Individual Accountability: Extending the Senior Managers & Certification Regime to all FCA firms, and extending the SMCR to Insurers
In July, the FCA published its much-awaited consultation in relation to rolling out the SMCR to all authorised firms. The majority of its Consultation Paper is comprised of the 300 pages containing the revisions to its current rules. The specific requirements of the SMCR are complex, but as an overall summary of the FCA's proposed architecture:
- all authorised firms will be SMCR firms;
- there will be different types of firms, with different obligations applying to each: SMCR dual regulated banking sector firms; SMCR insurance sector firms; core SMCR firms; enhanced scope SMCR firms; and limited scope core SMCR firms;
- almost all employees of SMCR firms will be subject to the individual conduct rules (with some carve-outs for non-financial services activities;
- enhanced scope SMCR firms (i.e. those which meet specific financial tests, or which are required to be enhanced scope SMCR firms by the FCA) will have more applicable Senior Management Functions (SMFs) than core SMCR firms, and be required to allocate more prescribed responsibilities. They will (unlike core SMCR firms) need to prepare management responsibilities maps, and have appropriate handover procedures. Linked to this is the point that this is the only subset of firms now joining the SMCR to which the "no gaps" principle, which has been a significant part of the SMCR as it applies to banks, will apply. The no gaps principle requires a firm to allocate responsibility for each business area, activity or management function;
- limited scope core SMCR firms will, by contrast, be subject to fewer requirements than core SMCR firms, which the FCA describes in the consultation as having a "baseline" of applicable requirements; and
- the certification regime will, in principle, apply to all SMCR firms, but to differing extents.
The CP stated that the FCA's consultation in relation to the introduction of the SMCR to banks went through several rounds. The FCA anticipated publishing final rules in summer 2018, but given the scale and complexity of changes proposed, it would not be surprising if there were further rounds of consultation before all the rules are finalised.
Strengthening individual accountability in insurance: extension of Senior Managers & Certification Regime to insurers
PRA Consultation Paper 14/17, July 2017
In this consultation, the PRA proposed changes to its existing rules in SIMR in order more closely to align the accountability regime for insurers with the SMCR in place for banks. Specifically, the PRA proposed changes in relation to Solvency II firms, insurance special purpose vehicles (ISPVs) and large non-Directive firms (NDFs) in order to:
- create a new certification regime;
- apply conduct rules to all employees within the scope of such regime and create notification requirements in relation to conduct rule breaches;
- set out expectations in relation to the duty of responsibility; and
- align terminology in the SIMR with that used in the SMCR and create requirements for handover procedures.
The PRA consulted on various other amendments to align the SIMR and SMCR, and make it easier for individuals to transfer between the two.
The PRA also proposed to make new rules in relation to small NDFs, including the creation of a certification regime. The PRA's approach to identifying those within the scope of its insurance certification regimes is quite different to that of the FCA, and the PRA says that it intends to align this population so far as possible with those identified in relation to the application of the firm's remuneration policy.
The PRA has also since consulted on, and produced final rules in relation to, amendments to SMCR forms.
Individual accountability: Transitioning FCA firms, insurers, and individuals to the Senior Managers & Certification Regime
The FCA has recently published its consultation on the transitional arrangements for moving firms to the SMCR. Whilst there are some points of interest amongst the technical provisions, the most notable aspect of the consultation is the FCA's revised expectations around timing. It now expects commencement of the SMCR to be in:
- late 2018 for insurers; and
- mid-to-late 2019 for all other firms not currently within the scope of SMCR.
Previously the Treasury and the regulators had suggested that all firms would move to the SMCR during 2018. The FCA has said that the actual transition dates will be up to the Treasury, which will need to draft legislation amending the relevant provisions of FSMA.
As with banks, SMCR will be introduced on a staged basis: whilst much of the regime will be effective from commencement, firms will have a year from commencement to issue certificates of fitness and propriety to those staff who require them, and conduct rules will only apply to staff who are neither senior managers nor staff requiring certification from the first anniversary of commencement.
Responses to this, and the other SMCR consultation papers published in December and mentioned below, are due by 21 February 2018.
The Duty of Responsibility for insurers and FCA solo-regulated firms
Consultation Paper 17/42, December 2017
The "duty of responsibility" is the name given to the statutory power under the SMCR allowing the regulators to fine a senior manager where an authorised firm has breached its duties in an area for which the senior manager was responsible, and the senior manager cannot show that he or she took reasonable steps to prevent the breach. In its July consultation papers, the FCA suggested that further guidance on the duty of responsibility might be required as part of the roll-out of the SMCR to the non-banking financial services industry.
Having considered the matter, the FCA believes that no changes to the existing guidance are necessary, and so none are proposed in this consultation paper. Instead, the FCA has taken the opportunity to reiterate some of the key points from existing guidance, including that:
- whether a senior manager is responsible for the management of an area will be a question of fact: statements of responsibilities and responsibilities maps will be relevant but not definitive; and
- in considering whether to take action, the FCA will consider the seriousness of the breach, the individual's responsibilities and seniority and the need to use enforcement powers effectively and proportionately.
Strengthening accountability: implementing the extension of the SM&CR to insurers and other amendments
PRA Consultation Paper 28/17, December 2017
In this consultation paper, the PRA sets out proposed changes to forms, and other consequential changes and minor amendments to its rules and guidance. It also proposes to remove gendered language from the SMCR rulebook text (e.g. replacing "chairman" with "chair").
The changes are largely technical rather than substantive, with some renumbering of SMF roles applying to insurers (this will not affect the existing SMF roles in banks), integration of the lists of prescribed responsibilities applying to banks and insurers, and arrangements to facilitate SMFs moving from insurance firms to banking firms.