At long last, the FCA has published its consultation paper CP17/25 on the Extension of the Senior Managers and Certification Regime to all firms regulated by the FCA.
The regime has been in force for banks and building societies since March 2016 and the regulator has emphasised its desire to implement a regime which can be consistently applied across the whole financial services sector. As with the banking sector, the focus remains on encouraging a culture of personal responsibility and requiring firms to demonstrate where that regulatory responsibility lies. However, the regulator has taken the welcome approach of accepting the need for a flexible and proportionate approach given the range in size and complexity of FCA-regulated firms.
What requirements is the regulator proposing?
The regulator proposes a set of core requirements which will apply to all firms (with the exception of those who are already exempt from the current approved persons regime). These are:
- To designate certain roles as Senior Manager Functions: individuals carrying out these functions will require FCA approval and annual review by firms. There will be a requirement to prepare a written Statement of Responsibilities for each role and Senior Managers will be personally accountable if they do not take ‘reasonable steps’ to prevent a regulatory breach within an area for which they are responsible. Depending on the seriousness of the breach, the responsibilities and seniority of the Senior Manager and other factors, this could lead to enforcement action against individual Senior Managers, or firms, or both. Senior Managers will include executive directors, the non-executive Chair, the MLRO and the manager with responsibility for compliance oversight. For partnerships, it is currently proposed that all partners would be Senior Managers unless they have no involvement in managing the firm or authority to act on behalf of the firm.
- To identify a second tier of roles which are subject to the Certification Regime: individuals performing these roles will require annual certification by their firms that they are fit and proper. These will include those who hold the Significant Influence Function under the current approved persons regime, a client dealing function (an extension to the CF30 function under the approved persons regime), certain trading functions, and other functions where there is risk of harm to the firm or its customers in the course of carrying out their duties.
- To introduce a set of Conduct Rules which will apply to (almost) every employee within the firm: these include a duty to act with integrity, to be open and cooperative with the regulator and to have due regard to the interests of customers. As a result many employees will be subject to regulation by the FCA for the first time.
There are additional Enhanced Requirements for around 350 large or complex firms (including Significant IFPRU firms and firms with Assets Under Management of £50 billion or more). These requirements include additional Senior Management Functions and additional responsibilities, taking them closer to the existing form of SMCR which applies to banks.
The regulatory reference regime, which sets out obligations in relation to the nature and provision of employee references for Senior Managers and certified employees, and which is now in place in the banking sector, will also be extended to all FCA-regulated firms.
The deadline for a response to the consultation is 3 November 2017, with final rules expected in 2018.
Separate consultation papers have been issued by the PRA and FCA in relation to insurers. A further consultation paper is also expected on how the Senior Managers and Certificate Regime will apply to Appointed Representatives. We will be reviewing all of these consultation papers and look forward to engaging with you on these issues over the coming months.