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On 9th December 2019 the Senior Managers and Certification Regime (SM&CR) will be in force across the financial services sector.
This year, there have already been two notable developments relating to the SM&CR. The first relates to whether the head of legal should be a designated senior manager within the SM&CR, and other changes to the scope of the certification regime. The second concerns some useful draft guidance on regulatory references.
The rest of this note sets out the implementation timetable and a short overview of the new regime.
Head of Legal
On 23 January 2019, the FCA published a consultation paper in which it proposes to exclude heads of legal from the SMF18 (Other overall responsibility function). The rationale for this is that as a senior manager, the head of legal would be in several positions of conflict:
That said, heads of legal will still be covered by the certification regime and can hold other functions that require them to be a senior manager (e.g. a compliance head or money laundering officer role). The other overall responsibility function (SMF18) is only applicable to enhanced solo-regulated firms, as well as banks and insurers.
In the same consultation paper, the FCA also made changes to the scope of the certification regime: it plans to narrow the client-dealing function and introduce a new "systems and controls" certification function for certain firms.
On 30 January 2019, the Banking Standards Board (BSB) published a consultation "Certification Regime: Regulatory References" in which the BSB seeks views on its proposed draft good practice guidance on regulatory references. Although directed at the banking sector, it will also be helpful guidance for the wider financial services sector.
The BSB was established in 2015 to help raise standards of behaviour and competence across UK banks and building societies. The guidance represents the pooling of member firms' knowledge through the BSB's cross-industry certification regime working group (CRWG). The CRWG meets regularly to consider where voluntary good practice guidelines could be useful to firms that are implementing the certification regime. The guidance is not intended to be binding on BSB members but the BSB hopes that members and the wider sector will find it relevant and practical, and that they will use it in developing their own processes, policies and procedures for implementing the regulatory references requirements.
The draft guidance is based on three principles: fairness, proportionality and consistency. It covers:
As soon as the guidance has been finalised, we will be publishing a summary of its key provisions.
OVERVIEW OF THE SM&CR
Time to prepare – your implementation timetable
Many firms will have already started their preparations for this important change, but if you're lagging behind there's still time to prepare. The rest of this briefing will help you get familiar with what the new regime looks like and sets out some practical ways you can start to prepare.
More information can be found in the FCA's guide for solo-regulated firms and the FCA's Policy Statement (Extending the SM&CR to FCA firms – feedback to CP17/25 and CP17/40, and near final rules - PS18/14).
By way of background, the SM&CR was rolled out to banks, building societies, credit unions, and PRA designated investment firms (called "banking firms") in 2016. A modified version of the regime (the Senior Insurance Mangers Regime) was also rolled out to insurers at the same time. On 10 December 2018, the SM&CR was extended to dual regulated insurers, and from 9 December 2019 it will be rolled out to most financial services firms, including insurance brokers, as shown below.
9 December 2019
Conduct rules apply to SMFs and certification staff so before commencement, firms must:
One year from 9 December 2019 to 8 December 2020
During this one year period, firms must:
|Post transitional period|
|9 December 2020||
|Post 9 December 2020||
Ongoing requirements to:
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).
An outline of the new regime
The three main elements that we expected from the roll out to the banking firms remain, and are called the "core regime":
|Rule 1||You must act with integrity|
|Rule 2||You must act with due skill, care and diligence|
|Rule 3||You must be open and cooperative with the FCA, the PRA and other regulators|
|Rule 4||You must pay due regard to the interests of customers and treat them fairly|
|Rule 5||You must observe proper standards of market conduct|
Additional conduct rules will also apply to senior managers:
|SC1||You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively|
|SC2||You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system|
|SC3||You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee this effectively|
|SC4||You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice|
Conduct rules applicable to Directors
All executive and non-executive directors are subject to the basic conduct rules (1-5 above) as well as senior manager conduct rule SC4 – to disclose appropriately any information of which the FCA or PRA would reasonably expect notice.
Executive directors at core and enhanced firms are required to be approved as senior managers, so SC4 will apply to them anyway. In limited scope firms, however, a narrower set of senior manager functions apply so there will be executive directors who may not be senior managers. The latest consultation paper proposes that in view of their seniority in the firm, such directors should also be subject to SC4 even though they are not senior managers.
