By now, most FCA regulated firms will be aware that the FCA intends to extend the Senior Managers and Certification Regime (“SM&CR”) so that it applies to all FCA regulated firms from an as yet unspecified date in 2018 (most likely mid to late 2018).
The FCA consultation period (in respect of Consultation Paper CP17/25 – “Individual Accountability: Extending the Senior Managers & Certification Regime to all FCA firms” (“Consultation”), found here: https://www.fca.org.uk/publication/consultation/cp17-25.pdf) is only open until 3 November 2017 for firms to respond to the FCA’s proposals. The Consultation not only applies to UK based FCA regulated firms, but also, branches of non-UK firms which have FCA permission to carry out regulated activities in the UK. Insurers are covered by a separate consultation (Consultation Paper 17/26).
The proposed extension of the SM&CR has come about as a result of the Financial Crisis and is intended to act as an “accountability system” – that is, a regime which is more focused on individual (as opposed to corporate) accountability. The SM&CR replaces the Approved Persons Regime.
SM&CR was introduced by the FCA in larger firms (e.g. banks and building societies) from spring 2016. However, SM&CR will be extended to all financial services firms in 2018. Indeed, it is estimated that, following implementation, the new regime will apply to circa 60,000 firms in the UK.
What is proposed?
The intention is that a “core” regime will apply to every firm (regardless of size), unless that firm is a “Limited Scope Firm” (please see further detail below).
The core regime consists of three elements: (i) Senior Managers Regime, (ii) Certification Regime and (iii) Conduct Rules. Unsurprisingly, the Senior Managers Regime focuses on the most senior individuals at a firm (see out at 2.27 of the Consultation) – anyone holding a “Senior Management Function” will need to be FCA approved before starting the role and the role will need to be governed by a Statement of Responsibilities (setting out what that individual is responsible/accountable for).
In addition, every Senior Manager will have a “duty of responsibility” – this means that they will have an area that they are personally responsible for and if something goes awry in that area, the FCA will consider whether that individual took “reasonable steps” to prevent the issue in question from occurring. The FCA will propose and outline new responsibilities which should be given to Senior Managers, known as “Prescribed Responsibilities”.
The Certification Regime element will apply to individuals who are in roles which may have a large impact on the financial markets, the firm they work for, or on the customers of that firm. These will be labelled “significant harm functions”. The FCA will require that firms certify (once a year) that individuals in these roles are suitable for the role. However, individuals in these positions will not need to be approved by the FCA before taking the post.
The Conduct Rules apply to arguably all individuals working in a financial services firm. The Conduct Rules will not be surprising and will comprise of elements such as integrity and treating customers fairly.
- More stringent rules will apply to the largest firms (such as those with Assets under Management of £50 billion or more – the full criteria is set out at 2.38 of the Consultation), which the FCA estimates only comprises of less than 1% of the firms which it regulates. This will be known as the “enhanced” regime under the SM&CR.
- Under the “enhanced” regime, firms will need to apply all of the elements of the core regime and also (i) Additional Senior Management Functions (ii) Additional Prescribed Responsibilities (iii) a Senior Manager will overall responsibility for every area/business activity/management function of the firm (iv) Responsibilities Maps and (v) Handover Procedures (see 2.39 of the Consultation for further detail); and
- A “limited scope” regime will apply to firms which are currently subject to a limited application of the Approved Persons Regime. Examples given are limited permission consumer credit firms, sole traders and authorised professional firms whose only regulated activities are in non-mainstream regulated activities. Recent estimates suggest that about 33,000 regulated firms will fall within the limited scope regime and those firms will need to appoint a named senior manager to have accountability and will be subject to fewer requirements than core firms.
The FCA has indicated that the new regime is being designed to be proportionate and flexible, whilst ensuring that consistent principles are implemented across financial services firms.
- SM&CR will impose new regulatory burdens on firms and senior individuals which may cost time and money in responding to new regulations;
- SM&CR may lead to changes in a firm’s business models and a re-shaping of firms’ compliance activities; and
- Breaches of SM&CR could result in individuals being disciplined by the FCA (the most severe end of the penalties spectrum including criminal liability) which in turn could affect the firm’s reputation and individuals’ livelihoods,
it is very important that firms and the individuals in their senior management functions that might be effected by extended SM&CR now take the time to carefully consider and respond to the FCA’s Consultation as they feel able. Time is running out and the reach of extended SM&CR will be far and wide.