29 August 2017

Extension of Senior Managers and Certification Regime

The FCA is consulting on extending the Senior Managers & Certification Regime (SM&CR) to all FSMA authorised firms.

The FCA recently issued a consultation paper (CP17/25)  on the extension of the Senior Managers & Certification Regime (‘SM&CR’) to those FSMA authorised firms that are not currently in scope of the regime.

The key drivers of this reform are still the same as the original SM&CR that is currently applicable to the banking sector: improving culture and governance in financial services firms, holding senior managers to high standards through individual accountability and increasing consumer protection remain amongst the highest priorities for the FCA.

Following the HMT announcement about the proposed increased scope of application, CP 17/25 provides the detail that firms were awaiting and confirms that the extended regime will include almost all FCA regulated firms and the current approved persons performing controlled functions in those firms. Types of firms in scope include large complex investment firms, as well as some very small consumer credit firms with limited permissions, sole traders and incoming branches of overseas firms.  

The paper does not affect insurers who are currently subject to the Senior Insurance Managers Regime under the supervision of the PRA, and is also not relevant to approved persons working in an appointed representative.The FCA has, however, published an associated Consultation Paper: Individual accountability - extending the Senior Managers and Certification Regime to insurers: CP17/26.

Firms that are not authorised under FSMA and are not subject to the Approved Persons regime will not fall within the regime (some PSD firms), whereas all FSMA authorised firms that provide payment or electronic money services will be in scope. 

Due to the difference in business models, size, nature of business activities and structure, the FCA intends to use proportionality in the way the relevant requirements apply. There will be a set of core requirements that all firms must adhere to, called the ‘Core Regime’, then a set of additional rules for more complex firms, called the ‘Enhanced Regime’ and finally a set of lighter obligations for firms classed as ‘Limited Scope’. 

The overall structure of the extended SM&CR will consist of the Senior Managers Regime, Certification Regime and Conduct Rules. All three will be part of the Core Regime.

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Senior Managers Regime

This is applicable to the most senior members of a firm, who will hold Senior Management Functions. Firms will need to ensure that Senior Managers are fit and proper and suitable for the role. Their duties must be outlined in the Statement of Responsibilities, which should include details of their role, function responsibilities and accountabilities. Firms will need to submit these statements of responsibilities to the FCA when appointing a new senior manager and then review and assess their suitability on an annual basis.  

Additionally, every senior manager will be subject to a ‘Duty of Responsibility’, which increases individual accountability if something goes wrong. Should any issues or concerns arise, the Regulator will need to prove where senior managers have failed, and in turn senior managers will need to demonstrate that they have taken all reasonable steps when making a decision and preventing any breaches.  

The SMR also lists all ‘Prescribed Responsibilities’, being the key areas of the business where responsibilities must be allocated to appropriate individuals. This will not be applicable to smaller firms, but firms in scope of the Core Regime will be affected.  

Certification Regime

This regime is applicable to all those members of staff in ‘Significant Harm Functions’ whose activities may have a significant impact on the firm’s business, their customers or financial services markets overall. The individuals subject to the Certification Regime will not be ‘approved’ by the FCA, but firms will need to certify internally that those individuals are suitable for their role and reassess suitability on an annual basis, with a certificate to be held on record for each person who is certified by the firm under the regime. The FCA has stated that individuals who hold more than one significant role will not require individual certificates each year, as one certificate covering all their roles and functions will suffice. 

Conduct Rules

The Conduct Rules will consist of a set of five rules applicable to all individuals who work in a firm subject to the SM&CR, with an additional set of conduct rules specifically applicable to senior managers. These rules are in line with the FCA’s current Statements of Principle for approved persons and confirm the importance of individual accountability at all levels. 

Conduct rules and fitness and propriety assessment will also apply to non-executive directors, even if they are not senior managers. 

Enhanced Regime

For the largest and most complex firms in the financial sector, the enhanced regime will impose additional requirements including the allocation of additional Senior Management Functions and Prescribed Responsibilities, developing and maintaining a ‘Responsibilities Map’ and Handover Procedures for those senior managers leaving a firm. Responsibilities maps will need to provide sufficient detail of a firm’s governance structure, all the senior managers and their responsibilities, all certified persons and reporting lines. Regulatory references will also be important to ensure that all individuals being appointed to senior management functions are able to provide a clean track record of their employment history. 

Firms that are in scope of the enhanced regime will include, significant IFPRU firms, large CASS firms and other firms where the value of assets under management, revenue and outstanding debt exceed certain prescribed limits. 

Limited scope firms

Limited scope firms will still need to adhere to the SM&CR but will be classed as a ‘Limited scope SM&CR firm’. These firms will have a reduced set of requirements than those in the Core Regime. Such firms include, but are not limited to consumer credit firms with limited permissions, sole traders, internally managed AIFs, oil market participants and authorised professional firms conducting non-mainstream regulated activities. 

Assessing individuals  

Assessment of individuals should include the ‘Fit & Proper’ test that firms will have to carry out upon employment and annually thereafter to ensure that the skills, knowledge and experience of the individual and relevant qualifications are suitable to the role they will cover. 

Final rules will be published in early 2018 and feedback for this consultation paper closes on 3 November 2017. All firms are encouraged to start planning ahead of implementation of the extended SM&CR in 2018, as some of the new requirements may involve structural changes, reconsideration of group relationships and in most firms, a complete review of organisational structures and governance arrangements.  

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