Earlier in 2017, the Financial Conduct Authority (FCA) published a consultation paper on its proposals to extend the Senior Managers and Certification Regime (SMCR) to all firms regulated by the FCA in 2018. Below, John Hayes, Principal and Partner at Constantine Law explains all you need to know about the extension of the Senior Managers and Certification Regime.
The new regime will essentially replace the Approved Persons Regime. Whilst I don’t think the extension of the SMCR is a great surprise to those affected, a lot of work will need to be done to ensure they are compliant in time, particularly for smaller FCA regulated entities. It will be imperative for compliance and HR teams to work closely to ensure a smooth transition.
Who does the SMCR currently apply to and who is it being extended to?
The SMCR was introduced in 2016 to enhance senior-level accountability in the financial sector and currently only applies to firms regulated by both the FCA and the Prudential Regulation Authority (‘PRA’). These so-called “dual-regulated” firms consist of banks, building societies, credit unions and PRA-designated investment firms (i.e. very large investment firms).
However, from 2018 all FCA only regulated firms will be subject to the SMCR, meaning that a further 47,000 firms will be caught. Almost everyone in a regulated firm will be subject to increased regulatory requirements and expectations as to how they conduct themselves.
How will the new regime work?
The proposed regime reflects the three components of the existing SMCR – the Senior Managers Regime, the Certification Regime and the Conduct Rules – and aims to ensure that those running affected firms are held to account.
Under the proposals, all FCA-regulated firms should have at least one ‘Senior Manager’, and there is a list of ‘Senior Management Functions’ (‘SMFs’) (which replace the existing ‘Significant Influence Functions’) which will apply. For certain types of firms, the list of SMFs is more extensive (see below). Every Senior Manager will have a statutory duty of responsibility. This means that where a firm breaches an FCA requirement, the Senior Manager responsible for that area could be held accountable if they did not take reasonable steps to prevent or stop the breach occurring.
Under the regime, firms will need to submit a statement of responsibilities to the FCA when applying for a Senior Manager to be approved, and this must be kept up to date. This statement will need to set out the relevant Senior Manager’s prescribed responsibilities.
The ‘Certification Regime’ requires firms to assess the fitness and propriety of those employees who, by virtue of their role, could pose a risk of significant harm to the firm or any of its customers. This moves the onus from the FCA to firms themselves to certify that individuals performing ‘Certification Functions’ (as well as Senior Managers and Non-Executive Directors) are fit and proper on an ongoing basis. Firms will need to consider how best they can assess the qualifications, training, competence and personal characteristics of individuals caught by this regime.
The ‘Conduct Rules’ replace the ‘Principles for Approved Persons’ and relate to professional conduct. These rules apply not only to those individuals caught by both the Senior Managers Regime and the Certification Regime but to all other employees other than ancillary staff (which is a narrow exception and includes, for example, receptionists, cleaners, caterers and security guards). Firms are required to make staff aware of the Conduct Rules and provide appropriate training.
What are the rules relating to regulatory references?
All affected firms will be required to request a reference from employers for Senior Managers, Non-Executive Directors and Certification Function holders going back six years. They will also be required to update any regulatory references given where new significant information comes to light.
What does this actually mean for firms affected and what steps should they be taking to prepare?
The FCA has created three new classifications of firms. The classification a firm falls into will depend on its size, complexity and potential impact on consumers. Most firms will be considered ‘Core’ firms, and will be subject to the Senior Managers Regime, the Certification Regime and the Conduct Rules. The second category will be known as ‘Enhanced’ firms, and these will be required to comply with the same requirements as ‘Core’ firms but with additional enhanced requirements (for example, an increased number of SMFs, additional prescribed responsibilities and a requirement to prepare responsibility maps and handover procedures for Senior Managers). Lastly, ‘Limited Scope’ firms (broadly speaking firms not currently subject to the Approved Persons Regime or only to a limited degree), will have a lighter set of obligations (for example, fewer SMFs to assign and no requirement to allocate prescribed responsibilities to SMF holders).
Although the final rules have yet to be published, firms caught by the extension should be taking steps to prepare now starting with identifying which classification they fall into and the scope of the changes required.
They will then need to update compliance procedures and employment documents, including contracts of employment and policies relating to regulatory references and appraisal and exit processes, to ensure they support the firm’s new responsibilities. Statements of responsibility (and, where necessary, responsibility maps) will need to be prepared and employees trained so that they fully understand the standards of behaviour expected of them under the new regime.
When will the rules be extended in this way?
The exact date for implementation remains unknown, but it is likely to be towards the end of 2018 to allow time for the new rules to be finalised.
This article first appeared in CEO Today online.