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02 Aug 2017

Regime change: FCA consults on extending the Senior Managers and Certification Regime to all FCA firms

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The way in which the FCA regulates individuals in financial services is changing.

On 26 July 2017 the FCA published a consultation on extending the Senior Managers and Certification Regime ("SM&CR") – which has been in effect for banks since March 2016 – to all FCA-authorised firms.

The change in regulatory regime will have profound consequences for individuals working in financial services, and also for the 47,000 firms which will fall into the scope of the SM&CR.

The key implications of the new regime are set out below.

Structure of the new regime

As was clear after the passage of the Bank of England and Financial Services Act in May 2016, the basic structure of the Banking SM&CR will be applied across financial services.

Accordingly, there will be three layers of regulation:

  • Senior managers – who will require pre-approval by the regulator; 
  • Certified staff – akin to current approved persons, whose fitness and propriety will be certified annually by firms; and 
  • Conduct rules staff – the majority of employees, who will be subject to Regulatory Rules.

Regime change

Senior managers

  • The most senior people in the firm will continue to require regulatory pre-approval.
  • As at banks, firms will need to document the precise responsibilities of senior managers in a statement of responsibilities.
  • Again, as at banks, a list of "prescribed responsibilities" will need to be allocated across the population of senior managers.
  • Senior managers will be subject to the Duty of Responsibility. In any enforcement action the FCA will consider whether a senior manager took "reasonable steps" to prevent a regulatory contravention occurring.

Certification regime

Many individuals who currently hold FCA Approval, for example: CF/29 – "Significant Management Function"; CF/10a – CASS Oversight; and (most significantly); or CF/30 – Customer Function will cease to hold approval from the FCA.

Instead, the onus will fall on firms to certify – on an annual basis –  that individuals performing "significant harm functions" are "fit and proper" to carry out those roles (see Table 4 in the Consultation Paper – "Certification Functions"). 

The conduct rules

  • The regulatory rules to which individuals are subject – the Statements of Principle for Approved Persons – will be replaced by the Conduct Rules (see Table 5 in the Consultation Paper – "Conduct Rules").
  • The Conduct Rules are high-level standards that substantially mirror APER. There is a new rule for senior managers ("SM/4") which requires that senior managers, "disclose appropriately any information of which the FCA would reasonably expect notice" – a pro-active and personal obligation to make reports to the regulator.
  • The most profound change arising from the advent of the Conduct Rules is their scope. The Individual Conduct Rules will apply to the majority of employees in financial services firms.

What you need to do – a tiered approach

The FCA recognises that many different types and sizes of firms will fall within the scope of the expanded SM&CR, and that a "one size fits all" approach would not be proportionate.

Accordingly, the requirements of the new regime will depend whether a firm is a limited scope firm, core firm or enhanced firm.

There are also rules for EEA and non-EEA branches in the UK.

Limited scope firms

  • This category covers all firms that currently have a limited application of the approved persons regime, such as Limited Permission Consumer Credit Firms, oil market participants and internally-managed AIFs.
  • Limited scope firms will have fewer senior management functions, and will not have to allocate the prescribed responsibilities (see Table 2 in the Consultation Paper).
  • Although the Certification Regime and Conduct Rules will apply to limited scope firms, in practice such firms are likely to have fewer certified members of staff, and fewer members of staff subject to the Conduct Rules.

Core firms

  • The vast majority of firms will be core firms in the extended SM&CR.
  • Core firms must apply the Core Set of Senior Management Functions and Prescribed Responsibilities (see Tables 1 and 3 in the Consultation Paper).
  • The Certification Regime and Conduct Rules apply.

Enhanced firms

  • A firm is an enhanced firm if it meets one (or more) of six criteria:
  1 firms that are significant investment ("IFPRU") firms;
  2 firms that are CASS Large firms;
  3 firms with assets under management of £50 billion or more; 
  4 firms with total intermediary regulated business revenue of £35 million or more per annum;
  5 firms with annual regulated revenue generated by consumer credit lending of £100 million or more per annum; and
  6 mortgage lenders (that are not banks) with 10,000 or more regulated mortgages outstanding.

