November 22, 2019

Time is running out for SMCR compliance

With just two weeks to go until the deadline for brokers and MGAs to comply with the new Senior Managers and Certification Regime (SMCR), it is clear that firms are running out of time to put the necessary processes in place.

The SMCR, which involves a shift towards individuals being held personally accountable for the area of the business they manage and an obligation on firms to police its employees, was first introduced into the banking sector in March 2016 and is now being extended to all FCA solo-regulated firms from 9 December.

Brokers and MGAs have so far been relatively lightly regulated; however firms will now have an obligation to ensure its employees comply with the FCA mandated Conduct Rules (CR) and of certifying that employees are fit and proper (F&P) to carry out their job function.

The FCA recently confirmed it has opened investigations into one firm and six individuals for non-financial misconduct following the introduction of the SMCR into the banking sector. With average enforcement fines in 2017/2018 of £90k for individuals and substantially higher for firms, there is a strong incentive to take SMCR obligations seriously.

Firms could face upheaval as they get to grips with the obligations of the new regime; the introduction of SMCR heralds a brave new world of regulation for brokers, MGAs and their employees. For a sector of the market that has until now enjoyed relatively light touch regulation, getting to grips with detailed requirements such as statements of responsibility, annual fit and proper certification and regulatory references will doubtless prove a significant challenge, particularly for those with limited internal compliance, HR and legal resources to draw on.

Coupled with John Neal's promise to clean up Lloyds and the FCA's clear messages about non-financial misconduct, standards of behaviour across some areas of the intermediary market will need to improve quickly at the risk of personal public censure, fines or even in some cases bans.

With weeks to go, there are still steps that firms can take to ensure they comply by 9 December:

  • Establish which of the three tiers (enhanced, core or limited) your firm falls within, which directs the scope of the SMCR obligations.
  • Obtain a list of your employees and their job functions, which will help you assess whether they carry out a significant management function, client-dealing function, pure ancillary or other roles. 
  • Designate individuals to have specified senior manager functions (SMF). These individuals will hold Prescribed Responsibilities (PR), which will include at least a SMF taking responsibility for the firm's obligations under the SMCR.
  • Designate a senior manager responsible and accountable for each business area. All senior managers must complete a concise standalone Statement of Responsibilities setting out the areas for which they are responsible.

However, that isn't the end of the obligations on brokers and MGAs. Moving forward, firms will have to do the following:

  • Certify those in significant management and client dealing functions as F&P by reference to their honesty, integrity and reputation, competence and capability, and financial soundness.
  • Ensure all employees, except those in pure ancillary functions comply with a tiered set of CR including such matters as acting with integrity, with due care, skill and diligence, and being open and co-operative with regulators.
  • Train employees on SMCR obligations and keep a log of CR breaches to be reported annually and with mandatory reporting to the FCA for breaches by SMFs and any "significant" breach.
  • Update employment contracts and internal policies to reflect these new requirements. There is also a requirement to obtain and provide Regulatory References in a mandated template.