Senior Managers & Certification Regime (SMCR)
- By MICHAEL HANSON
- •
- 04 Oct, 2017
In July 2017, the FCA issued a consultation paper that includes proposals for how it intends to regulate individuals working in financial services.
The proposals will affect almost every firm that the FCA regulates; from very small firms and those with limited permissions (including sole traders and consumer credit firms), to some of the largest global firms.
The full consultation paper can be accessed using the link below; closing date for any response to the FCA is 03 November 2017, with a policy statement due out “Summer 2018”.
The following details only give a flavour of what is being proposed; further information will be notified to client firms as and when available.
Background
The FCA currently regulates people in financial services through the Approved Persons Regime.
Following on from the financial crisis that began in 2008, Parliament recommended that the FCA develop a new accountability system that was more focused on senior managers and individual responsibility.
Having put this into place for banks, building societies, credit unions and PRA‑designated investment firms from March 2016, the FCA is now looking to replace the Approved Persons Regime with the Senior Managers and Certification Regime (SMCR) in almost all financial services firms.
SMCR is also a key part of their “Culture & Governance Priority”, as described in their Business Plan 2016/17, and its overarching aim is to reduce harm to consumers. This is achieved by raising the standards of conduct for everyone who works in financial services, and by making senior people in firms more responsible and accountable for their actions.
FCA Proposals
Currently, there are three main parts to the Approved Persons Regime:
people who perform functions known as ‘controlled functions’ at both senior and customer‑facing levels need to be approved by the FCA before they start their roles;
standards of behaviour (Statements of Principle and a Code of Practice) are applied to people holding controlled functions;
firms need to ensure people performing controlled functions are fit and proper
Approved Persons and Controlled Functions will disappear from FCA terminology.
The SMCR 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.
The changes will give the FCA new powers to:
make certain roles ‘Senior Managers’ – a new type of function where the people doing these jobs need approval from the FCA, and at least once a year firms need to make sure Senior Managers are suitable to do their jobs;
make certain roles ‘significant harm functions’ under the Certification Regime – the FCA does not approve these people but firms need to make sure they are suitable to carry out their roles, at least once a year;
apply Conduct Rules to almost all employees in financial services firms.
The proposals include
applying a standard set of requirements to all FCA solo-regulated firms known as the ‘core regime’ for the SM&CR;
having extra requirements for a small number (fewer than 1%) of solo-regulated firms whose size, complexity and potential impact on consumers warrant more attention – these additions are called the ‘enhanced regime’
applying a reduced set of requirements for a group of firms we are defining as ‘Limited Scope’
The FCA has stated that “We propose applying a baseline of requirements to every firm, known as the ‘core regime’. This means that the three main elements of the SM&CR will apply to every firm: the Senior Managers Regime, Certification Regime and Conduct Rules.”
The basic details for these are as follows:
Senior Managers Regime:
This focuses on the most senior people in the firm.
FCA rules will define which roles are ‘Senior Management Functions’ depending on the type of firm involved.
Anyone who holds a Senior Management Function needs to be approved by the FCA before they start their role, the same as under the Approved Persons Regime.
Firms also need to make sure that Senior Managers are suitable to do their jobs.
Every Senior Manager will need to have a document that says what they are responsible and accountable for - a ‘Statement of Responsibilities’.
Firms need to give the FCA this statement when a senior manager applies to be approved, and whenever there’s a major change to their responsibilities.
This is a requirement under legislation.
Every Senior Manager will also have a ‘Duty of Responsibility’.
This means if something goes wrong in an area that they are responsible for, the FCA will consider whether they took ‘reasonable steps’ to stop this from happening.
This is also a requirement under legislation.
The FCA also proposes some new responsibilities that firms will need to give their Senior Managers ‘Prescribed Responsibilities’.
This won’t apply to some firms (such as sole traders or firms with limited permissions, and EEA branches), and more responsibilities will apply to bigger firms.
The FCA Handbook will set out which roles are ‘Senior Management Functions’. The people who perform them will be referred to as ‘Senior Managers’.
The following Senior Management Functions are proposed for all firms (except Limited Scope Firms):
Governing functions
SMF9 – Chair;
SMF1 – Chief Executive;
SMF3 – Executive Director;
SMF27 – Partner.
Required functions
SMF16 – Compliance Oversight;
SMF17 – Money Laundering Reporting Officer (MLRO).
Many firms will not need to apply all of these Senior Management Functions (this is the same as under the Approved Persons Regime). Firms where fewer functions apply are called ‘Limited Scope Firms’.
Certification Regime:
This covers people who aren’t Senior Managers, but whose jobs mean they can have a big impact on customers, markets or the firm.
The FCA will say what these roles are in their rules.
They won’t approve these people, but firms will need to check and confirm (‘certify’) that they are suitable to do their job at least once a year.
This is a requirement under legislation.
The FCA Handbook will set out the roles that are Certification Functions. They are:
Significant management function;
Proprietary traders;
CASS oversight function;
Functions that are subject to qualification requirements;
Client dealing function;
Algorithmic traders;
Material risk takers;
anyone who supervises or manages anyone performing one of the functions above.
Conduct Rules:
These are basic rules that will apply to almost every person who works in financial services.
They include things like ‘acting with integrity’ and ‘treating customers fairly’.
The Conduct Rules are about improving the behaviour of all staff in financial services firms.
The proposed Conduct Rules are intended to drive up standards of individual behaviour in financial services. By applying the Conduct Rules to a broad range of staff the aim is to improve individual accountability and awareness of conduct issues across firms.
There will also be a requirement for firms to train their staff so that they know how the Conduct Rules apply to them. Firms will also need to notify the FCA when they’ve taken formal disciplinary action against a person for breaching a Conduct Rule.
