"Almost all regulated firms" to come within the Senior Managers and Certification Regime: FCA launches consultation

The FCA has published proposals to extend the Senior Managers and Certification Regime (SMCR) to ‘almost all regulated firms‘.  If a firm is currently regulated under the FCA’s Approved Persons Regime, this will be replaced by SMCR.

A culture change for the financial services industry

The extension of the SMRC is central to achieving the FCA’s aim of a culture change within the financial services industry.

In March 2016, all UK banks, building societies, credit unions and PRA-designated investment firms, as well as UK branches of overseas banks, became subject to the SMCR. With the SMCR, the FCA sought to tackle the perception that individuals in the financial services industry were responsible for the Global economic crisis of 2008, but that very little could be done by regulators to hold people to account.

The SMRC seeks to safeguard consumers and strengthen market integrity by making individuals more accountable for their conduct and competence. It also increases the burden on firms to ensure that their people are ‘fit and proper‘ to carry out regulated functions and to ensure that high standards of conduct are upheld throughout.

What does an extension of SMCR bring?

There are three key components to the SMCR:

1. Senior Managers

The responsibilities of ‘Senior Managers’ must be clearly defined and certain functions must be explicitly covered by Senior Managers. Firms and staff must clearly understand and be able to demonstrate where ultimate responsibility lies. Should something in their area of responsibility go wrong, be it their own action or omission or that of staff within their business, the Senior Manager will be held personally responsible. The Senior Managers will be approved by the FCA and appear on the FCA Register.

2. Certification regime

Under the Certification Regime, firms will certify individuals for their fitness, skill and propriety on an ongoing basis (at least once a year) if their roles significantly impact customers or firms. This puts the burden on the firm, rather than the FCA, to police the suitability of individuals undertaking regulated roles.

3. Conduct rules

Five conduct rules will apply to all financial services staff at FCA authorised firms. These are basic principles that individuals must ‘act with integrity, act with due care, skill and diligence, be open and cooperative with regulators, pay due regard to customer interests and treat them fairly, and observe proper standards of market conduct‘.

A “proportionate” regime according to “size”

With a broad extension to the SMCR now proposed, this may seem alarming and burdensome for smaller firms. However, the FCA has stated that it is committed to ensuring that the regime is “proportionate according to the size of the firm”.

The FCA is proposing a “core regime”, which will entail a baseline of requirements applicable to all regulated firms.  The FCA has also suggested it will maintain exemptions for firms who currently have exemptions under the Approved Persons Regime. These firms will be in a category called ‘Limited Scope Firms’, and will typically have fewer Senior Management Functions than firms in the core regime.

But extra requirements for the largest and most complex firms

However, for the largest and most complex firms (fewer than 1% of regulated firms), the FCA proposes an “enhanced regime” with additional requirements, including ensuring that:

• a Senior Manager has overall responsibility for every area, business activity and management function of the firm;
• the firm has a ‘Responsibilities Map’ in the form of a single document setting out the firm’s management and governance arrangements; and
• the firm has handover procedures ensuring that a person taking on the position of Senior Manager has all the information and material they could reasonably expect to do their job.

Change for insurers too

Insurers currently apply a revised version of the FCA’s Approved Persons Regime and the Prudential Regulation Authority’s Senior Insurance Managers Regime. The FCA proposes to build on this framework and introduce all elements of the SMRC to insurers.

What are the next steps?

We have known for some time that the FCA planned to extend the SMCR. However, it has not yet set a date for when the rules will be in force. A consultation period commenced on 26 July and the period for submitting feedback closes on 3 November this year.  Consequently, we do not expect to see final rules published until next year. The expectation is that implementation will also be in 2018. Transitional provisions will be important, especially in smaller firms, but the FCA has not yet addressed this.

HR and Compliance working together

Despite not yet knowing the final FCA rules, we are in the fortunate position of knowing the key elements of the regime and its implications in practice.

The SMCR has now applied for over a year in banks, enabling us to witness the impact of the SMCR on people management and the HR processes.  Our experience is that a close partnership between Compliance and HR is critical to implementation – working together to resolve the potential for conflict between the strict FCA requirements and people’s rights under employment law.

Indeed, asking your staff to take on additional responsibilities with significant personal liability and a higher level of scrutiny may be a “hard sell” in some cases. Clear and constructive communications from the start of the implementation process and throughout will be key to ensuring staff embrace the new regime and understand and are comfortable with the implications of it for them.

We shall provide further updates as the consultation progresses and will be very happy to discuss the impact of this for you and your next steps.