The Senior Managers and Certification Regime (SMCR) requires banks and major investment firms to:
- allocate prescribed responsibilities to pre-approved senior managers, each of whom must have a statement of responsibilities specifying those areas they are personally responsible for;
- produce a management responsibilities map showing how the statements of responsibilities all fit together; and
- certify the tier of staff below senior managers as fit and proper in order to perform their roles.
On 7 March 2017, all (bar ancillary) staff below the senior manager and certified tiers were made subject to overarching conduct rules.
On 3 May 2017, the FCA published a series of policy statements tidying up aspects of the SMCR for banks and insurers as well as finalising rules on remuneration and on whistleblowing in branches of overseas firms. With the roll-out of the SMCR to all regulated firms expected to commence this summer, for completion by 2018, the SMCR papers may be of interest to regulated firms more widely, especially as it is stated that the “duty of responsibility” will apply to senior managers in all types of firms.
This update covers a number of publications relating to the regime reflecting both the ongoing interest in the new regime and the fact that various aspects of the regime remained incomplete at the time it commenced. It is notable that the controversial issue of whether firms’ general counsel should be senior managers or excluded remains unresolved with a policy statement surely due in the next six months. It is interesting to note that the FCA’s approach is also attracting the attention of global regulators and the recent thematic review of the Financial Stability Board on Corporate Governance suggests similar regimes may be rolled out in other countries. Firms with an international presence will want to keep a close eye on this.
Response to Freedom of Information request for information on investigations under the SMR
Response, 27 February 2017
The FCA published its response to a request under the Freedom of Information Act 2000 on the number of investigations opened as a result of the introduction of the Senior Managers and Certification Regime (SMCR) since its introduction on 7 March 2016. The FCA’s response stated that since the SMCR’s introduction it has opened investigations into:
- two senior managers; and
- 11 approved persons likely to be certified persons.
Interestingly, in respect of enforcement investigations into any individual designated as a certified person, the FCA response noted that it does not keep a record of those individuals as under the SMCR it is the firm’s responsibility to decide which members of its staff fall under that definition. The FCA’s response therefore interprets the request as referring to approved persons since they are likely to have transitioned into certified persons under the SMCR.
It is interesting to note that the FCA reveals that it has not in all cases verified with the firms whether the individual in question is a certified person. Given that the definition of certified person is wider than that of approved person it suggests that the number may in fact be higher than that disclosed.
Final rules on applying conduct rules to all non-executive directors (NEDs) subject to the SMCR and SIMR
PS17/8, 3 May 2017
“Standard” NEDs are, broadly, those in banks and insurers that do not hold a senior management function or senior insurance management function, and that have no responsibility for implementing the decisions or policies of the board. Their regulatory treatment has proved to be one of the trickier aspects of the SMCR and SIMR, and the regulators’ positions have changed several times since the first consultation paper in July 2014. The policy statement extends most of the conduct rules to standard NEDs, which will have to comply with the five conduct rules applicable to all employees, as well as the senior managers’ obligation to disclose appropriately any information of which the FCA or PRA would reasonably expect notice. They will not, however, have to comply with the senior manager conduct rules on effective control, business area regulatory compliance and appropriate delegation. The FCA paper also refers to a related PRA policy statement, which has not yet been published.
Whilst firms and their NEDs will be reasonably comfortable with the end result, the FCA has introduced some uncertainty with the requirement to apply conduct rule breach reporting rules to standard NEDs where the firm has taken action “equivalent” to disciplinary action against an employee. Though it is not very clear what the FCA has in mind here, in practice such action is likely to be rare.
Firms will need to make sure that they have given appropriate, role- tailored training to their standard NEDs before the rules come into force on 3 July 2017. They will also need to consider whether and how to amend their conduct rule breach reporting procedures to ensure that any “equivalent to disciplinary” action against standard NEDs is considered for possible reporting.
Final guidance on the SMCR “duty of responsibility”
PS17/9, 3 May 2017
The duty of responsibility replaced the controversial presumption of responsibility before the latter was ever brought into force. It imposes a requirement on senior managers to take reasonable steps to avoid regulatory breaches in their business areas – and arguably adds little to the existing senior manager conduct rules, which include an obligation to take reasonable steps to ensure that the relevant business area complies with the requirements and standards of the regulatory system. Nevertheless, the FCA has finalised its guidance on the duty of responsibility, which is unsurprisingly similar, though not identical, to the guidance on the senior manager conduct rules. The guidance is helpful in that it gives a reasonably concise summary of how the FCA expects senior managers to run their businesses. So there are references to FCA favourites like dealing with possible breaches in a timely way, overseeing delegated responsibilities properly, and assessing and monitoring their area’s governance, operational and risk management arrangements. Whilst little of this is novel, it amounts to a checklist that senior managers might find it helpful to run through.
Notably, the FCA will have regard to whether a senior manager took reasonable steps to ensure an orderly transition when they were replaced in the performance of their function by someone else. The FCA justifies this by referring to related conduct rule guidance – though this guidance actually applies to the manager of the senior manager who is being replaced. The FCA has previously only applied the obligation to the firm or line manager rather than the mover/leaver themselves, and senior managers may find it difficult to comply where their relationship with their employer has broken down (though this risk is limited by the fact that the obligation is to take “reasonable steps”). Many firms now require their senior managers to maintain a detailed governance and management framework. As well as being good regulatory practice, if kept up to date this can form the bulk of a handover document, avoiding the need to put one together from scratch in what may be difficult circumstances.
Senior Managers and Certification Regime: Review one year on
News story, 7 March 2017
Exactly one year after the SMCR came into force the FCA published a review of the regime. In it the FCA admits that changing the culture of the banking sector will take time, and that there is still further work to be done. The review indicates that the SMR has had some success in correctly identifying senior managers’ roles and responsibilities; however, the review cites evidence of instances in which firms have allocated the same responsibilities to more than one senior manager, resulting in a lack of clarity over who is responsible for what, and in some cases “obscuring” who is genuinely responsible.
The overall impression left by the review is that there is still work to be done before a real culture change is imbedded in firms. The FCA promises to keep a “watchful eye” on firms in the coming year; time will tell if this proves effective.
The conduct of investment managers is particularly topical in the context of the asset management market study. So far, interim findings and proposed remedies have been published and the FCA has indicated its intention to refer the investment consultancy sector to the Competition and Markets Authority. The final report was published shortly before going to press, alongside a consultation paper setting out the FCA's proposals in relation to a number of areas including fund governance. A number of other papers are also of interest.