December 22, 2017

Extension of Senior Managers & Certification Regime: latest update

The FCA's plans to move firms and individuals in the wider financial services sector to the Senior Managers and Certification Regime (SM&CR) is now likely to be mid-to-late 2019, rather than during 2018 as previously envisaged.

In July this year, the FCA published its proposals for extending the SM&CR to almost all FCA regulated firms.  New consultation papers published on 13th December 2017 develop these proposals further by seeking views on:

 - How the FCA should move firms and individuals to the new regime

 - Associated consequential changes to the FCA Handbook

 - How the FCA will enforce the Duty of Responsibility

This briefing note summarises the main proposals contained in these latest consultation papers, but to understand the full set of proposals so far, read this note in conjunction with our earlier client update summarising the FCA's July 2017 consultation (CP17/25 -  Extending the SM&CR to FCA regulated firms).

Key dates and "Commencement" of the new regime

In this briefing note we use the term "Commencement" for the date on which the new regime will start.

Date What will happen
21 February 2018 Current consultations close

During 2018

  • FCA considers the feedback to these consultations alongside the feedback already received from the earlier July 2017 consultations
  • FCA makes final rules and finalises how the transitional process will work
  • Treasury sets final dates for when the new rules will commence
Mid-to-late 2019

Projected date for when the rules will apply

How will individuals be moved to the new regime?

For the majority of firms, the FCA plans to automatically convert existing relevant controlled functions approved under the Approved Persons Regime (APR) into Senior Manager Functions in the new SM&CR[1].  Of course, the majority of those under existing functions will not automatically convert because those roles will no longer require approval by the FCA and will not be Senior Manager roles[2]. This means the majority of firms will not need to submit anything to the FCA unless they need to change their approved individuals before conversion or apply for new approvals to be effective after Commencement (see below New and in-flight applications).

The FCA has said that it aims to make the conversion process to Senior Manager roles simple, clear and proportionate. To do this, they have proposed different approaches for different types of firms.[3]

-Core and limited scope firms, conversion to Senior Managers

Key points to note include:

  • Senior Managers at these firms will be automatically converted wherever possible with no action required by firms
  • There will be no need to perform extra checks such as mandatory criminal records checks and regulatory references because firms will already have to ensure that these individuals are, and continue to be, fit and proper
  • There is just one exception to the automatic conversion rule: where a CF2 Non-Executive Director is going to perform the SMF9 – Chair function, the firm must notify the FCA using Form K

-Enhanced firms, conversion to Senior Managers

For enhanced firms, there will be no automatic conversion to Senior Manager roles. To convert existing approved individuals to new Senior Manager Functions, enhanced firms will need to submit:

  • Form K conversion notification
  • Statements of responsibilities
  • Responsibilities Map

Form K is used to tell the FCA who the firm wants to assign to the new SMFs, but no further approval is required if the proposed SMFs can be mapped directly from the APR.[4]  For individuals who hold these so-called "mapped functions", there will be no need to do extra checks when they are converted since firms are already required to ensure that these individuals are, and continue to be, fit and proper.

Failure to submit a conversion notification (Form K) will be a breach of regulatory requirements which means the firm will have no FCA approved individuals, risking possible enforcement action by the FCA.  The consultation paper warns that for firms in this situation, firms would then have to follow the full application process for approval of the relevant individuals, including mandatory criminal records checks and regulatory references.

-New and in-flight applications

  • Where the firm needs to change their Senior Managers before conversion, or apply for new approvals to be effective before Commencement, the firm can still apply using the existing processes under the APR right up until Commencement. If these are not processed in time, it is proposed that they will be automatically converted to an application for the relevant SMF at Commencement. It is not proposed to apply the new criminal records checks and regulatory references requirement for such in-flight applications.
  • Where the firm needs to apply for new approvals for Senior Managers to be effective after Commencement the firm should apply using the new SM&CR application forms which will be available before Commencement.If these are submitted before Commencement, any approvals will only be effective from the start of the new regime.
  • For roles which will no longer need approval by the FCA under the new regime (ie non Senior Manager roles)[5] ,firms are reminded that approval will be needed in order for these individuals to perform controlled functions right up until Commencement. However, any applications still being processed at Commencement will lapse since they will no longer be needed. Firms are therefore advised to plan their recruitment activities during the transitional period accordingly.
  • Form A is used to apply for a new controlled function for an individual, Form C to cancel an individual approval, and Form E to transfer an approved individual from one controlled function to another.There will be two versions of each form: APR version to use prior to Commencement and the SM&CR version which, although available before Commencement, will only be effective after Commencement.

