Are you ready for the new Senior Managers and Certification Regime extension?

Senior Managers and Certification Regime

The Senior Managers and Certification Regime (“SM&CR”) will apply to all financial services firms that are solely regulated by the FCA and authorised under the Financial Services and Markets Act 2000 (“FMSA”) from 09 December 2019. The regime has been a requirement for banks, building societies and credit unions (known as “banking firms”) since March 2016 and a modified version of the regime was also since rolled out to insurers in December 2018. From December 2019, the regime will extend to solo-regulated firms and will apply to most financial services firms as well as dual-regulated insurers. This article will examine some of the implications of the changes, and how firms can be prepared.

Why has the regime been implemented?

In light of the financial crisis in 2007/2008, the Parliamentary Commission on Banking Standards recommended that the FCA develop a new accountability system. In response to the recommendations made, the FCA created the SM&CR which is replacing the “Approved Persons” regime. Parliament amended FSMA in March 2016 to extend the SM&CR to all firms authorised to provide financial services under FSMA (and this amounts to around 47,000 firms).

The framework aims to improve individual accountability within a firm, taking into account customer protection and the integrity of the financial services sector. Culpability will be extended across every level of a business, and staff need to be able to show that they have taken steps to adhere to the new regime.

What types of Businesses will be affected?

The extended regime will apply to three categories of business:

  • Core firms – the majority of solo regulated firms will fall into this category. They will need to comply to the requirements of the core regime, including the three parts set out below.
  • Limited scope firms – these firms will be subject to fewer requirements than the core firms. Generally speaking, these firms will be those who are currently subject to a limited application of the Approved Persons Regime. These will be firms who carry on activities other than regulated activities such as sole traders, service companies and oil market participants.  
  • Enhanced firms – these are firms that tend to be bigger in size or have more complex structures where weaknesses in accountability or governance may harm consumers. The FCA have set out some criteria which will help established whether a firm will be classes as an “Advanced Firm” and these criteria can be found on the FCA website.

What is the Regime? A Brief Overview

There are three parts to SM&CR to be rolled out (the “Core Regime”)

  1. The SM&CR Regime

The SM&CR deals with senior managers who are carrying out senior management functions designated by the FCA. A Senior Manager is someone who is responsible for one or more aspects of a business that involves a risk of serious consequences for a business. Senior Managers will need to be approved by the FCA.

Once a person has been identified as a Senior Manager they must be assigned the “prescribed responsibilities” for their role. These must be set out in a written statement of responsibilities.  Enhanced firms will also need to prepare a responsibilities map showing how prescribed responsibilities have been allocated.

Each senior manager will have a “duty of responsibility” to take reasonable steps to prevent, or stop, a breach of rules in their area, and if they fail, they could be held responsible for the breach and enforcement action could be taken.  The FCA will consider whether the SMF took reasonable steps to prevent the breach from happening.

There is a transition process for existing Approved Persons but individuals who were not previously Approved Persons will need to be approved by the FCA.

  1. The Certification Regime

The certification regime will cover those who are not senior managers, but whose jobs mean that they have a significant impact on customers, markets or the firm (also known as “significant harm functions”). The regulators will not approve people within the certification. Instead, businesses will need to check and confirm (certify) that the employees are fit and proper (fit and proper) to carry out their job (with a review to take place annually).

The types of roles which may be caught by the certification regime include functions which would have been significant influence functions (SIFs) under the approved persons regime, functions subject to qualifications requirements (ie retail investment advisers) and functions where a person deals with customers. Other types of persons who are caught will be proprietary traders, algorithmic traders, material risk takers and any supervisor or manager of someone who is a certified person.

  1. The Conduct Rules

These are new rules which will apply to all employees (not just those falling under the SM&CR regime or the Certification regime) and all non-executive directors. These rules outline expectations for personal conduct and replace the Statements of Principle and Code of Practice for Approved Persons in the FCA Handbook. The rules can be found in the COCON chapter of the FCA handbook. As they apply to staff directly, they will help shape the culture, standards and policies of firms as a whole and promote positive behaviours that reduce harm.  

What steps should firms be taking to be ready for the extended regime?

The checklist below will be a useful tool to consider whether your firm is ready for the regime when the 9th December comes around:

  • Confirm what type of firm you are if unsure - core, enhanced or limited. The FCA has a handy checker tool in its guide which can be found here.
  • Identify your Senior Managers and allocate their prescribed responsibilities in a written statement of responsibilities. 
  • Identify your certification staff (although you do not need to certify as fit and proper until 9 December 2020 you do need to identify appropriate staff by 9 December this year).
  • By 11.59pm on 24 November solo firms to submit Form K (Conversion Notification for core and enhanced firms only) and Form O (Opt-up Notification for core and limited scope firms).
  • Ensure that your staff and non-executive directors receive appropriate training on the FCA Conduct Rules.
  • Update your employment contracts and staff handbooks to reflect the new requirements.
  • Prepare a responsibilities map if an enhanced firm.

If you have any questions or would like further information on the extended regime, please do not hesitate to contact Rachelle Sellek.

Insight article byRachelle Sellek

Rachelle Sellek

Partner

+44 (0)7867 987 927
[email protected]