INTRODUCTION The FCA has published its first consultation paper on extending the Senior Managers & Certification Regime ("SM&CR") to all firms regulated under FSMA (CP 17/25). The new rules will have significant implications for individual accountability and governance arrangements across the financial services sector. In this Client Alert, we consider some of the implications and key actions that firms can be taking now in order to prepare. What is the FCA Proposing? The Government has been consulting since October 2015 on extending the SM&CR, which first came into effect for banks and large investment firms in March 2016. The FCA is now consulting on the specific rules to be applied to the wider sector. Similar to the SM&CR for banks, the new regime will involve (i) regulatory approval of designated "Senior Managers" (rather than of all Approved Persons, as currently); (ii) firm approval of other staff performing prescribed functions (such as customer-facing front office staff); and (iii) a new set of regulatory standards ("Conduct Rules") that all staff (other than those in purely ancillary roles) will need to comply with. However, as explained below there are some important differences between the FCA's proposals and the existing rules for banks - a lighter touch approach is proposed across a number of areas, and it appears that only a limited population of large firms will be subject to some of the more onerous rules. The specific areas covered in CP 17/25 include:
- Which individuals will need to be approved as Senior Managers. As is the case for banks, this could include individuals based in the UK, or overseas, including where the individuals are employed by firms' parent companies;
- The minimum "Prescribed Responsibilities" that need to be allocated amongst Senior Managers. A more limited list has been prescribed than in the case of banks (although the extent will depend on the type of firm).
- Which employees need to be subject to individual certification by firms and subject to regular assessments as to their fitness and propriety ("Certified Employees"). There are similarities in the approach taken for banks, but most firms covered by the new consultation are likely to have a much smaller population of Certified Employees than banks.
- As noted above, new "Conduct Rules" will be introduced - the proposed rules reflect those that already apply to banks.
- Requirements on firms where employees are hired or leave (including requirements to provide, and obtain, Regulatory References). As is already the case for banks, disciplinary action against staff for breaches of Conduct Rules will need to be disclosed in References.
- Reporting obligations, including where Conduct Rules are breached (these rules reflect the position for banks).
- start considering now to which Senior Managers relevant responsibilities will be allocated. The FCA has made clear its expectation that this should generally be the most senior person involved with a relevant activity; and
- consider how they will document the activities and business areas which individual Senior Managers are responsible for. In particular, they must consider where responsibility lies for any outsourced functions and ensure that the governance arrangements for this can be properly articulated. Firms should review existing job descriptions and consider how these may be adapted.
- all firms will be required to carry out a criminal records check as part of the application for approval of Senior Managers and Non-Executive Directors. This may require firms to register with the Disclosure and Barring service and equivalent agencies in Scotland and Northern Ireland, and overseas checks may be required if candidates have spent a significant amount of time outside of the UK. Policies may need to be updated;
- all firms will be required to request and provide Regulatory References, which contain prescribed information as to the nature of disciplinary action taken against staff and breaches of Conduct Rules. There will also be record-keeping obligations associated with this. Firms will want to consider at an early stage changes to policies and procedures and the implications, for example, on the current approach taken by the firm to settlement and non-disclosure agreements with departing employees.
- the requirement for annual fitness and propriety assessments of employees will trigger process changes from an HR perspective around appraisals. Firms will want to consider the structure of these changes at an early stage, given the potential lead time for implementation. Firms will need to decide who will be responsible for assessing fitness and propriety - for example, whether there will be a separate panel constituted or individual(s) designated for this purpose.
Individual Conduct Rules Senior Manager Conduct Rules
1. You must act with integrity SC1. You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively
2. You must act with due care, skill and diligence SC2. You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system
3. You must be open and cooperative with the FCA, the PRA and other regulators SC3. You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively
4. You must pay due regard to the interests of customers and treat them fairly SC4. You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice
5. You must observe proper standards of market conductRESPONDING TO THE CONSULTATION Responses to the consultation are required by 3 November 2017. Firms should review the list of questions contained in Annex 2 to CP 17/25 and consider whether they wish to respond to any of the issues raised. In addition to the questions on the shape of the new regime, the FCA is also seeking views on related issues including whether Certified Employees should be listed on a public register or not. The FCA is also consulting on the extension of the SM&CR to insurers (CP 17/26) in parallel to this consultation. The new insurer SM&CR regime will replace the Senior Insurers Managers Regime and follows a similar structure to the SM&CR for financial institutions. ANNEX - Summary of Application of SM&CR We set out below an overview of the application of the SM&CR to different businesses to assist firms in their assessment of their obligations.