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SM&CR: a 'culture of accountability'

FCA consultation on the Senior Managers & Certification Regime

· News,SMCR

The FCA has today published draft rules that, once approved, will apply to almost all financial services firms as part of the extended Senior Managers and Certification Regime (SM&CR).

The SM&CR essentially replaces the existing Approved Persons regime, and aims to protect consumers by changing the way in which people working in financial services are held accountable for their professional conduct and competence.

On first review, the contents look fairly positive, with the FCA adopting a proportionate approach to implementation, and allowing more time than expected before the regime comes into force. Firms have until 3 November 2017 to provide feedback on today's announcement.

Background

The SM&CR was first introduced in March 2016, when it was applied only to banks, building societies, credit unions and the largest investment firms. It came in response to the 2008 banking crisis and subsequent significant conduct failings, such as the manipulation of LIBOR.

Today’s announcement takes forward a commitment to extend the regime to all sectors of the financial services industry.

Below, we'll consider how the FCA has proposed to implement the extension in all remaining areas with the exception of insurance. These details are included in a separate consultation paper, available here.

A proportionate and flexible approach

As we hoped, the FCA has proved willing to adopt a proportionate and flexible approach to implementation, proposing a ‘core regime’ that will apply to every firm, and an extended regime that will apply only to the biggest of firms. (The regulator's stated aim is not to impose particular structures or hires upon firms, but rather to enhance good governance within structures in which firms already operate.)

Its headline aims are the same for small and large firms alike, however: to promote a ‘culture of accountability’, where senior management are responsible for defined parts of the business, and standards of conduct are improved throughout the firm.

Addressing a recent press briefing, FCA Chief Executive Andrew Bailey was sure to emphasise the importance of balanced implementation for the "whole world of FCA firms", right down to those run by a single individual. The outline provided today suggests this could indeed be realised in practice.

Core vs extended regime

The ‘core regime’

The 'core' regime consists of the 3 main elements of the SM&CR that will apply to all firms: the Senior Mangers Regimes, the Certification Regime, and the conduct rules.

1. Senior Managers Regime

There will be a list of new Senior Management Functions (SMF), some of which will require to be filled by all firms, and some of which will be optional. The change is not as radical as expected, and some firms may find that relatively few individuals are classed as Senior Managers (most NEDs, for example, are not expected to meet the definition). For those who do meet the definition, however, an FCA-approved 'Statement of Responsibilities' will be required. This will set out the precise scope of their responsibilities and accountability and, somewhat uncomfortably, will become the basis for assessing any enforcement action brought against them.

2. Certification Regime

Under the new Certification Regime, the CF30 function will no longer exist. Instead, any persons not undertaking Senior Management Functions but whose role could have an impact on customers, markets or the firm, needs to be identified and certified by the firm (rather than by the FCA) as fit and proper.

3. Conduct rules

Conduct rules will replace APER, the existing Handbook framework governing the Approved Persons regime. Instead, there will be tiers of rules that will apply according to individual seniority, but will in some way affect almost everyone in your firm. The themes here will be well familiar (e.g. ‘acting with integrity', ‘treating customers fairly’ etc).

The enhanced regime

Larger, complex firms will need to adhere to additional requirements such as having a responsibilities map and handover procedures in place, and arrangements to make sure that a Senior Manager takes overall responsibility for every area of the firm.

The FCA expects this to apply to less than 1% of firms and many of these became subject to the regime when the first part of SM&CR was rolled out.

A 2019 timeline?

The timeline for the full extension of SM&CR roll out looks to be far longer than we expected. The FCA had previously indicated that early 2018 was the likely timetable. Today's paper, however, says final rules will be published in summer 2018, meaning they are unlikely to apply before Q4 2018 at the earliest, or even at some point in 2019.

Further consultation is expected to take place later this year, with the FCA promising a further 'technical' consultation paper in 2017 to cover the transition to the new regime, and other operational changes such as approval forms and templates.

While the extended timeline is certainly welcome, many firms will find that now is the best time to plan ahead for SM&CR, as part of the wider overhaul to governance and staff arrangements taking place as part of MiFID II.

Recommended actions for firms

If you're yet to consider how SM&CR will impact your firm, there's no better time than the present!

For those getting to grips with the rules, the best first steps include:

  1. Identifying staff who are likely to meet the definition of Senior Managers, and entering discussions about the scope of their future responsibility
  2. Identifying staff who are currently caught by the Approved Persons regime, but may only require certification under SM&CR to carry out their role
  3. Reviewing policies and procedures to check consistency with the incoming conduct rules, and revisiting your procedures on training, and knowledge and competence in particular (areas of the Handbook that are closely linked to these upcoming changes)

Final thought

A quick final thought - the FTAdviser has a perspective worth highlighting, flagging concerns around how the regime affects appointed representatives. Watch this space!

“Earlier this year FTAdviser reported on concerns about how appointed representatives would be affected by the regime, since they might not be listed if their network becomes their “senior manager” on the grounds that it handles members’ compliance.The FCA has not addressed this issue in today’s consultation but has said it will confirm how it intends to approach the regime for appointed representatives in a follow-up consultation paper – though it has not indicated when this will be published.”

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