Need to know guide: Extending the Senior Managers and Certification Regime to all financial services firms

The Financial Conduct Authority is changing how people working in financial services are regulated. The Approved Persons Regime is being replaced by the Senior Managers and Certification Regime (SMCR) for all financial services firms, not just banks. This will affect businesses ranging from one person IFAs to asset managers with billions under management. This article summarises provides a “need to know” guide for HR and recommends the steps HR should be taking now to ensure compliance with the new regimes and rules.

Background

In July 2017, the FCA published a Consultation Paper on the proposed changes that will affect financial services firms. It recognises that there is a wide range of different business models and governance structures that apply to the broad variety of firms that will be affected by the new regime. There will be a standard set of requirements for all FCA solo-regulated firms, known as the ‘core regime’. But to ensure that the new regime is flexible enough to meet these different structures, there will be extra requirements for a portion of firms whose size, complexity and potential impact on consumers warrant more attention, known as the ‘enhanced regime’. Likewise, firms defined as ‘Limited Scope’ will have a reduced set of requirements.

The core regime applies to all FCA regulated firms (except “Limited Scope” firms) and consists of three main elements:

• the Senior Managers Regime;
• the Certification Regime; and
• the Conduct Rules.

Senior Managers Regime (SMR)        

The proposals include:

1. Use of Statements of Responsibilities – the SMR is intended to close gaps in responsibility, which have previously allowed senior managers to avoid personal responsibility for issues which have occurred under their watch. The regime holds senior individuals responsible for their conduct and for the conduct of persons and areas for which they are responsible. Senior Managers will have a ‘Statement of Responsibilities’ for this purpose, which sets out the areas for which they are responsible and accountable. Firms will need to keep Statements of Responsibilities up to date and resubmit them to the FCA whenever there is a significant change to a Senior Manager’s responsibilities.
2. Introducing certain specific ‘Senior Management Functions’ so that, as with the current Approved Persons Regime, anyone who holds such a Senior Management Function will require pre-approval from the regulator before performing this role.
3. Senior Managers will also have a duty of responsibility – this means that if a firm breaches one of the regulator’s requirements, the Senior Manager responsible for that area could be held accountable if s/he did not take ‘reasonable steps’ to prevent or stop the breach. There will be no territorial limitation on the Senior Managers Regime so anybody who performs a Senior Manager role, whether in the UK or overseas, will be subject to the regime.
4. The introduction of 7 new ‘Prescribed Responsibilities’ – that must be given to Senior Managers and an additional responsibility for Authorised Fund Managers. This is to ensure that a Senior Manager is accountable for the SMCR and for key conduct and prudential risks.

Certification Regime

The Certification Regime will apply to employees who are not Senior Managers but whose roles involve “one or more aspects of the firm’s affairs, so far as relating to a regulated activity, and those aspects involve, or might involve, a risk of significant harm to the firm or any of its customers”. This covers a wider range of roles than the approved persons regime e.g. HR director roles.

Firms will be responsible for certifying these individuals as fit and proper to perform the role assigned to them. Some of the staff in scope of the Certification Regime may have been previously approved by the FCA. The regulator will not approve these people anymore; the objective of the Certification Regime is to reinforce that firms, rather than the regulator, are responsible for ensuring their staff are fit and proper.

Conduct Rules – a significant change

A new set of rules will apply to almost every person working in financial services, including Non-Executive Directors and all other employees in a firm, except staff who do not perform a role specific to financial services (such as post room staff, switchboard operators and security guards).

Two tiers of Conduct Rules are proposed. The first is a general set of rules applying to most employees in a firm. The second tier consists of rules that only apply to Senior Managers.

The FCA proposes applying the Conduct Rules to a firm’s regulated and unregulated financial services activities (including any related ancillary activities). For example, an activity carried on in connection with a regulated activity.

In addition, FSMA requires firms to make individuals who are subject to the Conduct Rules aware that this is the case, and train them in how the rules apply to them. The FCA also proposes to require firms to notify it when disciplinary action has been taken against a person because of breaches of the Conduct Rules.

What can you do now?

The FCA’s consultation is now closed and final rules are due to be published later this year. Although we are waiting for the final version of the rules there are a series of critical steps that firms can take now to ensure that they are best able to implement the new regime. It is not expected they will differ significantly from the regime which banks are subject and our experience working with banks to implement the regime was that being prepared well in advance was critical to a successful implementation. Any business affected by the changes would be wise to bring together its SMCR project team which should include HR and compliance expertise. They can usefully start thinking with advisers about:

• Identifying who their senior managers may be;
• Training their board and potential senior managers on the scope of the regime, what changes will need to take place in the business and the implications for senior managers

In the longer term issues which will need to be considered are:

• Mapping the organisation, drafting responsibility maps and updating employment contracts;
• Revising and implementation of new contracts of employment;
• Drafting new policies and updating existing ones to assist with SMCR compliance;
• Managing possible departures of senior managers including procedural and referencing issues and liaison with regulators;
• Dealing with the employee relations issues which inevitably come with a period of change including dealing with those who want to be senior managers but aren’t, and with those who don’t want to be senior managers but are;
• Providing bespoke training sessions for relevant affected groups (i.e. directors, senior managers and certified staff an conduct rules staff)
• Implementing a suitable process for assessing fitness and propriety annually;
• Drafting new whistle blowing policies to comply with SMCR;
• Implementing a process to manage regulatory references.

Joanna Chatterton is a partner in the Employment Team at Fox Williams and a member of its SMCR team of HR and regulatory experts.