The extension of the Senior Managers and Certification Regime to all financial services firms – application to UK limited liability partnerships

September 18, 2017

You can find our introduction to this new regime here.

The current regime for LLPs regulated by the FCA requires each person carrying out the controlled function of Partner (CF4), to be approved by the FCA as a fit and proper person. The activity covered by CF4 is acting in the capacity of a partner (which in relation to an LLP means acting in the capacity of a member). Each member is treated as performing the Partner function and has responsibility for each regulated activity carried on by the LLP.

The starting point for the approach to LLPs set out in the FCA’s consultation paper (you can find the Consultation Paper here), is that all members of an LLP will be treated as senior managers. This reflects the current regime. The rationale for this approach is that members are likely to have influence over how the LLP is run.

Unlike the current regime, the FCA have acknowledged that some members may not meet the overarching definition of a senior manager. The examples which the FCA uses are a member who is “purely silent” or a LLP with a large number of junior members with no management involvement or authority to act on behalf of the LLP.

When the SMCR was extended to PRA regulated firms, the PRA decided not to continue with an equivalent to the CF4 Partner function in the new PRA senior management functions. This leaves no current comparison available to illustrate the approach of firms or the regulator in deciding when a member does not satisfy the overarching senior management definition.

It is not unusual for financial services business LLPs to be controlled by a single member or by an executive committee of a small number of senior members, with the other members not taking part in management decisions, other than two or three decisions (often related to the insolvency and winding up of the LLP) which are reserved to a decision of all the members. Where an LLP has these kinds of management arrangements, the FCA proposal to exclude certain members as not being senior managers is to be welcomed.

The suggestion that a member who has authority to act on behalf of the LLP is a senior manager could be problematic. Many members (and also employees of an LLP) have authority to act on behalf of the LLP. For members this authority may arise from the LLP Agreement or as with employees, it may be delegated authority from a management committee or similar body. Greater clarity in the final rules on when a member is not to be treated as a senior manager will be needed.

If members do not carry out a senior management function, for example because of their non-participation in management, it is likely that members will carry out the kind of activity which would be subject to one of the certification functions. Certification functions apply only to employees. A member of an LLP cannot also be an employee of the LLP. We expect that this issue will be addressed in a further consultation paper.

With further accountability of individual members of LLPs and the possibility of regulatory fines, members may be more concerned about what protection may be available to them if they are subject to regulatory action. Members usually benefit from an indemnity from the LLP in the members’ agreement. Indemnities differ in the scope of cover which they offer to members. Some indemnities fall away if the liability is caused by the member’s negligence. Others fall away only where there is a higher standard of culpability, for example, wilful misconduct of the member. Existing FCA rules make it clear that a LLP cannot pay a penalty imposed on a member. Moreover, the firm cannot arrange or make a claim under an insurance policy (for example directors and officers liability insurance) with a view to indemnifying a member for a regulatory fine. Where the LLP is part of a wider international group, group level insurance may be available which may cover regulatory fines.

Firms should review their management arrangements to ensure that implementation of the new regime and the allocation of senior management functions and prescribed functions and statement of responsibility to members proceeds smoothly.

Although there will be further issues arising when the FCA reviews the responses to the consultation paper, there are a series of critical steps that firms can take now to ensure that they are best able to implement the new regime.

Fox Williams’ SMCR team can support you through this process including:

  • advise and train boards and senior managers
  • assist with mapping
  • revise and assist with the implementation of new contracts
  • draft new policies and update existing ones to assist with SMCR compliance
  • deal with the member and employee relations issues which inevitably come with a period of change.

Related pages:

Financial Services more

Senior Managers & Certification Regime more

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Douglas Preece
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Direct dial: +44 (0)20 7614 2519
dpreece@foxwilliams.com

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