Senior Managers & Certification Regime: proposed changes to the existing regime

The proposals will be of great interest to those firms who are not already subject to the SMCR (so called solo-regulated firms). However, banks, building societies, credit unions and PRA-designated investment firms who already operate under SMCR should not ignore this consultation, as the paper proposes some changes to the existing regime.

Changes to FCA-prescribed senior management responsibilities

The FCA is proposing a number of amendments to the FCA-prescribed senior management responsibilities currently contained in SYSC 4.7.7R. The majority of these changes are simply to reflect that not all Prescribed Responsibilities will be suitable for all types of solo-regulated firms. However, those already within scope of SMCR should take note that the FCA is proposing the addition of a new Prescribed Responsibility for all firms[1] in relation to compliance with the Conduct Rules.

Specifically, the FCA has proposed that every firm should be required to designate a senior manager who is responsible for:

• ensuring the firm complies with its obligation to provide training to all relevant employees in respect of the Conduct Rules[2] and
• ensuring the firm complies with its obligation to notify the FCA where any individual subject to the Conduct Rules is subject to disciplinary action as a result of a breach of the Conduct Rules.[3]

Changes to the 12 week rule

Firms currently in scope of the SMCR are permitted to cover senior manager absences by way of the rule at SUP10C.3.13R (the 12 week rule). This rule allows senior manager functions to be covered by an individual who is not an approved senior manager as long as the senior manager's absence is temporary or reasonably unforeseen and cover does not continue for more than 12 weeks in a consecutive period.

However, there are currently no absence provisions for the responsibilities which must be allocated to a senior manager under the "overall responsibility" requirement (currently set out at SYSC 4.7.8R). This effectively means that, where a senior manager is absent, Senior Management Functions may be temporarily allocated to a non-senior manager but any "overall responsibility" which the absent senior manager is responsible for must be allocated to another senior manager.

The FCA is proposing to extend the 12 week rule so that it also applies not only to senior manager functions, but also to the overall responsibilities allocated to that senior manager.

To illustrate how this might work, the FCA provides an example of a senior manager who has been allocated overall responsibility for the complaints handling process. Under the FCA's current proposals, should that individual become unwell, firms will be allowed to:

• temporarily appoint another non-senior manager to perform the Senior Management Function without that person being approved; and
• temporarily reallocate the overall responsibility for the complaints handling process to that same non-senior manager (or to a different non-senior manager if it so wishes) without that person being approved.

However, the FCA is also proposing to insert new guidance into SUP to clarify that the above does not apply in respect of FCA-prescribed senior management responsibilities. Where a firm allocates any FCA-prescribed senior management responsibilities to a senior manager, and that senior manager becomes absent, those Prescribed Responsibilities must still be reallocated to another senior manager.

Next steps

Firms who are currently in-scope for the existing SMCR regime should take the opportunity to consider CP17/25 (and in particular chapter 11) along with the draft rules. The FCA's consultation on these new rules is open until 2 November 2017 and the final rules will be published in 2018.

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. Grania Baird and Fiona Lowrie have prepared a briefing which may be of interest to solo-regulated firms and 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.   

If you require further information on anything covered in this briefing please contact Grania Baird (+44(0)203 375 7443), Jessica Reed (+44 (0)20 3375 7518) 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.

© Farrer & Co LLP, August 2017