On 23rd January the FCA published a Consultation Paper 19/4 outlining several amendments to the Senior Managers and Certification Regime (“SM&CR“) for banking firms, insurers and FSMA-authorised solo-regulated firms. The FCA hopes that the proposals will ensure the effectiveness of the SM&CR and support its objectives of reducing harm to consumers and strengthening market integrity.
The key proposals include:
- excluding the persons carrying out the head of legal function from the requirement to be FCA approved as a Senior Manager performing the Overall Responsibility function under the SM&CR;
- introducing a notification requirement for firms with permission to undertake retail intermediation business who do not submit RMA-B (profit and loss on Retail Mediation Activities) if they have over £35 million in regulated revenue from activities undertaken using these permissions thereby taking them into the enhanced SM&CR regime;
- clarifying that the certification regime will apply to individuals performing roles that were systems and controls functions under the approved persons regime at core and limited SM&CR firms;
- allowing firms to exclude purely administrative roles from the Certification Regime where the roles involve taking part in investment activities by amending the scope of the client dealing function; and
- ensuring executive and non-executive directors at limited scope firms are subject to equivalent requirements by applying the Senior Manager Conduct Rule 4 (“SC4“) requiring them to disclose appropriately any information of which the FCA would reasonably expect notice.
The exclusion of the legal function follows concerns raised by the industry in response to the FCA’s Discussion Paper DP16/4 in September 2016. In particular, industry respondents noted that the obligation to notify the FCA under SC4 could conflict with a solicitor’s duty of confidentiality and that having lawyers in scope could put pressure on firms to waive legal professional privilege during the course of an investigation to prove that “reasonable steps” were taken.
During its initial consultation, the FCA had originally expressed a view that the head of legal function should be within the scope of the Senior Managers Regime as the role had evolved from a purely advisory role to being a control function or “line of defence”. However, concerns around privilege and the fact that solicitors are, in any event, subject to Solicitors Regulatory Authority conduct rules has persuaded them to exclude the function.
The FCA did stress that, while the Head of Legal would no longer be a separate category of Senior Manager, these individuals would still be captured under the Certification Regime as either a Material Risk Taker or Significant Management Function and would remain subject to individual conduct rules. Heads of Legal would also be classed as Senior Managers where they perform additional roles which are in scope (e.g. Chief Operations Officer or Head of Compliance). The FCA emphasised that it does not see its proposal excluding Heads of Legal as creating an opportunity for firms or other Senior Managers to “avoid their responsibilities”.
The FCA intends to make the proposed changes before the extended SM&CR comes into force for solo-regulated firms on 9 December 2019.