Non-executive Directors will only be senior managers to the extent that they hold a chair position eg Chair of the Board, or Chair of the Nominations Committee. For those directors, all the senior manager conduct rules will apply. Those NEDs who do not hold a senior manager position, will be subject to SC4.
So what are the key differences going to be?
And for those who have been looking closely at what banking firms have previously been subject to, what are the key differences?
The core regime is "lighter" than the regime that the banking firms are subject to. Banking firms also have obligations which do not apply to firms covered by the "core regime". These are the obligations to:
However, although these obligations are removed for firms covered by the core regime, firms who are covered by the "enhanced regime" will need to comply with these obligations. More details are set out below on the "enhanced regime", which essentially applies to the biggest, more complex, firms.
How does the "core regime" vary for firms?
The "core regime" applies as a rule of thumb to all firms.
There are increased obligations for firms covered by the "enhanced regime" (larger and more complex firms) and reduced obligations for firms covered by the "limited scope" regime.
In terms of how firms work out whether they are "core regime", "enhanced regime" or "limited scope", a useful diagram from the FCA Guide is reproduced below (wording underlined indicates the changes made following the FCA's consultation).
An enhanced firm will have:
As is referred to above, enhanced firms must also have in place:
So what will the SM roles be?
Core regime firms, and enhanced regime firms, are proposed to have the following senior manager roles (far fewer than banking firms), although there is the ability to flex these depending on what is relevant/appropriate for firms:
|Money Laundering Reporting Officer||MLRO|
The requirements for limited scope firms will be lower.
Enhanced firms will also have to review and have as appropriate additional senior manager roles as follows:
|Chief finance function||SMF2|
|Chief risk function||SMF4|
|Head of internal audit||SMF5|
|Senior independent director||SMF14|
|Chair of remcom||SMF12|
|Chair of risk committee||SMF10|
|Chair of audit committee||SMF11|
|Chair of nominations committee||SMF13|
|Group entity senior manager||SMF7|
|Chief operations function||SM25|
|Other overall responsibility||SMF18|
Core regime firms and enhanced regime firms will also have to place "prescribed responsibilities” on the senior managers (limited scope firms will not be subject to this) including responsibilities for:
Enhanced firms will also have to have responsibilities for:
The new duty of responsibility
Currently only applicable to banks (from March 206) and insurers (from December 2018) this key new duty makes the senior manager individually responsible if the firm contravenes a regulatory requirement, and the senior manager responsible for that area did not take "reasonable steps" to prevent or stop it from happening.
This duty is an additional ground on which the regulator can discipline a senior manager so senior managers need to understand what this means in the context of their jobs.
The FCA's guidance on the duty of responsibility currently applying only to banks, is set out in its Decision Procedure and Penalties manual of its handbook (DEPP) and will be extended, unchanged to financial services firms.
What are the proposals re Regulatory References?
The regulatory reference scheme proposed to go along with the new SM&CR looks very similar to that brought in for banking firms. This will require firms to request references for regulated individuals from past employers, and also to provide such references.
This is a step up from previous referencing obligations and requirements, and is what enables firms to get the information that they need to work out if someone is fit and proper.
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. 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. 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 9 December 2019 ("Commencement") - see below New and in-flight applications.
To keep the conversion process simple, there will be a different approach depending type of firm.
Key points to note include:
- senior managers 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
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. 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. Firms in this situation would then have to follow the full application process for approval of the relevant individuals, including mandatory criminal records checks and regulatory references.
The FCA guide explains the process if a firm wishes to change their approved individuals before Commencement. The key points to note are as follows –
What are the next steps?
Firms should prepare for the new regime by considering the following:
Key Documents and Links
 See page 8 of the FCA Guide for a useful table of firm types
 For example, someone performing a CF10 (Compliance Oversight function) will be eligible to be converted automatically into a SMF16 (Compliance Oversight function)
 Eg CF10a, CF28, CF29, CF30 and CF2 (Non-Executive Director except SMF9- Chair)
 See page 62 of the FCA Guide for proposed function mapping for Enhanced firms and page 54 for Core and Limited Scope firms (including branches)