Senior Managers and Certification Regime (1)

YOUR COMPLIANCE MATTERS:   Senior Managers and Certification Regime (1)

Relevance:                   All firms.

Action required:           Begin to make preparations for changes to the Approved Persons regime

SMCR is coming

The implementation date is Monday 09 December 2019

Background

Back in 2008 there was the start of something called “a financial crisis” and the political and economic climate that followed was largely responsible for the UK government’s increased scrutiny of the financial markets and their regulation.

The Senior Managers and Certification Regime (SMCR) is an overhaul of the Approved Persons Regime (APER) and is the result of recommendations from the Parliamentary Commission on Banking Standards (PCBS), a government appointed body set up to consider and report on the UK banking sector following the “financial crisis”.

The PCBS released a condemning report where it highlighted the ‘profound lapse in banking standards”, in particular from senior bankers. A lack of responsibility from these senior managers and criticism of the APER is what led to the introduction of SMCR in banks and insurance companies.

The FCA will now extend SMCR to all solo-regulated firms. (Solo-regulated firms are regulated by the FCA only. Dual-regulated firms are regulated by the FCA and the PRA). This extension affects almost every firm the FCA regulates, from very small firms and those with limited permissions (including sole traders and limited permission consumer credit firms) to some of the largest global firms.

Not only will SMCR apply to every FCA-regulated firm but it also applies personal accountability and obligations on almost everyone working in the regulated financial services sector in the UK.

This newsletter will give an overview of the areas involved under SMCR and we will issue further newsletters over the coming months leading up to the implementation date of 9th December 2019. We will also be working with individual firms, either by request or as part of our normal monitoring arrangements.

FCA Aim

As stated by the FCA,

“The SM&CR is to reduce harm to consumers and strengthen market integrity by creating a system that enables firms and regulators to hold people to account. As part of this, the SM&CR aims to:

•      encourage staff to take personal responsibility for their actions;

•      improve conduct at all levels;

•      make sure firms and staff clearly understand and can demonstrate who does what.”

SMCR Firm Type

Under the extension, SMCR rules will apply to all FSMA authorised firms. There are 3 tiers of firm identified:

•      Core:               firms in this tier will have to comply with baseline requirements;

•      Enhanced:       this will apply to a small number of firms whose size, complexity and potential impact on consumers or markets warrants more attention;

•      Limited scope: this will apply to firms who already have exemptions under the Approved Persons Regime. These firms will be exempt from some baseline requirements and will typically have fewer senior management functions.

We anticipate that most, if not all, our client firms will fit into the Core tier and these notes apply to those firms.

To check what your firm would be classed as, the FCA have provided a “Firm Checker tool”, which is a series of questions where the answers given determine the type of firm identified. It can be found at https://www.fca.org.uk/decision-tree/firm-checker-tool

Conduct Rules

All staff involved in the delivery of advice or products must be trained in how the conduct rules apply to their specific role. Conduct rules require all staff to:

•      Act with integrity;

•      Act with due care, skill and diligence;

•      Be open and co-operative with regulators;

•      Pay due regard to the interests of customers and treat them fairly;

•      Observe proper standards of market conduct.

Additional rules will apply to Senior Managers, relating to the governance and control of their business.

Senior Manager Regime (SMR)

The SMR will be applied using the following areas.

•       Senior Manager Functions

As you are aware, anyone who has a governing role in a business has to apply to the FCA to be an Approved Person before they can carry out that role. SMCR introduces a new type of Controlled Function (CF) and this will be Senior Manager Function (SMF).

The FCA guidance on this matter is:

“We call the people who hold these functions Senior Managers. They are the most senior people in a firm with the greatest potential to cause harm or impact upon market integrity. We make particular functions SMFs so that we know who a firm’s most senior decision makers are, and to make sure firms clearly allocate responsibilities to those key individuals. Anyone who performs an SMF needs to be approved by us before they can start their role.”

Some SMFs are referred to as “Governing Functions” and will be:

SMF1:     Chief Executive;

SMF3:     Executive Director;

SMF27:   Partner

SMF9:     Chair

Others as “Required Functions”:

SMF16:   Compliance Oversight;

SMF17:   Money Laundering Reporting Officer (MLRO)

‘Required Functions’ are functions that some firms are required to have by the FCA Handbook. For example, some types of firms must have a Compliance Oversight Function. If your firm isn’t required to have people in these roles, then the SMCR doesn’t change this.

A person can hold more than one function. The responsibility for the function cannot be outsourced, but the work around it can.

•       Statement of Responsibilities (SoRs)

A SoR is a single document that is self-contained (without reference to other documents) and makes clear what a Senior Manager is responsible and accountable for.

There are rules and guidance in the FCA Handbook about what needs to be included in a SoR. We shall cover this in another newsletter.

Certification Regime

The Certification Regime applies to people who are not Senior Managers but whose activities can have a significant impact on customers, the firm and/or market integrity.

These people won't need to be approved by the FCA. Instead, firms will need to check and confirm ('certify') that they are fit and proper to perform their role at least once a year.  The certified person will ultimately report to a Senior Manager.

Certification only applies to employees – not principals. Certification only applies to UK based staff, unlike the Senior Manager rules which apply in all jurisdictions.

A physical certificate must be issued by the firm, stating:

•      The person is fit and proper to perform the certification function; and

•      The aspects of the business in which the individual will be involved.

However, it is entirely possible that a firm may not have any certified persons.

We will cover the requirements and detail for Certification in a later newsletter.

Implementation

The new regime commences from 9th December 2019. The FCA intends writing to every firm to indicate what they believe the firm’s status is (Core, Enhanced, Limited) but firms are required to carry out their own assessment to check it matches with that of the FCA.

There are 2 transitional provisions:

1)  Firms must identify their Certification staff by 9th December 2019 but will have 12 months to complete the initial certification process;

2)  Senior Managers and Certification staff will need to have been identified and trained and abide by the Conduct Rules from the start of the new regime, but firms will have 12 months to train their other staff on the Conduct Rules.

Existing Approvals

Individual Approved Persons at Core and Limited Scope firms will be automatically converted wherever possible, with no action required by firms.

We recommend that firms consider whether any changes to their approvals are required ahead of 9th December 2019 to make sure that the move to the new regime is as smooth as possible

Conclusion

This is a major change for the FCA and will involve additional work by firms to ensure all staff are correctly identified and trained in the new regime.

We will continue to provide guidance in this matter over the months leading to the Commencement Date (09/12/2019).

If you need to discuss any aspect of this newsletter, please contact us.