Summary

The FCA has published its proposals for extending the UK Senior Managers and Certification Regime (SMCR) to all financial services firms authorised under the UK Financial Services and Markets Act 2000 (CP17/25). In addition, the FCA has published a consultation extending the SMCR to insurers and reinsurers (CP17/26).

The SMCR is being extended beyond its current scope to almost all UK authorised firms and incoming branches of non-UK firms. For these firms, the SMCR will replace the existing Approved Persons Regime.

Prior to consulting on the changes, the FCA had indicated that it would seek to apply the extended SMCR proportionately, recognising the differences in risk and complexity between firms. Accordingly, the FCA proposes that the SMCR applies differently to larger, more complex firms than to smaller firms or to those with more limited activities. To achieve this, the FCA proposes:

  • to apply a “core regime” containing a baseline set of requirements to all firms;
  • for larger more complex firms whose potential impact on consumers may warrant more regulatory scrutiny (fewer than 1 per cent of regulated firms), an “enhanced regime” containing extra requirements; and
  • a reduced set of requirements applicable to “limited scope” firms. This category includes limited permission consumer credit firms, authorised professional firms whose only regulated activities are non-mainstream regulated activities, energy market participants, internally managed alternative investment funds and insurance intermediaries who only have permissions to carry on insurance mediation activity in relation to non-investment insurance contracts.

Structure of the new SMCR

Senior Managers Regime

The most senior people performing key roles will continue to need approval from the FCA before starting their roles. The FCA’s expectation is that the number of senior managers (i.e. those who are identified as performing ‘Senior Management Functions’ (SMF)) for a firm will be less than the firm’s existing Approved Persons population. The SMF will be set out in the FCA Handbook. The FCA proposes that the following governing functions for all firms are SMF (as appropriate for the particular firm): chair, chief executive, director and partner. In addition, there are required functions of the compliance oversight and the MLRO.

Each senior manager will have a Statement of Responsibilities that clearly states what that manager is responsible and accountable for. These are filed with the FCA and are required to be updated as responsibilities change.

Senior managers will be subject to a statutory duty of responsibility to prevent breaches occurring (or continuing) and will need to demonstrate that they have taken all reasonable steps to do so. The burden of proving misconduct will fall on the regulators, as with other regulatory enforcement actions. But this may make it easier for the FCA to pursue enforcement action against an individual senior manager where a regulatory breach has occurred in the activities of the firm for which the manager is responsible.

Prescribed Responsibilities

In addition, there are Prescribed Responsibilities that firms will need to allocate to senior managers to ensure there is a senior manager accountable for key conduct and prudential risks. The Prescribed Responsibilities will be required to be reflected in a senior manager’s Statement of Responsibilities.

Certification Regime

The Certification Regime will apply to employees who are not senior managers but whose role means it is possible they might cause significant harm to the firm or its customers e.g. proprietary traders and client dealing personnel. These certification functions are set out in the FCA Handbook and firms will need to certify that these staff are fit and proper to perform their role at least once a year. Implementation of these assessments will need to be at least in part addressed through firms’ HR policies.

Conduct Rules

A set of five Conduct Rules and guidance (which will replace the existing Statements of Principle and Code of Practice for Approved Persons) will apply to all financial services staff. Further Conduct Rules will apply only to senior managers.

Firms will be required to train staff so they know how the Conduct Rules apply and FCA notification obligations apply to firms when staff have breached Conduct Rules.

Firms subject to the enhanced regime

Firms subject to the enhanced regime will have additional requirements placed upon them.

  • There will be additional SMF that the FCA will need to approve e.g. the chief operations function.
  • There will be more Prescribed Responsibilities that need to be given to senior managers.
  • A firm will need to ensure that there is a senior manager with overall responsibility for every area, business activity and management function carried out by the firm.
  • Firms will have to have a “Management Responsibilities Map” which maps how the relevant responsibilities have been allocated and to which senior managers.
  • Firms will need to ensure they have handover procedures so an incoming senior manager has all the information and material reasonably expected in order to be able to carry out the job.

Firms subject to the enhanced regime are as follows:

  • “significant investment (IFPRU) firms” defined in IFPRU 1.2.3.;
  • “CASS large firms” defined in CASS 1ª.2.7.;
  • firms with assets under management of £50 billion or more;
  • firms with total intermediary regulated business revenue of £35 million or more per annum;
  • firms with annual regulated revenue generated by consumer credit lending of £100 million or more per annum; and
  • mortgage lenders (non-banks) with 10,000 or more regulated mortgages outstanding.

Impact on insurers

The FCA’s proposals affect all insurers and reinsurers regulated by the PRA and FCA. Specifically the proposals cover:

  • all firms in scope of the UK rules implementing the Solvency II Directive (Solvency II firms). This includes the Society of Lloyd’s, managing agents, incoming branches of non-UK firms and insurance special purpose vehicles (ISPVs), but excludes some firms able to rely on transitional provisions. The FCA’s proposals will affect most staff in those firms, including (but not limited to) most of the existing approved individuals; and
  • all insurers outside the scope of the Solvency II Directive (non-directive firms), Approved Persons and most other staff within those firms. The PRA defines a small non-directive firm as a firm where the value of assets for all the regulated activities it carries out is £25,000,000 or less. Non-directive firms exceeding this threshold qualify as “large” non-directive firms.

The FCA is proposing to apply the proportionality principle here such that the full SMCR will apply to Solvency II firms and large non-directive firms, with a lighter regime applicable to small non-directive firms, small run-off firms and ISPVs. In practice these proposals would mean that:

  • all insurers will need to comply with the Certification Regime, fitness and propriety assessments and Conduct Rules requirements;
  • the Senior Managers Regime will apply to all insurers but it will apply differently to small non-directive firms and ISPVs;
  • not all insurers will be subject to the same list of Senior Management Functions;
  • the full list of Prescribed Responsibilities will apply to Solvency II firms and large nondirective firms. Fewer Prescribed Responsibilities will apply to small non-directive firms, UK branches of third country firms and ISPVs. No Prescribed Responsibilities will apply to UK branches of EEA firms; and
  • certain roles that currently require approval under the Approved Persons Regime will no longer need FCA approval and will instead be covered under the Certification Regime.

Impact on banking firms

The FCA is consulting predominantly on the extension of the SMCR to those firms who are not already in scope of the SMCR for banks, credit unions and PRA-designated investment firms (banking firms). However, the FCA is also consulting on amending the existing regime applicable to banking firms. In summary the FCA proposes to:

  • introduce a new Prescribed Responsibility for all firms (including banking firms) required to be allocated to a senior manager to make sure that firms train their staff on the Conduct Rules and that firms comply with the notification requirements described above;
  • change to the scope of application to the “12 week rule” such that it can apply to certain additional SMF; and
  • extend the new “Partner Senior Management Function” to banking firms.

What’s next?

The deadline for comments is 3 November 2017. The FCA intends to publish a Policy Statement with final rules in 2018.

  • HM Treasury will set the implementation date. The expectation is that this will be from 2018.
  • The FCA will consult separately on the application of the SMCR to Appointed Representatives later in 2017.