UK: The Extension Of The Senior Managers And Certification Regime To All FCA Regulated Firms

Last Updated: 17 July 2018
Article by Chris Holme and Ruth Bonino

Most Read Contributor in UK, November 2018

On 4th July 2018 the FCA published its near-final rules on how it plans to extend the Senior Managers and Certification Regime (SM&CR) to the wider financial services sector.

So what has happened already?

The SM&CR was rolled out to banks, building societies, credit unions, and PRA designated investment firms (called "banking firms") in 2016. A modified version of the regime (the Senior Insurance Managers Regime) was also rolled out to insurers at the same time. The regulators now intend to extend the SM&CR to most financial services firms as well as to dual-regulated insurers.

The FCA already published its draft proposals for extending the SM&CR in last year's consultation papers (CP17/25 and CP17/40). In this briefing we set out a full summary of the key rules as they are now proposed in the FCA's latest Policy Statement (Extending the SM&CR to FCA firms – feedback to CP17/25 and CP17/40, and near final rules - PS18/14). At the end of the briefing we summarise the key changes to the original proposals.

We have prepared a separate briefing on the extension of the SM&CR to dual-regulated insurers.

The proposed timetable for implementation

Commencement

9 December 2019

Conduct rules apply to SMFs and Certification Staff so before commencement, firms must:
  • Identify Senior Managers and Certification Staff
  • Train them on the Conduct Rules
  • Review contracts of employment
Transitional period

One year from 9 December 2019 to 8 December 2020
During this one year period, firms must:
  • train all other Conduct Rules staff in preparation for when it applies to them at the end of the transitional period
  • assess existing Certification Staff
  • identify new in-period Certification Staff
  • assess Certification Staff hired during transitional period
Post transitional period

9 December 2020

  • Conduct Rules apply to all staff
  • Initial Certification Assessments completed
  • Firms must check that the firm's information is correct on the Financial Services Register after automatic conversion
Post 9 December 2020 Ongoing requirements to:
  • train new staff in the Conduct Rules and
  • re-certify Certification Staff as fit and proper at least annually

What are the key changes following the public consultations?

The vast majority of respondents to the consultations supported the FCA's proposals although many asked for further clarification on how the rules will apply. As a result, some changes have been made to the original proposals and a substantial Guide for FCA solo regulated firms has been published. For a summary of the main changes, see Box A at the end of this briefing.

Appointed Representatives

The SM&CR does not apply to Appointed Representatives (ARs) (except for certain Limited Permission Consumer Credit firms that also act as ARs for other businesses).

An outline of the new regime

The three main elements that we expected from the roll out to the banking firms remain, and are called the "core regime":

  • The senior managers regime. The most senior people in a firm will be approved by the FCA, with firms also having a responsibility to ensure they are suitable for their role (with a review at least once a year). The senior managers will be required to have:

    • A statement of responsibilities – mapping what they are responsible and accountable for;
    • A duty of responsibility – meaning that if something goes wrong in an area they are responsible for, the FCA will consider if they took "reasonable steps" to stop it from happening;
    • Prescribed responsibilities – these will vary by firm, and are responsibilities that the FCA will require firms to place on their senior managers.
  • The certification regime. This will cover people who are not senior managers, but whose jobs mean they have a significant impact on customers, markets, or the firm (called "significant harm functions").

    • These roles include proprietary traders, CASS oversight function, functions subject to qualification requirements, client dealing functions, algorithmic traders, material risk takers, and any supervisor or manager of someone who is a certified person
    • These individuals will not be approved by the FCA; rather they will be approved by their own firm.Their firm will have to "certify" they are suitable (fit and proper) to carry out their job (with a review taking place at least once a year).
  • The conduct rules. These will apply to almost all people working in financial services. The conduct rules will be:
Row 1 You must act with integrity
Row 2 You must act with due skill, care and diligence
Row 3 You must be open and cooperative with the FCA, the PRA and other regulators
Row 4 You must pay due regard to the interests of customers and treat them fairly
Row 5 You must observe proper standards of market conduct

Additional conduct rules will also apply to Senior Managers:

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 this effectively
SC4 You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice

So what are the key differences going to be?

  • Senior managers will be created and they will have more clear individual responsibilities and more clear accountability than previously
  • The "approved persons" regime will disappear; being replaced at the senior end by the senior management regime, but for the most part by the certification regime (which will likely include at least as many people as were previously approved persons, probably more)
  • Firms take on from the FCA their own responsibility for the certification (and assessing suitability and fitness and propriety) of individuals
  • A new duty of responsibility on senior managers, making senior managers more accountable for contraventions in the part of the business for which they are responsible
  • New "simple" code of conduct rules will apply to almost everyone in the firm
  • The regulatory referencing scheme which has been introduced for banking firms will extend to all firms in the regulated sector, so increasing the obligations around obtaining, and giving, references

And for those who have been looking closely at what banking firms have previously been subject to, what are the key differences?