What are the transitional arrangements?

  • Certified Staff

The new Certification Regime (CR) will cover people who are not senior managers, but whose jobs mean they have a big impact on customers, markets or the firm.  Once a year, firms will need to confirm that they are fit and proper for their roles. They will have to do this even if the individuals were in these roles before the CR comes into force, or were approved by the FCA under the APR (eg CF29- Significant Management Function or CF30  – Customer function). 

The requirement for firms to certify relevant employees as fit and proper for the first time will commence 12 months after Commencement.

However, the Conduct Rules in COCON in the FCA handbook will apply to these employees from Commencement. Therefore, all firms will need to identify their certified staff from Commencement.  Firms will not be required to obtain regulatory references for existing employees who will be performing the same role after Commencement.

  • Other Conduct Rules staff

There are also individuals who will not hold a SMF or CF but will still be subject to the Conduct Rules in COCON.  Firms will have 12 months from Commencement before the Conduct Rules apply to these staff in order to give them the opportunity to give these individuals the right training.

What guidance has the FCA given on the new Duty of Responsibility?

The FCA is also consulting on extending the ‘Duty of Responsibility’ to firms regulated only by the FCA. This currently applies to Senior Managers of banking firms.

Under the Duty of Responsibility, the FCA can take action against the Senior Manager responsible where their firm has contravened an FCA requirement in their part of the business. The FCA has to show that the Senior Manager did not take reasonable steps to avoid it taking place or continuing.

The FCA does not propose to amend its current guidance on the Duty of Responsibility which is already set out in its Decision Procedure and Penalties manual of its handbook (DEPP). That guidance sets out the circumstances in which the FCA will apply the duty, together with a list of considerations for determining whether a senior manager was responsible for the management of any of the firm's activities in which a contravention occurred, and for determining whether a senior manager took reasonable steps to avoid the contravention.   The consultation paper does, however, summarise some of the more important factors that the FCA took into account when producing the guidance. 

Importantly, the FCA points out that the guidance isn't prescriptive about the steps a senior manager should take, nor gives examples of such steps for specific types of firms, but there is considerable guidance on the reasonable steps a senior manager must take in the Conduct Rules.

Appointed Representatives

The SM&CR does not apply to Appointed Representatives (ARs) (except for certain Limited Permission Consumer Credit firms that also act as ARs for other businesses).

What firms should be doing now

  • Consider if you would like to respond to the consultation by submitting your responses by 21 February 2018
  • Consider which type of firm you are: core, limited scope or enhanced – use the firm checker tool in section 1.3 of CP17/40
  • Consider if the firm has the appropriate people in the correct approved functions before conversion of approved individuals to Senior Manager roles. This will make conversion much easier and smoother

More reading

To read the proposals, click on the relevant consultation paper below:

·         CP17/40 – Transitioning solo-regulated firms and individuals to SM&CR

·         CP17/42 – The Duty of Responsibility

The consultations close on 21 February 2018.


[1] For example, someone performing a CF10 (Compliance Oversight function) will be eligible to be converted automatically into a SMF16 (Compliance Oversight function)

[2] Eg CF10a, CF28, CF29, CF30 and CF2 (Non-Executive Director except SMF9- Chair)

[3] See page 4 of CP17/40 for a useful table of firm types

[4] See page 25 of the CP17/40 for proposed function mapping for Enhanced firms and page 16 for Core and Limited Scope firms

[5] Such as the CF29  - Significant Management Function and CF30 – Customer function, which will move in to the Certification Regime