Extension of the Senior Managers and Certification Regime - Are you ready?

What is the current SMCR?

The current SMCR has been in place since March 2016 and is the regulatory framework currently applicable to firms regulated by both the FCA and the Prudential Regulation Authority (PRA) (together referred to as the regulators).  These so-called "dual-regulated" firms consist of banks, building societies, credit unions and PRA-designated investment firms (ie. very large investment firms).

The SMCR has three key elements:

• Senior Managers Regime (SMR) – applies to individuals carrying out "senior management functions", as specified by the regulators.  Individuals who carry out these functions are subject to pre-approval by the regulators and annual review by firms.

• Certification Regime – applies to individuals who carry out roles which pose a risk of significant harm to the firm or any of its customers.  Relevant firms must assess the fitness and propriety of an individual prior to appointment to a certified role and, thereafter, on an annual basis.

• Conduct Rules – apply to individuals within the scope of the SMR and the certification regime and since March 2017 the FCA has also applied the conduct rules to most individuals in relevant firms who deal with customers in the UK.

How is the FCA proposing to extend the SMCR?

The FCA is proposing to expand the SMCR to all FCA-regulated firms.  It builds on the current regime and its aim is to reduce customer harm and it fits with the FCA’s focus on culture and governance.  The FCA has recognised that the remaining thousands of FCA only regulated firms come in all shapes and sizes; it is therefore proposing a degree of flexibility and proportionality to the expansion of the SMCR.

In order to achieve the proportionality it describes, the FCA intends to adjust the application of the SMCR to firms at either end of the scale. For example, "limited scope firms" (broadly speaking firms that are not currently subject to the Approved Persons Regime or only to a limited degree) do not require as many assigned Senior Management Functions and the Prescribed Responsibilities do not apply.  A small number of larger or more complex firms (estimated by the FCA to be fewer than 1% of the firms it regulates) will, in turn, be subject to enhanced requirements.  These requirements will include additional Senior Management Functions, additional Prescribed Responsibilities, Responsibilities Maps and Handover Procedures for Senior Managers.

Nevertheless, the core requirements of the Senior Managers Regime, Certification Regime and Conduct Rules will be expected of all FCA regulated firms.
 
Senior Managers Regime

The consultation paper proposes that under the core regime, there will be seven senior management functions: the CEO, Executive Director, Partner, Chair of the Board, Compliance Oversight and Money Laundering Oversight and the Limited Scope functions.  Every Senior Manager will have a duty of responsibility, meaning that, if the firm broke one of the FCA’s requirements, the relevant Senior Manager could be held individually accountable if they had not taken "reasonable steps" to prevent such a breach.  However, the burden of proof would be on the FCA in these situations to prove that the individual had not taken such reasonable steps.  The FCA also notes that, as most of these functions are already caught under the Approved Persons Regime, it will already have approved individuals in many of these posts and intends to consult later in the year as to how such Approved Persons should transition to being Senior Managers under the new regime.

There is no territorial limitation on the SMR, so it will apply to any individual performing a Senior Management Function, whether based in the UK or not.

The FCA has also identified seven Prescribed Responsibilities, which address key conduct and prudential risks (such as ensuring the firm complies with the SMR, the certification regime and the conduct rules etc). These Prescribed Responsibilities must be assigned to a Senior Manager.  If there is only one Senior Manager in a firm, all the applicable Prescribed Responsibilities will need to be allocated to that person.

Certification Regime

The proposed Certification Regime builds upon the current significant influence function under the Approved Persons Regime. It will apply to firms who have individuals carrying out any one of the eight Certification Functions the consultation paper identifies.  These include the significant management function which captures employees who have "significant responsibility for a significant business unit" but who are not caught by the SMR, and are not limited to commercial business units.  The examples given in the consultation paper include the underwriting unit of a mortgages firm and firms may consider that their HR and IT departments also fall within scope.

In terms of territorial scope, generally the certification regime applies to employees in the UK or, if they are based outside the UK, deal with UK based customers.  There is an exception to this territorial limitation for individuals categorised as "material risk takers" under the remuneration codes.

Conduct Rules

The FCA is planning to introduce two tiers of conduct rules to all firms.  The first tier would apply to most employees in a firm (except ancillary staff such as receptionists etc) and the second tier would apply only to Senior Managers.

The first tier consists of five high level statements including: requiring staff to act with integrity, due care skill and diligence and treat customers fairly and are intended to drive up standards of individual behaviour throughout the financial sector.  The rules will apply to a firm’s regulated and unregulated financial services activities, in order to capture any activity which itself may not be regulated but is furthering a regulated activity.

Branches

Branches will be subject to the extended SMCR, the exact extent of the application and a branch’s obligations will depend on whether it is an incoming EEA branch or an incoming third country branch.

Regulatory References

Furthermore, the regulatory reference regime, which sets out certain obligations in relation to employee references for Senior Managers and Certification Function candidates, will be expanded to all FCA-regulated firms and will also apply to Non Executive Directors who are not Senior Managers.

Conclusion and next steps

There is plenty for firms to consider in this consultation paper, including for example deciding whether they fall into either the "limited scope" or enhanced regime". Firms also need ensure the appropriate Senior Management Functions are mapped across and will need to begin preparing the necessary statements of responsibility. Compliance and human resources teams will need to work closely in order to ensure a smooth transition.

It is also worth noting that the FCA expect to publish further consultations on the extension of the SMCR including how it will apply to staff at appointed representative firms and on the practicalities of how firms will transition into the new regime, what forms will be required etc.  The FCA intends to apply the principles of simplicity and proportionality to the transition from the Approved Persons regime to the extended SMCR. Hopefully this approach will avoid the need for individuals currently authorised as Approved Persons to go through a further extensive approval process to become approved as Senior Managers. 

The consultation is open for comments until 3 November 2017.

As a firm we will be working closely with our clients and contacts to help with preparations for the implementation of the extended SMCR and will be providing updates and seminars on this topic. Rob Lewis in our employment team has a written an interesting blog post on the impact of the extended SMCR from a human resources perspective.  If you would like to be included on any further briefing or seminar invitations on this topic please contact Christina Cronin ([email protected]).   

If you require further information on anything covered in this briefing please contact Grania Baird ([email protected]; +44(0)203 375 7443), Fiona Lowrie ([email protected]; +44(0)203 375 7232 or your usual contact at the firm on 020 3375 7000. Further information can also be found on the Compliance & Regulatory page on our website.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

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