The core regime is "lighter" than the regime that the banking firms are subject to. Banking firms also have obligations which do not apply to firms covered by the "core regime". These are the obligations to:

  • have a full responsibilities map for their business;
  • have full handover responsibilities; and
  • have a senior manager responsible for every area of their business.

However, although these obligations are removed for firms covered by the core regime, firms who are covered by the "enhanced regime" will need to comply with these obligations. More details are set out below on the "enhanced regime", which essentially applies to the biggest, more complex, firms.

How does the "core regime" vary for firms?

The "core regime" applies as a rule of thumb to all firms.

There are increased obligations for firms covered by the "enhanced regime" (larger and more complex firms) and reduced obligations for firms covered by the "limited scope" regime.

In terms of how firms work out whether they are "core regime", "enhanced regime" or "limited scope", a useful diagram from the FCA Guide is reproduced below (wording underlined indicates the changes made following the FCA's consultation)1

An enhanced firm will have:

More senior managers

More prescribed responsibilities for those senior managers

Other requirements

As is referred to above, enhanced firms will also have to have the below in place (similar to banking firms):

  • a full responsibilities map for their business (which sets out the firm's management and governance arrangements)
  • full handover procedures (to ensure that every senior manager role has the information and materials needed to do the job effectively)
  • a senior manager responsible for every area of their business

So what will the SM roles be?

Core regime firms, and enhanced regime firms, are proposed to have the following senior manager roles (far fewer than banking firms), although there is the ability to flex these depending on what is relevant / appropriate for firms:

Chair SMF9
CEO SMF1
Exec Director SMF3
Partner SMF 27
Compliance oversight SMF16
Money Laundering Reporting Officer MLRO

The requirements for limited scope firms will be lower.

Enhanced firms will also have to review and have as appropriate additional senior manager roles as follows:

Chief finance function SMF2
Chief risk function SMF4
Head of internal audit SMF5
Senior independent director SMF14
Chair of remcom SMF12
Chair of risk committee SMF10
Chair of audit committee SMF11
Chair of nominations committee SMF13
Group entity senior manager SMF7
Chief operations function SM25
Other overall responsibility SMF18

Core regime firms and enhanced regime firms will also have to place "prescribed responsibilities" on the senior managers including the below (limited scope firms will not be subject to this): Responsibility for:

  • performance of obligations under the senior manager regime including implementation and oversight
  • performance of obligations under the certification regime
  • performance of firm in relation to conduct rules
  • firm's policies and procedures regarding countering the risk of firm being used for financial crime
  • firm's compliance with CASS (as applicable)
  • value for money assessments, independent director representation and acting in investors' best interests

Enhanced firms will also have to have responsibilities for:

  • compliance with rules relating to firm's responsibilities map
  • safeguarding and overseeing independence and performance of internal audit
  • safeguarding and overseeing independence and performance of compliance function
  • safeguarding and overseeing independence and performance of risk function
  • if audit function outsourced, overseeing independence and performance of that
  • developing and maintaining firm's business model
  • managing the firm's stress tests and ensuring accuracy and timeliness of information provided to the FCA for stress testing

What guidance has the FCA given on the new duty of responsibility?

The FCA will not be making any changes (other than to definitions) to its current guidance on the duty of responsibility currently applying only to banks, as set out in its Decision Procedure and Penalties manual of its handbook (DEPP). The FCA explains its reasoning for this in its guidance set out in SP18/16, also published on 4 July 2018.

What are the proposals re Regulatory References?

The regulatory reference scheme proposed to go along with the new senior manager and certification regimes looks very similar to that brought in for banking firms. This will require firms to request references for regulated individuals from past employers, and also to provide such references.

This is a step up from previous referencing obligations and requirements, and is what enables firms to get the information that they need to work out if someone is fit and proper.

For more information on the Regulatory References regime for banking firms click here.

How will individuals be moved to the new regime?

For the majority of firms, the FCA plans to automatically convert existing relevant controlled functions approved under the Approved Persons Regime (APR) into Senior Manager Functions in the new SM&CR2. Of course, the majority of those under existing functions will not automatically convert because those roles will no longer require approval by the FCA and will not be Senior Manager roles3. This means the majority of firms will not need to submit anything to the FCA unless they need to change their approved individuals before conversion or apply for new approvals to be effective after Commencement (see below New and in-flight applications).

To keep the conversion process simple, there will be a different approach depending type of firm.

  • Core and limited scope firms, conversion to Senior Managers

    Key points to note include:

    • Senior Managers will be automatically converted wherever possible with no action required by firms
    • There will be no need to perform extra checks such as mandatory criminal records checks and regulatory references because firms will already have to ensure that these individuals are, and continue to be, fit and proper
    • There is just one exception to the automatic conversion rule: where a CF2 Non-Executive Director is going to perform the SMF9 – Chair function, the firm must notify the FCA using Form K
  • Enhanced firms, conversion to Senior Managers

    For enhanced firms, there will be no automatic conversion to Senior Manager roles. To convert existing approved individuals to new Senior Manager Functions, enhanced firms will need to submit:

    • Form K conversion notification
    • Statements of responsibilities
    • Responsibilities Map

Form K is used to tell the FCA who the firm wants to assign to the new SMFs, but no further approval is required if the proposed SMFs can be mapped directly from the APR.1 For individuals who hold these so-called "mapped functions", there will be no need to do extra checks when they are converted since firms are already required to ensure that these individuals are, and continue to be, fit and proper.

