FCA finalises Senior Manager and Certification Regime rules for solo-regulated firms

Written on 15 Aug 2019

The FCA has finalised the body of rules that extend the Senior Managers and Certification Regime (SMCR) to “almost all regulated firms.” If a firm is currently regulated under the FCA’s Approved Persons Regime, it will now fall to be regulated under the SMCR instead.

A culture change for the financial services industry

The extension of the SMCR is central to achieving the FCA’s objective of a culture change within the financial services industry, with the aim of reducing harm to consumers and strengthening market integrity.

In March 2016, all banks, building societies, credit unions and PRA-designated investment firms, as well as UK branches of overseas banks, became subject to the SMCR. From 9 December 2019, all solo-regulated firms will also become subject to a form of the SMCR.

With the SMCR, the FCA sought to tackle the perception that individuals in the financial services industry were responsible for the global economic crisis of 2008, but that very little could be done by regulators to hold people to account.

The SMCR seeks to safeguard consumers and strengthen market integrity by making individuals more accountable for their conduct and competence. It also increases the burden on firms to ensure that their people are “fit and proper” to carry out regulated functions and to ensure that high standards of conduct are upheld throughout.

What does this extension of the SMCR bring?

There are three components to the SMCR:

Senior Managers

The responsibilities of “Senior Managers” must be clearly defined and certain functions must be explicitly covered by Senior Managers. Firms and staff must clearly understand and be able to demonstrate where ultimate responsibility lies. Should something in their area of responsibility go wrong, be it through their own action or omission, or that of staff within their business, the Senior Manager will be held personally responsible. The Senior Managers will be approved by the FCA and will appear on the FCA Register.

Certification Regime

Under the Certification Regime, firms will certify individuals for their fitness, skill and propriety on an ongoing basis (at least once a year) if their roles significantly impact customers or firms. This puts the burden on the firm, rather than the FCA, to police the suitability of individuals undertaking regulated roles.

Conduct Rules

Five conduct rules will apply to nearly all staff at FCA authorised firms. Only those in ancillary roles which are not related to financial services activity, such as reception, are exempt. These are basic principles that individuals must

  • act with integrity,
  • act with due care, skill and diligence,
  • be open and cooperative with regulators,
  • pay due regard to customer interests and treat them fairly, and
  • observe proper standards of market conduct.

Additional conduct rules apply to Senior Managers.

A “proportionate” regime according to “size”

Smaller firms need not worry about regulatory overreach, since the SMCR has a tiered regime, proportionate to the size of the firm. A small number of the largest firms are subject to the Enhanced regime, which imposes the heaviest regulatory burden (similar to the rules that apply to banks). Core firms, being the majority of firms, are subject to an intermediate level of regulatory oversight. A reduced regulatory burden will apply to smaller Limited Scope firms – these are, essentially, firms that are presently subject to a limited application of the Approved Persons Regime.

What are the next steps?

Determine your SMCR categorisation

The FCA has a webpage providing more information on the SMCR categories and a firm checker tool. Firms may need to change or challenge their categorisation, which is something we can help with.

Once a firm understands its categorisation, it will become clear which rules will apply from 9 December 2019 and planning can take place.

HR and Compliance working together

Now that the SMCR has been applied to banks for over three years, we have plenty of experience of its impact on people management and HR processes. Our experience is that a close partnership between Compliance and HR is critical to implementation – working together to resolve the potential for conflict between the strict FCA requirements and people’s rights under employment law.

Indeed, asking your staff to take on additional responsibilities with significant personal liability and a higher level of scrutiny may be a hard sell in some cases. Clear and constructive communications from the start of the implementation process and throughout will be key to ensuring staff embrace the new regime and understand and are comfortable with the key implications of it for them.

Contracts, policies, procedures and training

We would recommend a review of employment contracts, in particular in relation to individuals who will become Senior Managers or who will be certified. Firms will need to have procedures and policies in place to deal with fitness and propriety assessments, the conduct rules, and regulatory references. Firms are also required to ensure that staff are trained on the conduct rules.

If you would like to discuss how the new regime will affect your firm, and the steps you should be taking now, please contact one of the experts listed below.