UK: The Senior Managers Regime And The Certification Regime For All FCA Regulated Businesses

Last Updated: 14 November 2017
Article by Robert Wharton

This note will be of interest to all firms who are regulated by the FCA alone. It will not cover in great detail the requirements applying to Enhanced Firms (further note available on request). Please note that any proposals affecting Approved Persons of Appointed Representatives have not yet been published by the FCA, so networks will have some unanswered questions. Those proposals are expected in the autumn.

BACKGROUND

The FCA is proposing to extend the Senior Managers Regime and the Certification Regime (SM&CR) to all firms regulated by the FCA. The regime already applies to banks and insurers and has been in full force since March 2016. The origins of the regime came from the Parliamentary Commission on Banking Standards recommendations after the financial crash of 2007/2008 and the rigging of LIBOR. The whole purpose is to make senior managers and certain staff in relevant firms personally accountable for their actions and to ensure that they abide by a set of personal conduct rules which, if broken, opens them up to disciplinary proceedings. Furthermore, senior management and other staff involved in the business will need to be certified annually as being fit and proper for their job.

WHICH FIRMS WILL BE CAUGHT BY THE REGIME?

The regime will replace the Approved Persons Regime in full, but the regime will cover a wider cross-section of staff in a firm than APER did. There will be three tiers of the regime's application:

CORE REGIME. This will apply to all firms (except limited scope firms) regulated by the FCA alone. The core regime will consist of the senior managers regime, the certification regime and the conduct rules (see below).

ENHANCED REGIME. This will apply additional requirements to the larger firms whose size and complexity may have more potential impact on consumers. Very broadly these will be firms with AuM of £50 billion or more, revenue of more than £35 million, consumer credit lending revenue of £300 million or more, and mortgage lenders (who are not banks) with 10,000 or more regulated mortgages outstanding.

LIMITED SCOPE REGIME. This will apply to firms which currently have a limited application of APER, and these firms will only need to observe a reduced number of requirements. This is likely to cover authorised professional firms, some insurance intermediaries, limited permission consumer credit firms, sole traders, and some other less usual categories

WHICH PERSONS WILL BE CAUGHT BY THE SENIOR MANAGERS REGIME?

The staff of a firm will be categorised as senior managers, certified staff, all other staff and ancillary staff.

Senior managers will be identified by their function. The proposed functions are:

SMF1 Chief Executive

SMF3 Executive Director

SMF 9 Chairman

SMF27 Partner

SMF16 Compliance oversight

SMF17 MLRO

These persons will need pre-approval by the FCA, will be subject to all of the conduct rules (see below), must have a statement of responsibility (see below), and are subject to the "duty of responsibility". It is possible that a person will hold two different functions and consent for that must be obtained from the FCA who may impose conditions and time limits. It is to be noted that NEDs do not hold a governing or required senior management function (SMF) and will not need pre-approval (except in the case of the chairman). However, all NEDs will be subject to the conduct rules and the fitness and propriety requirements. It is likely that a grandfathering scheme will apply where there is no change of role for a person from a controlled function to an SMF. Limited scope firms will not be required to apply all of the SMFs, and what they do have will depend on their precise business, but they will need a minimum of compliance oversight, MLRO and a limited scope function (SMF29). Enhanced firms will have 11 further SMFs.

Certified Staff will be those employees below the level of senior manager who can cause significant harm to the firm or its customers. These people are likely to be team managers, dealers, investment decision makers, and customer advisers. These persons will not be individually approved by the FCA even if they currently hold a controlled function. Instead, the firm is responsible for ensuring and certifying their fitness and propriety on an annual basis. They will be subject to the Tier 1 conduct rules.

All Other Staff. Will be subject to the Tier 1 conduct rules but will not require certification.

Ancillary Staff. A list of 20 designated categories such as receptionists, cleaners and others who will be subject to no special provisions.

For Enhanced Firms, there are additional quite detailed requirements relating to the handing over of SMF functions between persons and the information to be provided by/to such persons.

THE CONDUCT RULES

In practice, the conduct rules (to be found in COCON) will differ very little to the current statements of principle for approved persons. The principal difference will be the extension of these rules to ALL members of the firm's staff (other than ancillary staff) and there will be a consequential impact in terms of training, monitoring and certification. The rules to be observed are in two tiers:

Tier 1. Those applicable to all senior managers and certified staff (and code staff in the case of enhanced firms).

Rule 1. You must act with integrity.

Rule 2. You must act with due skill, care and diligence.

Rule 3. You must be open and co-operative with the FCA and other regulators.

Rule 4. You must pay due regard to the interests of customers and treat them fairly.

Rule 5. You must observe proper standards of market conduct.

Tier 2. Those applicable to senior managers only.

SC1. You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively.

SC2. You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system.

SC3. You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively.

SC4. You must disclose appropriately any information of which the FCA would reasonably expect notice.