Failure to submit a conversion notification (Form K) will be a breach of regulatory requirements which means the firm will have no FCA approved individuals, risking possible enforcement action by the FCA. Firms in this situation would then have to follow the full application process for approval of the relevant individuals, including mandatory criminal records checks and regulatory references.

  • New and in-flight applications

    The FCA guide explains the process if a firm wishes to change their approved individuals before Commencement. The key points to note are as follows:

    • The existing processes for applications for controlled functions under the APR will apply right up to Commencement
    • The SM&CR application forms will be available for submission before Commencement but any new approvals will only be effective from Commencement
    • An APR application submitted but not determined before the start of the new regime will be converted to an application for the relevant SMF at Commencement

What are the next steps?

Firms now have approximately 18 months to prepare for implementation of the new regime so you now need to start your preparations by considering the following:

  • Who is planning and running your preparations? Do they have a project plan?
  • What firm-type are you? Core, enhanced or limited? Use the firm checker tool in the FCA Guide.
  • Consider preparing a responsibilities map. Whilst only enhanced firms are required to produce a full responsibilities map, this could be a good exercise for all firms to carry out as it will make the transition to SM&CR far easier.
  • Check the appropriate people are in the correct approved functions before conversion of approved individuals to SM roles. This will make conversion much easier and smoother.
  • Who are your SMs going to be? Are they fit and proper? When are you getting your applications ready? What will their responsibilities be? Are their prescribed responsibilities clearly included in their statement of responsibilities? Check all prescribed responsibilities which apply to your firm are covered. Check every activity, business area and management function has been allocated to an SM under the Overall Responsibility requirement.
  • Trained your SMs? Do they know what the duty of responsibility is? Do they know that they need to make sure happy with their statements of responsibility? Trained on the Conduct Rules?
  • Certification regime – which (if any) of the defined Certification Functions apply to your firm? Identify certified persons before Commencement. How will you assess if fit and proper, fitting these into existing HR processes? What will their training be?
  • Conduct Rules – who will they cover? Identify other Conduct Staff and ancillary staff. Understand conduct rules training and notification requirements.
  • For enhanced firms, handover procedure, and responsibilities mapping.
  • From HR perspective – review contracts, policies and procedures; how do you fit criminal records checks and regulatory reference requirements into recruitment processes?

Key Documents and Links

  • PS18/14 - Extending the SM&CR to FCA firms – feedback to CP17/25 and CP17/40, and near final rules

https://www.fca.org.uk/publications/policy-statements/ps18-14-extending-senior-managers-certification-regime-to-fca-firms

  • SM&CR: Guide for FCA solo regulated firms July 2018

https://www.fca.org.uk/publication/policy/guide-for-fca-solo-regulated-firms.pdf

  • PS18/16: The Duty of Responsibility for insurers and FCA solo-regulated firms

https://www.fca.org.uk/publications/policy-statements/ps18-16-duty-of-responsibility

Box A

Outcome of the July and December 2017 Consultations

The key changes to the FCA's proposals in CP17/40 (July 2017) are:
  • The Prescribed Responsibility (that only applied to Core firms) to inform the governing body of their legal and regulatory requirements has been removed
  • There is now an easy process for firms to tell the FCA they wish to voluntarily apply a higher regime tier (e.g. if a Core firm wishes to opt into the Enhanced tier they can do so using a notification process and a new form O, but they must be ready to comply with all the rules of the higher regime 3 months after the date Form O is submitted)
  • Three of the Enhanced criteria have been amended to smooth single-year anomalies (see updated table above where the changes have been underlined)
  • The time period for a firm to implement the Enhanced tier once they have met relevant criteria has been lengthened from 6 to 12 months. This aligns the entry transition period with the exit transition period (which applies once a firm no longer meets the relevant criteria)
The main changes to the FCA's proposals in CP17/40 (December 2017) are:
  • A number of regulatory forms have been adjusted following specific feedback
  • The REP008 reporting period for Limited Permission Consumer Credit firms have been aligned with their annual return

Footnotes

1 See page 8 of the FCA Guide for a useful table of firm types

2 For example, someone performing a CF10 (Compliance Oversight function) will be eligible to be converted automatically into a SMF16 (Compliance Oversight function)

3 E.g. CF10a, CF28, CF29, CF30 and CF2 (Non-Executive Director except SMF9- Chair)

4 See page 62 of the FCA Guide for proposed function mapping for Enhanced firms and page 54 for Core and Limited Scope firms (including branches)

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions