The Senior Managers & Certification Regime (SM&CR) is a key part of the FCA’s Culture & Governance priority and aims to promote development of a ‘culture of accountability’ at all levels with senior managers being fully accountable for defined business activities and material risks. The SM&CR is currently in place for banking firms, and will apply to insurance firms from December 2018 and all authorised firms from December 2019. The regime will replace the current approved persons regime, and firms should be preparing now to assess and shape the culture in their firm and ensure that employees are prepared and understand the additional responsibilities that the regime brings.
The FCA intend to implement the regime proportionately to the size and complexity of firms, and to have varying requirements accordingly. Firms which were exempt from the approved persons regime will remain outside the scope of SM&CR. Appointed Representatives will not be included within the SM&CR and will continue to require approval by the Financial Conduct Authority under the approved person regime.
SM&CR requirements for solo-regulated firms are split into three ‘levels’:
- Limited Scope firms
- Core firms
- Enhanced firms
Firms that were subject to a limited application of the approved persons regime will continue to be a “limited” scope firm under SMCR. This includes sole traders, secondary intermediates, limited permission consumer credit firms and other similar less complex businesses.
All other firms will fall into the “core” firm category, unless they are an “enhanced” firm.
A small number of firms will be enhanced firms and subject to additional regulatory requirements. These include: Large CASS FIRM, Mortgage Lender with more than 10,000 mortgages outstanding and firms with assets under management of £50 billion or more at any time in the last three years etc.
An early assessment of whether a firm falls into the limited, core or enhanced category will ensure that the right approach is taken to implementation.
There are three key elements to the regime, Senior Managers, Certification and the Conduct Rules.
For Limited and Core firms, individuals who are currently approved persons will automatically be grandfathered into the applicable Senior Manager functions (SMF) on commencement of the new regime, without any need for further action by firms. There will be no need for re-approval or any background or criminal records checks for individuals already approved, although for new applications there is a requirement on firms to request regulatory references going back 6 years and perform criminal record checks.
Enhanced firms must submit documentation to transition to SMFs. Senior managers will also be subject to the Senior Manager Conduct rules and prescribed responsibilities.
Firms must prepare a Statement of Responsibility for each approved person who is transitioning into a SMF.
Ongoing applications for approval of individuals under the current regime will continue to be accepted right up to implementation and will be automatically converted to SMF applications.
To reflect the more complex structures and activities of enhanced firms, there are additional requirements on transition. There will not be automatic mapping of existing CFs to SMFs. Instead, enhanced firms must identify the individuals who will perform the appropriate SMFs and notify the regulator using Form K, which must be accompanied by a Statement of Responsibilities for each SMF and an overall management responsibilities map.
The Certification Regime applies to individuals within the firm that have the potential to cause significant harm to the firm or any of its customers. The FCA require firms to certify that these individuals are fit and proper to perform their roles, and assess their qualifications, training, competence and personal characteristics. There is a requirement to carry out this exercise annually.
The Conduct Rules will apply to almost every employee of an authorised firm, and will require everyone within the company to:
- 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
- Observe proper standards of market conduct
Additional Conduct Rules will also apply to Senior Managers and will require them to:
- Take reasonable steps to ensure that the business of the firm for which they are responsible is controlled effectively
- Take reasonable steps to ensure that the business of the firm for which they are responsible complies with the relevant requirements and standards of the regulatory system
- Take reasonable steps to ensure that any delegation of their responsibilities is to an appropriate person and that they oversee the discharge of the delegated responsibility effectively
- Disclose appropriately any information of which the FCA, or Prudential Regulation Authority, would reasonably expect notice
Authorised firms should notify the FCA whenever they take disciplinary action against an individual for a breach of the Conduct Rules.
To ensure a smooth transition to the SM&CR, firms should consider implementing changes now, such as identifying the category of firm, the employees who will hold a SMF or require certification and any potential issues with this, and also the allocation of responsibilities early to allow a period of adjustment before the regime is in force. For more advice on how you can best prepare for the SM&CR, speak to one of our experts today.