsibilities Map setting out management and governance arrangements; and
  • Have handover procedures for SMF holders in place.

C. LIMITED SCOPE REGIME

By contrast, 'limited scope' firms (such as Limited Permission Consumer Credit Firms and sole traders) will have fewer requirements to meet under SMCR. For example, there will be fewer SMFs for 'limited scope' firms, and the requirement to allocate prescribed responsibilities to SMF holders (as per the core set of requirements) is not applicable to 'limited scope' firms. In addition, Non-Executive Directors at 'limited scope' firms will not be subject to the fit and property, criminal records checks and regulatory reference requirements.

Next steps

The FCA's consultation closes on 3 November 2017 and final rules are expected to be published next year. A further consultation is expected to clarify how SMCR will apply to staff in appointed representatives as this is not within the scope of the current consultation.

Although the final rules have yet to be published, there are a series of critical steps that firms will need to take in order to implement the new core and enhanced regime. We have extensive experience of working with a range of institutions to help them align their compliance, HR and risk functions to get them ready for the extended SMCR.

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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