If the FCA need to investigate an issue, then in the case of both tiers it is likely that they will look at the circumstances and characteristics of the function and the size and organisation of the firm in question. It must be remembered that the purpose of these proposals is to hold individual persons personally culpable. It is likely that the personal conduct will be in breach where it is either deliberate or falls below a reasonable standard. This is likely to include what a person knew or ought to have known about their role and responsibilities. There is likely to be a focus on ensuring that "group think" does not govern collective decision making. It is likely that these conduct rules should be incorporated into contracts of employment, and firms will be required to notify the FCA in the event of any significant breach of the rules. NEDs will be of particular interest as their role is to provide effective oversight and challenge and to help develop the strategy of the firm. They too must observe the conduct rules.

ALLOCATION OF RESPONSIBILITIES – STATEMENT OF RESPONSIBILITIES

The proposals set out certain Prescribed Responsibilities, all of which need to be allocated to a person with an SMF. The FCA is proposing the following responsibilities. These are in addition to the responsibility inherent in the SMF/job function held by the person in question. The result will be a statement of responsibilities to be given to each function holder. The Prescribed Responsibilities are:

1. Responsibility for the firm's compliance with the senior manager's regime, including implementation and oversight.
2. Responsibility for the firm's compliance with the certification regime.
3. Responsibility for the firm's obligations in respect of notifications and training of the conduct rules.
4. Overall responsibility for countering financial crime including responsibility for the firm's policies and procedures.
5. Overall responsibility for the firm's compliance with CASS (where applicable).
6. Responsibility for ensuring the governing body is informed of its legal and regulatory obligations.
7. Responsibility for an AFM's value for money assessments, independent director representation and acting in investors' best interests.

For Enhanced Firms, there are a further 7 prescribed responsibilities. Enhanced firms will also have to identify and allocate a wide range of key functions to a senior manager. Prescribed responsibilities will not apply to limited scope firms.

These responsibilities, once allocated, will need to appear in a statement of responsibilities in a regulatory format which will require to be accepted/agreed by the FCA. This is likely to require a review of the job specification of relevant senior managers with possible changes to employment contracts to require specific compliance with the responsibilities.

DUTY OF RESPONSIBILITY

The duty of responsibility requires a special mention as it is designed to back up the prescribed responsibilities. Currently a senior manager can be disciplined for breaching a statement of principle for approved persons or for being knowingly involved in a firm's breach of the rules. It is proposed to add a third obligation in that where a breach has occurred either by the manager or the firm, then the FCA must show that that person in question/with that particular responsibility did not take reasonable steps to prevent that breach. The FCA will assess the steps that the senior manager took in the light of the complexity of the firm, what the manager knew, his or her expertise, and what steps the senior manager could or should have taken. This duty of responsibility will apply to all firms including limited scope firms (although the specific prescribed responsibilities do not apply to limited scope firms).

THE CERTIFICATION REGIME

All firms will be required to ensure that an employee who is a "certified staff" member (so not senior managers or NEDs) only performs a function which is subject to certification if the firm has issued a certificate stating that the person is fit and proper to perform that function for the next 12 months. As a minimum, these certification functions will cover client and customer dealing and all client-facing activities, functions requiring a qualification where training and competence requirements apply, managers of all supervisors of certified staff, material risk takers, proprietary traders, those with a significant management responsibility (for example, risk, capital management, staff and customers), algorithmic trading, and CASS oversight.

There is much to consider behind the certification process as it will link to job descriptions and performance, character and integrity, training and knowledge, appropriate qualifications, and being up to date in knowledge. These certificates need to be retained. However, there is more to that in that on initial employment appropriate references will need to be obtained and DBS checks carried out. There are further proposals in relation to references being done in the statutory format covering the previous six years. References will need to be kept and updated for six years. The days of "an agreed reference" have gone and a firm will not be allowed to enter into any arrangement which limits its ability to disclose any information in a regulatory reference.

Regulatory references will apply to NEDs on whom DBS checks will also be required. For those currently in post, future consultation will clarify the extent of grandfathering and any additional references/checks to be carried out at that time.

ENHANCED FIRMS – MANAGEMENT RESPONSIBILITY MAP

There are a number of provisions which apply to enhanced firms, the most important of which is the requirement for a management responsibility map. This is to show in a single document the names and responsibilities of all board members, senior managers and senior personnel reporting to them with details of the reporting lines and lines of responsibility. This will therefore be a picture of the management and governance arrangements and is likely to have attached to it the terms of reference of committees and details of allocation of the prescribed responsibilities. While responsibility maps are not a requirement for core or limited scope firms, they are clearly a simple (when completed) way of keeping the management of a firm in picture and may well be something that core firms will find useful, depending on their size, to prepare for compliance with the SM&CR when the final rules are published for implementation in 2018.

Enhanced firms should also note the proposal for an additional 11 SMFs, including 1 for overall responsibility, and an additional 5 prescribed responsibilities.

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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