As many anticipated, the Treasury has announced an extension of the Senior Managers Regime (SMR), which currently applies to banks and insurers, to other financial services firms, including asset managers. This will replace the Approved Persons Regime (APR). What many did not anticipate was the replacement of the Presumption of Responsibility with a Duty of Responsibility. The Duty, which at first glance, is similar to that which currently operates under the APR, will apply to asset managers. The Treasury has confirmed that the SMR will extend to all non-executive directors but relaxed other requirements for firms which would have applied had it extended the original proposals for banks and insurers to asset managers. The government expects the new regime to come into operation during 2018
The main obligations for asset managers under the SMR will be:
- to submit robust documentation to the FCA on the scope of their Senior Managers’ responsibilities – Senior Management Responsibility.
- to certify as fit and proper any individual who performs a Significant Harm Function, both on recruitment and annually thereafter – Individual Certification.
- to ensure that any individual subject to Rules Of Conduct made by the FCA, comply with those Rules – Rules of Conduct Compliance.
The Main obligations under the SMR
An approval regime will apply to those individuals carrying on Senior Management Functions to be FCA approved. Assuming the same functions as those for banks and insurers is applied to banks and insurers, the Senio Management Functions will correspond with the current Governing Functions under the APR but also add a list of prescribed management responsibilities.
What will this mean in practice? Firms need to provide for Senior Managers who are already approved under the APR to be "grandfathered" into relevant roles under the new SMR. Any firms planning a new senior manager appointment, or a material change in role for currently approved individuals, will need to prepare and submit an application to the FCA for approval. Firms will need to prepare individual responsibility statements and responsibility maps showing which functions are allocated to whom.
An Individual Certification regime will apply to individuals performing Significant Harm Functions, i.e. who are not carrying out SMFs but whose roles have been deemed capable of causing significant harm to the firm or its customers by the FCA.
What will this mean in practice? Firms will themselves have to assess the fitness and propriety of persons performing Significant Harm Functions and formally certify this at least annually. Although the FCA will specify the Significant Harm Functions, the appointments will not be subject to prior FCA approval.
The FCA will have the power to make Rules of Conduct. These Rules will apply to senior managers, certified persons and other employees (in essence, anyone except ancillary staff for example receptionists, cleaners). For senior managers (and other approved persons), these rules will replace the statements of principle made under the APR currently found in APER.
What will this mean in practice? Firms will have to amend their compliance and monitoring policies to reflect the Rules of Conduct and ensure that a broader category of staff are trained on the contents of the Rules Replacing the Presumption with a Duty and extending it.
Under the Presumption of Responsibilitfy, in the event of relevant firm’s breach of a regulatory requirement, the Senior Manager with responsibility for managing the firm’s activities in relation to which the breach occurred would have been guilty of misconduct, unless they could satisfy the PRA or FCA that they took such steps as a person in their position could reasonably be expected to take to avoid the breach.
Under the Duty of Responsibility, the Senior Manager with responsibility for managing the firm’s activities in relation to which a breach of a regulatory requirement occurred will be guilty of misconduct. However, in the case of an asset manager, it will be for the FCA to prove that the Senior Manager failed to take such steps as a person in his/her position could reasonably be expected to take to avoid the breach.
What will this mean in practice? In substance, the duty on a Senior Manager and the circumstances in which they would be deemed to have breached that duty will be the same. The difference is that, in keeping with the general approach to proving a breach of a regulatory requirement, the Upper Tribunal will require the FCA to tell it why the Senior Manager fell short rather than requiring the Senior Manager to tell it why his/her conduct was reasonable. This will still require Senior Managers to record the reasons why.
Application of Rules of Conduct to Non-Executive Directors
The PRA and FCA will now have the power to make Rules of Conduct applying to Non-Executive Directors (NEDs). This plugs a perceived gap necessary to address CRD IV, incorporated by reference into MiFID II, which requires Member States to be able to take action against members of an institution’s management body (including NEDs).
What will this mean in practice? A firm will likely need to apply the requirements above to NEDs.
On the current timetable, implementation of the regime is two-and-a- half years away. Both the Treasury and the FCA is likely to consult on the content of the regime. Firms will need to monitor these and also look to factor the SMR into MiFID II implementation and any changes to improve corporate governance generally.
For more information on the contents of this briefing and how Eversheds can assist you with implementation of the SMR combining our legal and consulting skills drawing on our experience of advising banks and insurers on implementation of the current SMR and our industry leading asset management expertise.
The Bill will introduce the following to reduce what would otherwise have been “burdensome… for firms or administratively cumbersome for government”:
- removing the obligation on firms to report all known or suspected breaches of Rules of Conduct, although a firm will still have duties under SUP 15 and Principle 11.
- giving the FCA and PRA greater powers to make transitional provisions to make it easier for them to deal with the grandfathering of existing approvals when new controlled functions are introduced or existing functions changed.
- allowing the variation of time limits on Senior Manager approvals (in addition to the current power to vary the conditions attaching to approvals).
- allowing separate statements of responsibility to be sent to the PRA and FCA (relevant to dual regulated firms only).