The FCA has published its near-final rules for insurers and FCA-regulated firms. This follows the close of its consultation on the and its proposals on transitioning into SMCR.
Both sets of rules are accompanied by FCA guides, which are essential reading for firms preparing for implementation of the regime.
Crucially, the FCA has also confirmed its timetable for implementation. SMCR will apply to insurers from 10 December 2018 and to FCA-regulated firms from 19 December 2019, although that date is subject to confirmation by HM Treasury.
The rules remain broadly the same as they were during consultation, but there are some important changes to note for FCA-regulated firms.
- The FCA has removed the proposed prescribed responsibility for a Senior Manager to be responsible for informing the governing body of their legal and regulatory obligations. The decision is principally in response to feedback that it was inappropriate to assign this prescribed responsibility to one individual as responsibility tended to be shared between individuals such as the Company Secretary, General Counsel and Compliance Officer.
- The FCA has developed a simplified process for permitting firms to volunteer for a higher tier of regulation. This is most likely to be relevant for large groups that contain some entities that qualify as enhanced firms and others as core or limited scope firms, as it will enable them to apply the same rules across the group structure. There is also a welcome extension of the period for assessing whether a firm falls within the enhanced tier from 12 months to 36 months, with the aim of smoothing out single-year anomalies.
- Firms will also have 12 months (an extension from six months) to implement the rules required by the enhanced tier, once they have met the requirements.
- Frustratingly for partnerships, the guidance on whether a partner will meet the relevant criteria for the applicable Senior Management Function (SMF) has not been clarified. It remains for firms to decide whether a partner performs a SMF based on the existing guidance. The FCA’s guide also makes it clear that prescribed responsibilities should not be shared between partners unless there is a strong justification for this, which may be contrary to the traditional partnership ethos.
- Where an individual performs a SMF and also a separate significant harm function for the purposes of the certification regime, they will also need to be certified for the latter function. That might arise where, for example, they perform the client dealing function under the certification regime as well as an executive management role.
- After contemplating an extension, the FCA has confirmed that firms must complete certification processes within four weeks of an individual taking up a significant harm function (in contrast to the 12 weeks that the FCA gives itself to approve Senior Managers).
- The FCA has clarified that the scope of the new client dealing function is broader than the CF30 – customer function under the current approved persons regime. It covers anyone advising or dealing for clients, including retail and professional clients. The FCA expects that some employees who were not previously CF30s will hold the client dealing function under the new regime.
There are no surprises for insurers in the latest proposals, which are in similar form to the draft regime published during consultation.
Duty of responsibility
A key part of SMCR is the obligation on Senior Managers to demonstrate that they have taken reasonable steps to avoid regulatory misconduct in an area for which they are responsible. The FCA has confirmed that the duty of responsibility will be applied in an identical fashion to the banking sector.
New financial services directory
Currently the Financial Services Register contains details of Senior Managers, but no information about certified employees.
Much of the feedback during consultation was that a central record of certified persons would be useful, not least because certified persons themselves felt the lack of a register entry represented a drop in status. The FCA is therefore proposing a new financial services directory which contains details of both Senior Managers and certified persons. This will therefore require firms to inform the FCA of the identity of its certified persons, something that is not currently required under the SMCR. The consultation on this point closes in October 2018.