Firms should establish implementation teams, create project plans, design procedures, and take several other measures to prepare for the new rules.
The UK Financial Conduct Authority (FCA) has published three more consultation papers (CPs) detailing the proposed transitional arrangements to extend the Senior Managers & Certification Regime (SMCR) to all regulated firms and insurers in the UK. The window for providing comments to the FCA ends on February 21, 2018.
What is new?
The FCA and the Prudential Regulation Authority (PRA) have already published a number of consultation papers on the extension of the SMCR to all regulated firms (including FCA solo-regulated firms and insurers). The latest CPs, published on December 13, 2017, set out the regulators’ planned proportionate approach to the extension of the SMCR to different firms and provide much needed detail on the transitional arrangements. The FCA is also consulting on guidance on the introduction of the “Duty of Responsibility” for FCA solo-regulated firms and insurers.
Key Points from the CPs
For all firms
- The Approved Persons Regime will continue to apply up until the start of the new regime. Firms should therefore plan their recruitment activities during the transition period accordingly
- Firms will have 12 months from the date of commencement of the SMCR to complete fitness and propriety assessments and complete the certification paperwork. However, certified staff will be expected to comply with the Conduct Rules from day one, so firms will be required to identify certified individuals in advance and provide them with sufficient training
- Firms will have 12 months from the SMCR commencement date to apply the Conduct Rules to “Other Conduct Rules Staff.” These are staff who are subject to the Conduct Rules but do not hold a senior management function or certified function
- The FCA proposes to apply the guidance in DEPP 6 (the FCA’s Decision Procedure and Penalties manual) on the application of the Duty of Responsibility to all Senior Managers
- In prior consultations the FCA proposed that only individuals holding senior management functions would be included on the Financial Services Register. The FCA has now stated that it is reviewing feedback, in particular on concerns regarding removing those performing certification functions from the register, and will reconsider its proposal if necessary
For FCA solo-regulated firms
- The FCA proposes grandfathering provisions so that individuals at core firms, except non-executive director (NED) chairs, and limited scope firms will be automatically converted from the current approved persons regime to the corresponding senior management functions. The CPs propose that firms will not be required to file Statements of Responsibility for the conversion process; however, they should have a Statement of Responsibility for each senior manager ready at the time of conversion (and the FCA will be able to ask for these on request)
- For enhanced firms, conversion from the approved persons regime to senior management functions will not be automatic. Firms will have to submit a Form K conversion notice and accompanying documents (Statements of Responsibilities and Responsibilities Map). Enhanced firms will have up to one week before the commencement of the SMCR extension to complete the conversion process. Failure to complete the conversion process by the deadline will result in the individual’s approval lapsing and re-application for approval, triggering the full SMCR application process (including mandatory criminal reference checks and regulatory references). It will also be a breach of the FCA rules not to have the required approved individuals in certain roles
- Small firms and insurance special purpose vehicles will not be required to take any action if there is no change to existing senior insurance management functions
- Solvency II firms and large non-directive firms (NDFs) will need to submit a Form K, Statement of Responsibilities and Responsibilities Map to convert their senior managers to the new regime. Failure to do so will be a breach of the FCA rules. Submission of the Form K can be done in advance and will take effect when the SMCR comes into force.
Timing and next steps
Feedback on the CPs should be submitted to the FCA by the February 21, 2018. It is expected that a policy statement will be made in 2018 with the final rules.
The extended SMCR will not come into effect until a commencement date has been set by HM Treasury. However, the FCA and PRA expect that the new rules will apply to insurers by late 2018, and solo-regulated firms by mid to late 2019. The new implementation deadlines are later than firms had been expecting, which will no doubt be welcome news to many.
What should firms be doing now?
- Establish an SMCR implementation team, brief key players, and raise awareness of proposed rules amongst in-scope population
- Identify point persons within key functions/business areas to deal with questions from employees on the regime and its implications
- Create a project plan dealing with (i) senior manager implementation; (ii) certification implementation; and (iii) Code of Conduct implementation, as well as overarching strategy and regulatory approach
- Conduct a gap analysis based on current management framework
- Identify senior managers and review outsourcing arrangements to ensure appropriate responsibility is allocated within the senior manager framework
- Prepare key documents including Responsibilities Map and Statements of Responsibility, policies, handbooks, and contracts
- Design and document key procedures: staff training, fitness and propriety panels, disciplinary processes, early warning system and reporting of breaches to the FCA, handover strategy, and regulatory reference mechanisms
- Establish a system for recording key decisions and action taken in connection with the regime
- Be mindful that “culture” is at the heart of the regulators’ focus. Role-modelled behaviours from the top, a clearly defined conduct risk framework, and appropriate people management practices will go a long way in demonstrating compliance with the spirit of the regime