What has happened?
On 15 October 2015, the Chancellor of the Exchequer, George Osborne, announced an extension of the controversial Senior Managers and Certification Regime across the remainder of the UK financial services industry (including, for the avoidance of doubt, asset managers).
What is the Senior Managers and Certification Regime (“SMCR”)?
Following the financial crisis, the SMCR was developed as a new regime designed to govern the way in which individuals working for UK banks, building societies, credit unions, PRA designated investment firms and UK branches of foreign banks would be supervised and held accountable for the roles they perform. It is due to take effect in the UK banking sector from March 2016 and is subject to staggered implementation.
The Chancellor's announcement regarding the extension of this regime is not entirely surprising. The writing has been on the wall since the Fair and Effective Markets Review (“FEMR”) was published in June of this year. Based on the FEMR, many in the asset management community (and indeed, the financial services sector more generally) expected that the scope of the extension would be subject to consultation. Contrary to early indications, the latest announcement now suggests a wholesale extension of the regime (although the detail will still be subject to consultation and will in theory take account of proportionality).
When is the new regime going to come into effect?
The extension of SMCR is not currently intended to take effect until 2018. Many UK asset managers will therefore consider it too early to start taking positive action toward implementation. This is understandable, particularly as the devil will no doubt be in the detail. However, notwithstanding this, it is important that firms are aware of this significant regulatory change on the horizon and the likely impact it will have on their business, which is not to be underestimated.
What are the likely implications?
The following list represents an indication of what we might expect from the SMCR based on current experience in the banking sector.
- Under SMCR, Senior Managers will generally be expected to demonstrate a higher level of competency, requiring them not only to possess a rich knowledge of the business in which they operate (and, in many cases, might have operated for many years), but to continue their development, proactively informing themselves about, for example, new risks to the business and the continually changing regulatory framework.
- Senior Managers will be required to have individual written statements setting out the aspects of the affairs of the Firm for which they are responsible for managing (including certain mandatory responsibilities prescribed by the FCA (“Financial Conduct Authority”)). This will be reinforced by a firm-wide Management Responsibilities Map. The intention is that in the event that things go wrong, it will be easier for the regulator to take disciplinary action against senior managers personally. Whilst the controversial proposal for a reserved burden of proof for senior managers has now been dropped, the underlying obligation will remain on individuals to ensure that they take reasonable steps to prevent regulatory breaches in the areas of the firm for which they are responsible. This is likely to encourage senior managers to demand more management information and increased papering of decisions.
- Senior Managers will be expected to take a more active role in management, taking positive steps to ensure that the area of the business for which they are responsible is effectively controlled, including questioning (and where necessary challenging) volatile profits or funding requirements and overseeing any delegation of responsibilities.
- The process of transitioning from the current Approved Person Regime to the Senior Managers and Certification Regime will inevitably carry implementation costs. In addition to grandfathering certain approved persons into the SMCR, firms will be required to adapt their governance frameworks, policies and procedures, as well as educate staff on the new code of conduct. The new code is not materially different in substance to the statement of principles for Approved Persons, but it will have a much wider scope (capturing all staff except certain prescribed ancillary staff). More significant still, given the change of regime impacts on senior managers’ individual accountability, it is likely to absorb much more management time than other regulatory change projects and is not something which can be dealt with solely by a compliance team.
- The SMCR is also likely to result in increased operational costs going forward. Whereas under the Approved Persons Regime, the FCA has been the gatekeeper for firms making new hires, by requiring formal applications for persons performing controlled functions, under the new regime, responsibility for certifying certain staff (broadly, approved persons below senior management level) will be shifted to the Firm itself. Firms will not only be required to certify persons as fit and proper during the recruitment process, but thereafter on an annual basis.
hilst the SMCR is unlikely to drive the way in which asset managers conduct their business to the same extent that AIFMD has in recent years, the SMCR will have important consequences, not only for the way in which firms operate internally, but also for individuals personally. Whilst many will consider it too early to commence implementation planning, it is prudent to know what the future holds in store.