Senior Managers and Certification Regime | how and when will this impact your business?

Published on 13th Oct 2017

On 26 July 2017, the FCA published a consultation paper which looks at extending the Senior Managers and Certification Regime (SMCR) to all FCA firms (CP17/25). In this article we consider why the regulator is intending to extend the scope of the regime to effectively replace the current Approved Persons regime, what it will mean for your firms and when you can expect final rules.

Why is the SMCR being extended to all FSMA authorised firms? 

In the light of the financial crisis in 2007/08, the Parliamentary Commission on Banking Standards recommended that the FCA develop a new accountability system that was more focused on senior managers and individual responsibility. In response to the recommendations, the FCA created the SMCR, which has replaced the approved persons regime for individuals in banks, PRA investment firms and some insurers since 7 March 2016. The Government announced in 2015 that all regulated firms will be subject to SMCR from 2018, which has led to these proposals from the FCA. This extension means that all 47,000 FCA regulated firms will now be caught, although as we discuss below, the regulator intends to adopt a proportionate approach. 

What does the SMCR consist of?

Similar to the structure that applies to banks and others, the FCA is intending to introduce three main pillars to the new rules:

  • Senior Managers Regime – The rules for Senior Managers cover certain individuals who are subject to approval by the regulator. Under the FCA’s proposals, all FCA authorised firms should have at least one Senior Manager. The FCA has set out the senior management functions (SMFs) which will apply to firms. A firm does not need to have a Senior Manager for every SMF the FCA has listed, but if there is an individual who is performing a role which constitutes a SMF, then they will be a Senior Manager and will require FCA approval as such. For certain types of firms, the list of SMFs is more extensive (although not as extensive as for banks, PRA investment firms and the insurers covered by the current regime). Individuals appointed as Senior Managers will be will be assigned certain responsibilities that have to be documented in formal documents which are filed with the FCA, known as Statements of Responsibilities.
  • Certification Regime – Under the new regime, only Senior Managers will require approval by the FCA. Other individuals within FCA-only authorised firms who meet the FCA’s criteria for one or more of eight prescribed Certification Functions (which have already been adopted by banks and building societies) will not require approval by the FCA. Rather, firms will be required to assess the fitness and propriety of these individuals on at least an annual basis.
  • Conduct Rules – These rules govern professional conduct and apply not only to those individuals caught by both the Senior Managers regime and the Certification Regime but also to all of a firm’s employees other than ancillary staff. This excludes only a very narrow group of people such as cleaners, caterers, security guards etc. For most people working in financial services firms, these rules will apply. There is also a requirement on the firm to report any breaches of these rules to the regulator.

Will there be a proportionate approach?

Given the diverse range of firms that will be within the extended regime, the FCA has proposed to take a proportionate and flexible approach; splitting SMCR requirements into ‘limited’, ‘core’ and ‘enhanced’ categories. The applicable category will depend on a firms size, complexity and potential impact on consumers.

  • Limited Scope Firms – Firms that are only required to have a limited application of the current approved persons regime. These firms will be permitted to adopt a lighter touch approach to the SMCR than ‘core’ and ‘enhanced’ firms. In particular, these firms will be required to appoint fewer Senior Managers and allocate fewer responsibilities than ‘core’ or ‘enhanced’ firms. Examples given by the regulator include – limited permission consumer credit firms, service companies and internally managed AIFs;
  • Core Firms – will have a baseline of SMCR requirements; most firms will fall within this category; and
  • Enhanced Firms – approximately 1% of firms will be subject to additional SMCR requirements set by the FCA (namely requirements relating to handovers between Senior Managers, maintaining Management Responsibilities Maps and ensuring that a Senior Manager is responsible for every aspect of their UK business). The SMCR that will apply to enhanced firms is more aligned with the requirements that apply to banks and building societies. Examples of such firms include: firms with assets under management of £50 billion or more and significant investment (IFPRU) firms.

When will the FCA finalise its rules? 

HM Treasury has not yet announced the implementation date for the extension of the SMCR. Originally, it had intended to implement the extension by March 2018, but given that this consultation was only published in July, many believe implementation will now not be until summer 2018. It is also expected that the FCA will take a phased approach to implementing the SMCR.

Practical comment 

One area of focus for the fund management industry has been how the FCA will view the current CF4 partner function under the new regime. According to CP17/25, the FCA believes that all partners in a firm will be Senior Managers (based on the assumption that partners have influence over how a firm is run) and there is a partner senior management function for that purpose (SMF27). However, if a partner has no involvement in the management of the firm, such as a silent partner or a junior partner, they will not need to be a Senior Manager. The FCA seems to expect that it is likely that there will be more sharing of responsibilities in partnerships than in other firms, but does not go very far to elaborate, except to acknowledge that the Statement of Responsibilities for a partner with limited management responsibility is likely to be short. 

The FCA’s suggested approach as regards proportionality is a welcome relief for the industry as is the timing discussed above. However, given the sheer volume of regulatory change facing the industry at present, firms should not delay the commencement of implementation projects. Key areas of these proposals are unlikely to change – regardless of a firms size, underpinning all of the requirements are the same structure of senior managers, certified persons and the application of the conduct rules. As a result, firms would benefit from early engagement with the changes.

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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