The Senior Managers and Certification regime has already been in place for UK banks, building societies, credit unions and PRA–designated investment firms and incoming branches of such firms for two years. With the regime intended to be rolled out to all FCA regulated firms next year including asset managers, investment firms, insurance and mortgage brokers, consumer credit firms as well as incoming branches of such firms, we set out in this article some of the key principles of the regime, the practicalities of transitioning to the new regime, the lessons that have been learnt by those firms which have already gone through the process and how FCA regulated firms can best prepare for the new regime.
Summary of the Senior Managers and Certification Regime (SM&CR)
The SM&CR aims to reduce harm to consumers and strengthen market integrity by increasing individual accountability in the industry. As part of this, the SM&CR aims to encourage a culture of taking personal responsibility for one’s actions at all levels and making sure firms and staff have a clear understanding of where responsibilities lie.
Every Senior Manager will need a Statement of Responsibilities setting out the areas of the firm’s regulated activities that the individual is responsible for and will have a “duty of responsibility” in relation to such areas. When enforcing the duty of responsibility, the FCA is required to prove that the Senior Manager did not take the steps a person in their position could reasonably have been expected to take to avoid the firm’s breach occurring or continuing.
Firms will therefore need to prepare for the following changes:
- Senior Managers (including certain non-executive directors) will need to be identified and responsibilities allocated accordingly
- Any new Senior Managers will need to be approved and firms will need to submit robust documentation on the scope of these individuals’ responsibilities
- Carry out their own fit and proper “certification” on recruitment and on an annual basis of persons whose roles are capable of causing “significant harm” to the firm or its customers. These include:
- material risk takers within the firm
- most approved persons from the current regime who do not fall within scope of being a Senior Manager
- customer-facing roles
- proprietary traders
- CASS oversight function
- line managers of certified persons
- algorhythmic traders, and
- other client facing staff.
The FCA will no longer provide approval for the appointment of such individuals and they will not be included in the public register.
- All staff (excluding ancillary staff for example receptionists) will need to be trained on new “Conduct Rules”
- Firms are required to report disciplinary action taken as a result of breaches of the Conduct Rules
Under the Certification regime, as responsibility now falls on firms as opposed to seeking “approval” from the FCA, regulatory references from an individual’s previous employer will be very important.
The SM&CR Regime does not apply to payment services firms (which have their own fit and proper test) or to Appointed Representatives (ARs) who remain under the Approved Persons Regime.
Transitioning to the new SM&CR
Due to the huge variety of firms that will be covered by the extended regime in terms of scale and complexity, the scheme will be applied in a proportionate way.
For most firms, current Senior Managers can be automatically converted to the new regime into equivalent Senior Management Functions where possible, with no action required by firms. However firms that are deemed “Enhanced SM&CR firms” (which will include Significant IFPRU firms, CASS large firms, asset managers with assets under management of £50bn or more at any time in the last 3 years, a firm with intermediary regulated business annual revenue of £35million or more, consumer credit lenders with annual regulated revenue of £100million or more or mortgage lenders with 10,000 or more regulated mortgages outstanding) will not be able to automatically convert their Senior Managers and instead will need to submit the Form K conversion notification detailing all of the approved persons to be converted to Senior Managers along with a Statement of Responsibilities for each Senior Manager, a Responsibilities Map and Forms A and E for new or transferred individuals respectively.
Where a function falls away under the new SM&CR (such as the CF30 Customer function), firms do not need to submit a Form C, the approval will lapse when the regime comes into effect automatically.
Lessons learnt from dual-regulated firms’ experience of SM&CR
- Preparation is key – allow plenty of time to implement the new regime.
- Get the firm’s chairman/ CEO and senior executive on board. Support from the top is critical in achieving support throughout the firm.
- Determine each role and their respective responsibilities internally so as to be able to justify those responsibilities to Senior Managers. This may require contractual changes for Senior Managers.
- Make sure you have caught all key decision makers.
- Remember to update your policies and procedures to refer to the increased focus on individual accountability, and, for Enhanced SM&CR firms, the requirements for detailed handovers.
- Certification staff – identify all relevant staff early on. The Conduct rules will apply to them as soon as the SM&CR comes into force so the appropriate training should be in place beforehand.
- It is important to get co-operation underway early between the firm’s compliance and human resources departments to ensure disciplinary processes, references, reporting disciplinary action for breaches and certifications are compliant with the new regime.