The FCA has published its near final rules on the extension of the Senior Managers and Certification Regime (SM&CR) to almost all regulated firms.
Firms have been keenly awaiting these rules, not least to get an indication of their implementation date. As many suspected, the implementation date for solo-regulated firms is 9 December 2019, subject to commencement regulations to be made by HM Treasury. The FCA also confirms a one-year transitional period for some aspects of the regime. However, the arrangements for Senior Managers and Certification Staff (except for the certification process) must be in place by 9 December 2019, and the Conduct Rules will apply from then to all Senior Managers and Certified Staff. While the FCA warns that the near-final rules published in PS18/14 may be amended by subsequent Handbook changes, for example, as a result of Brexit or subsequent SM&CR optimisations, and are subject to the Treasury commencement regulations, we do not anticipate substantive amendments will be made. We advise that firms set the wheels in motion and begin their implementation plans.
To aid firms in their implementation process, the FCA has produced a guide for solo-regulated firms, The Senior Managers and Certification Regime: Guide for FCA solo-regulated firms. This guide summarises the application of the SM&CR and is a good starting point for firms, providing sign posts to areas of the FCA Handbook for further reading. However, the FCA states that the guide does not substitute reading the Handbook rules and guidance, and where the rules and guidance conflict with the guide, the rules and guidance take precedence.
Areas of change
The FCA is implementing the rules substantially as they were consulted on. We published a detailed paper on this in January 2018: Extension of the senior managers and certification regime. However, as a result of the consultation responses it received, in PS18/14 the FCA makes some helpful changes to its previous proposals in CP17/25 and CP17/40, including:
- removing the Core firms Prescribed Responsibility to inform the governing body of their legal and regulatory obligations;
- clarifing that the Chair Senior Management Function (SMF9) may be held by an executive or non-executive director;
- providing an “easy” process for firms to apply a higher regime voluntarily, using a new “Form O”;
- amending the three financial Enhanced criteria (relating to AUM, current total intermediary regulated business and annual regulated revenue) so that they are worked out on a three year rolling average basis, to smooth single year anomalies; and
- extending the transition period from six to 12 months for a firm to implement the Enhanced tier, once they have met the relevant criteria.
Duty of responsibility
The FCA previously proposed extending its existing guidance on the duty of responsibility (contained in its Decision Procedure and Penalties manual (DEPP)) to insurers and solo-regulated firms, and making minor definitional changes to facilitate this. At the same time as publishing its near final rules referred to above, it published a Policy Statement on this proposal (PS18/16). The FCA confirms the extension of its guidance in DEPP to apply to other firms when the SM&CR extension is brought into force.
In response to feedback received, the FCA reiterates its view that the guidance in DEPP is flexible enough to accommodate firms of all sizes and when considering if a Senior Manager has taken reasonable steps, it will take into account all the relevant circumstances, including the Senior Manager’s role and responsibilities and the scale and complexity of the firm’s business. The FCA also does not consider it necessary to give guidance beyond what already appears in DEPP, on what steps are considered ‘reasonable’.
There were some requests from stakeholders for guidance on compliance record-keeping. However, the FCA states that obligations on Senior Managers under the FCA's Code of Conduct sourcebook (COCON) and the firm under the FCA Handbook should require adequate record-keeping without the need for more. In addition, it does not consider any compliance record-keeping obligations are more onerous under the SM&CR than those which already should be in place.
The FCA has also launched a consultation (CP18/19) on a new Directory to help consumers and firms check the status and history of individuals working in financial services. The proposed Directory will include:
- those who hold Senior Manager positions requiring FCA approval;
- those whose roles require firms to certify that they are fit and proper under the Certification Regime;
- non-Senior Manager Function (SMF) Directors; and
- sole traders and appointed representatives where they are undertaking business requiring qualification in their capacity as an individual.
Many of these individuals do not currently appear in the FCA's Financial Services Register (FS Register) and, particularly in light of the extension of the SM&CR to all firms, this has been a cause for concern by both the financial services industry and consumer groups; the Directory will plug this gap. In addition, the FCA plans to make changes to the FS Register (which will continue) to provide better access to the full record of information on authorised firms and the individuals it has approved. In particular, the FCA intends to make it clearer when requirements, including suspensions, apply to an entry, improve the search facility and present more simply some common search information.
Alongside the consultation paper, the FCA makes available a basic prototype (Password: WyDk4w947@;) version of the Directory. This is interactive so users can see how the Directory could work and leave feedback.
SM&CR Senior Managers and Certification Staff must be identified and trained by 9 December 2019. The Conduct Rules will apply to them from that date. However, firms have a 12 month transitional period in which to complete the certification process for existing Certified Staff and to train other staff on the Conduct Rules. This process must be completed by 9 December 2020 from when the Conduct Rules will apply to other Conduct Rules staff.
Firms will be contacted by the FCA before the implementation date to inform firms of its assessment of their status (Core, Enhanced or Limited Scope). Firms will be responsible for checking the accuracy of the FCA’s assessment and informing the FCA if they disagree. It is essential that firms check this assessment to ensure they are correctly categorised, applying the correct regime and using the right forms. If a firm thinks it may change tiers during the transition to the new regime, it should contact the FCA as soon as possible to discuss this.
The FCA also expects firms to check their approvals on the Financial Services Register before and following the commencement date of the new regime and correct any inaccuracies as soon as possible.
There remain further related FCA consultations to come in respect of:
- the FCA’s approach to benchmark activities; and
- the legal function under the SM&CR.
Public Directory The FCA seeks feedback, by 5 October 2018, on which individuals to include on the Directory, what information it should publish about each person and when firms need to submit and update information about their employees. Following feedback, the FCA aims to publish final rules in the winter and complete system testing by summer 2019.
As firms would need to provide the FCA with information about individuals and more information about individuals will be made public, firms should consider the proposals and the prototype with a view to providing feedback to the FCA. In particular, under the proposals, firms will be responsible for ongoing, timely (within one business day of a reportable event) and accurate reporting of information using Connect, including on the individual’s role, their unique identifiers, their workplace location and the types of business they are qualified to undertake. The deadline for dual-regulated firms to upload their data would be 10 December 2019 and for solo-regulated firms, 9 December 2020.
Firms should not wait for the FCA to contact them about their categorisation before thinking about this regime. While the FCA stresses that it does not expect firms to have to change the way they are organised as a result of the implementation of the SM&CR, firms may find that some adjustments are necessary when reporting lines are reviewed and roles are scrutinised in preparation for statements of responsibility. In addition to involving Legal and Risk, there is a heavy HR and Training task ahead - for example, in updating contracts and job descriptions, reviewing HR policies and procedures, tailored training of staff to be familiar with the Conduct Rules which will apply to them, and the assessment and approval of Certified Staff. Firms should not underestimate the implementation process ahead.