 

  • Enhanced firms will need to apply all of the requirements under the core regime, as well as:

    • Additional senior management functions: The list of SMFs for enhanced firms is the same as the list for banks, with only SMF/6 (Head of Key Business Area) omitted. The Chief Operations Function, (SMF/24 – which the PRA will apply to Banks from 12 November 2017) will also be applied to Enhanced Firms in the Extended SM&CR (see Table 7 in the Consultation Paper);
    • Additional prescribed responsibilities: There are seven more prescribed responsibilities for enhanced firms to allocate, additional to the seven for core firms (see Table 8 in the Consultation Paper);
    • Overall responsibility: Enhanced firms will need to make sure that there is a senior manager with overall responsibility for every area, business activity and management function of the firm;
    • Responsibilities maps: Enhanced firms will need to have a single document that sets out the firm's management and governance arrangements; and 
    • Handover procedures: Enhanced firms will need to make sure that a person who is becoming a senior manager has all the information and material that they could reasonably expect in order to do their job.

EEA and Non-EEA branches

  • As is the case in the Banking SM&CR, the regime will apply to non‑UK firms that have permission to carry out any regulated activities in the UK.
  • The SM&CR will operate differently for EEA and Non-EEA branches.
  • EEA branches:
    • Only two senior management functions will apply: SMF/21 (EEA Branch Senior Manager) and SMF/21 (MLRO); and
    • The Certification Regime will apply, albeit only to UK-based staff.
  • The Conduct Rules will apply to all staff at the UK branch.
  • Non-EEA branches:

    • The following senior management functions will apply:
      • SMF/19 – Head of Third Country Branch;
      • SMF/3 – Executive Director;
      • SMF/27 – Partner;
      • SMF/16 – Compliance Oversight; and
      • SMF/17 – MLRO.
    • There is a discrete list of nine prescribed responsibilities that must be allocated to the population of senior managers (see Table 11 in the Consultation Paper).
    • The Certification Regime will apply, albeit only to UK-based staff.
    • The Conduct Rules will apply to all staff at the UK branch. 

Next steps

  • The consultation is open until 3 November 2017. It is likely that Final Rules will emerge in Q1 2018.
  • The FCA expects that the SM&CR is likely to come into effect for at least some firms from late 2018. A staggered implementation process seems likely; it is possible that enhanced firms (such as the larger asset managers) may be afforded a longer period, to complete the more extensive implementation exercise that will be required. 
  • As was the case for the Banking SM&CR, the Extended SM&CR is likely to substantially reflect the proposals contained in the Consultation Paper. Accordingly, there are a number of steps which FCA-authorised firms can take in the short term to begin to prepare for transition and implementation.
  • The most significant point to determine, in the short term, is whether the firm will be a core firm or an enhanced firm, with reference to the six criteria set out in the Consultation Paper (see new SYSC 23 Annex 1, 6.2R and 7.1R; pp.95 – 98 of the Consultation Paper).
  • The SM&CR will – for both enhanced and core firms – necessitate a fundamental reconsideration of how responsibilities are delineated and allocated among senior management. Firms that plan any structural or personnel changes to management in the coming 12 months may wish to have in mind the pending changes to the regulatory status and obligations of senior managers.
  • More fundamentally, a brand new, annual process will need to be created, for "certifying" the fitness and propriety of certification regime staff. Consideration might usefully be given at this juncture to which function will take the lead on certification (typically human resources, with compliance, legal and senior management input).
  • It is almost certain that the requirement for banks to deliver training on the new conduct rules will be extended to all FCA-authorised firms (see para 7.18 (p.41) of the Consultation Paper). Accordingly, forecasts for compliance, HR and training budgets might usefully reflect the resource implications of the transition to the SM&CR.

Stephenson Harwood LLP has advised a large number of financial institutions on the transition to the SM&CR. Should you wish to discuss how the new regime may affect your firm, please contact Tony Woodcock or Alan Ward.

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KEY CONTACT

Kiersten Lucas

Kiersten Lucas
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Paul Reeves

Paul Reeves
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Tony Woodcock

Tony Woodcock
Partner

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Alan Ward

Alan Ward
Senior associate

T:  +44 20 7809 2295 M:  Email Alan | Vcard Office:  London