The FCA has published consultation papers (CP17/40-42) that set out proposed transitional arrangements for the wider roll-out of the Senior Management and Certification Regime (SMCR). As will be well known, a version of SMCR has applied to Banks since March 2016 and the paramount goal of the SMCR reforms is to increase levels of actual and perceived accountability. In July 2017 the FCA set out (in CP17/25) for the first time its substantive proposals as to how the wider roll-out of SMCR would operate. In very broad terms, for most authorised firms, the regime proposed is substantially similar to the SMCR that already applies to Banks. It includes the replacement of the current Approved Persons Regime (APR) with a tri-partite regime of Senior Managers holding defined Senior Management Functions (SMF), certified staff whose "fitness and propriety" is assessed by the authorised firm itself and a wider constituency of non-ancillary staff not subject to the requirement of being "fit and proper" but subject to new Conduct Rules. It was proposed by the FCA in July 2017 that the precise application of the rules would depend upon the categorisation of authorised firms (in broad terms based on size) into any of 'Limited Scope', 'Core' and 'Enhanced'. These most recent consultations deal with the proposed transitional arrangements for these firms into the SMCR. There are separate FCA and PRA consultations dealing with the application of SMCR to insurers, which we do not cover in this article.
Implementation for Limited Scope and Core Firms.
It was already known from the FCA's July 2017 consultation that individuals with APR controlled functions at Core and Limited Scope firms corresponding to SMCR SMF's are proposed to be "grandfathered" across to the new regime without the need to re-apply for approval or to notify the FCA. The only exception to this is non-executive directors (CF2 under the APR). NED's will either cease to be approved on implementation (albeit they will likely be subject to the Conduct Rules including Senior Manager Conduct Rule 4 (notifications to the regulator)) or, to the extent they are the Chairman, will take on the SMF9 (Chairman function) which must be notified to the FCA before implementation. Firms should take careful note that "grandfathering" will only operate where there is a direct correlation of roles. As such, for example, a director (CF1) will grandfather to SMF3. However, if the CF1 happens also to be the Chief Executive then they must hold SMF1 (Chief Executive) and this will require an application for approval using the SMCR Form A process (although the enhanced SMCR regulatory references need not be requested).
Readers will know that SMCR, as it applies to Banks, requires all SMF holders to sign up to a Statement of Responsibility (SoR). The SoR is key to the FCA's aforementioned goal of enhanced accountability and to the Duty of Responsibility (DoR) (see below). The FCA propose that SoR's will need to be prepared for new SMF holders at Limited Scope and Core Firms, but need not actually be submitted to the FCA for approval. This will substantially lighten the administrative burden on the FCA, although of course the risk of defective SoR's going without check until it is "too late" (for example if a case is brought in terms of the DoR – see below) is increased.
The FCA also (rightly) recognise that the transition to the Certification regime may take some time for authorised firms, requiring as it does a new or updated set of systems, controls, policies and contracts. As such, it is proposed that individuals who will fall to be certified (and in this context firms must remember that there is not a precise correlation between certification and the APR), will be subject to the new Conduct Rules from the moment of implementation but will only have to be certified by firms as "fit and proper" 12 months after implementation and annually thereafter. To complete the picture, for those non-ancillary staff subject to the Conduct Rules only, the FCA propose a 12 month window following implementation before the Conduct Rules apply to allow firms time to train staff, to implement appropriate policies and to amend contracts (as appropriate).
Implementation for Enhanced Firms
The proposal is that Enhanced Firms will similarly benefit from grandfathering where there is a direct correlation of roles (see above). However, the FCA wishes to be notified of this fact and to receive SoR and Responsibilities Maps (a requirement that only Enhanced Firms are likely to be subject to) before the grandfathering takes place. Those taking on new roles will be required to submit an SMCR Form A in the usual fashion or Form E if they are approved under the APR and they are changing roles.
The delayed implementation of the Certification regime and the application of the Conduct Rules to non-ancillary staff summarised above, will also apply to Enhanced Firms.
Guidance on the Duty of Responsibility
As will be known, the FCA proposes that the DoR will apply to all new SMF holders as it applies to those existing SMF holders at Banks. The DoR is another key part of the FCA's overall goal of delivering increased levels of accountability. The FCA proposes that the existing guidance (in DEPP) regarding the application of DoR applies without amendment to all SMF holders.
Timing and Next Steps
The consultation window for the consultations on transitional provisions closes at the end of February 2018 and the FCA's aspiration is to finalise its approach, both in terms of the new rules and the transitional provisions, in the summer of 2018. The final implementation dates are not yet clear but is anticipated that implementation will be staged depending on whether firms are Core, Enhanced or Limited Scope. It is possible that Core Firms will not be required to transition to SMCR until 2019.
The FCA consultation papers are supplemented by a series of useful flow charts and tables, which firms are advised to consult in order to understand the specific implementation challenges that they will face. All firms captured by the wider SMCR roll-out will be required to plan and implement significant changes, both in order to ensure compliance with the final transitional provisions and to ensure on-going compliance with the new SMCR. This will (no doubt) necessitate systemic reforms that will need to be carefully planned in advance. As such, whilst the timescales are relatively generous firms would be well advised to start their planning processes if they have not already done so.