The much awaited Consultation Paper (CP17/25) Individual Accountability: Extending the Senior Managers & Certification Regime ('SM&CR' or 'the Regime') was published on 26 July 2017 and closes on 3 November 2017.
View the full paper
The new SM&CR is replacing the current Approved Persons Regime and is set to come into force at a date to be decided in 2018 once the FCA publishes the final rules. The FCA will also consult on the operational aspects of the new regime, including how firms will transition into the regime. The FCA want the new regime to be proportionate and flexible enough to accommodate the different business models and governance structures of firms. In order to do so they have used the tools and principles from the earlier banking regime to create a consistency across financial services but have tailored them to reflect the different risks, size and complexity of firms subject to the extension of this regime.
The aim of the regime is to reduce harm to consumers and strengthen market integrity by creating a system that enables firms and regulators to hold people to account, by:
The Regime will apply to almost all financial services firms and all existing Approved Persons. It also affects incoming branches of non-UK firms that have permission to carry out any activities that the FCA regulate in the UK as well as people working in those branches. This paper does not affect approved persons of appointed representatives of firms. The FCA has said that they intend to release a new consultation in respect of this category at a later date.
The proposal is for the application of a baseline of requirements that every firm will be subject to, known as the 'core regime'. The FCA propose a reduced set of requirements for a group of firms defined as 'Limited Scope' and an 'Enhanced Regime' for larger more complex firms. Accordingly there are three main elements of the core regime that will apply to every firm, which are:
The FCA is proposing the following Senior Management Functions for all firms (except Limited Scope Firms):
Where a person holds more than one Senior Management Function, for example being the Executive Director and MLRO, the person will need to apply to the FCA for each function. This can be undertaken at the same time, but there is only one Statement of Responsibility required and it must clearly describe all of the candidates' responsibilities.
There is no territorial limitation on the Senior Managers Regime which means that the Senior Managers Regime applies to anyone who performs a Senior Manager role regardless of whether they are based in or outside of the UK.
FCA are proposing six extra responsibilities ('Prescribed Responsibilities') that must be given to Senior Managers. These responsibilities are new and firms will need to carefully consider which Senior Manager is the best person to hold one or more of each of these Prescribed Responsibilities. Each of the responsibilities described should be given to the Senior Manager who is the most senior person responsible for that issue. These responsibilities do not apply to Limited Scope Firms.
|1||Performance by the firm of its obligations under the Senior Managers Regime, including implementation and oversight|
|2||Performance by the firm of its obligations under the Certification Regime|
|3||Performance by the firm of its obligations in respect of notifications and training of the Conduct Rules|
|4||Responsibility for the firm's policies and procedures for countering the risk that the firm might be used to further financial crime|
|5||Responsibility for the firm's compliance with CASS (if applicable)|
|6||Responsibility for ensuring the governing body is informed of its legal and regulatory obligations|
|7||Responsibility for an AFM's value for money assessments, independent director representation and acting in investors 'best interests'|
Limited Scope Firms (currently holding CF8 Apportionment and Oversight and expected to come under SMF29) are defined as:
Those firms falling within the definition of 'enhanced regime' will have additional requirements placed upon them, such as additional senior management functions and additional prescribed responsibilities, overall responsibility, responsibility maps and handover procedures. Firms that have been proposed as 'enhanced firms' are:
The Certification Regime is applicable to members of staff whose role enables that person to have a significant impact on customers, markets or the firm. The FCA will not 'approve' these people, but firms will need to certify that these individuals are suitable for their role. Suitability will need to be assessed annually with a certificate held on file for each person who holds such a position. Where someone is performing more than one Certification Function, a firm will need to certify and document that person as fit and proper to carry out each function although only one certificate covering all functions is required.
The Financial Services and Markets Act (FSMA) defines a Certification Function as 'one that requires the person performing it to be involved in 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.'
The FCA proposes to make the following roles Certification Functions:
|Significant Management Function (based on current CF29)||
These individuals perform functions that would have been Significant Influence Functions under the FCA Approved Persons Regime.
These important roles can seriously impact the way the firm conducts its business.
|Proprietary traders (also covered by current CF29)|
|CASS oversight function (current CF10a)|
|Functions subject to qualification requirements||This includes, for example, mortgage advisors, retail investment advisers and pension transfer specialists. The full list is set out in the FCA's current Training and Competency Sourcebook.|
|The client dealing function||
This function will be expanded from the current CF30 function to apply to any person dealing with clients, including retail and professional clients and eligible counter-parties.
This will cover people who:
|Anyone who supervises or managers a Certified Function (directly or indirectly) but is not a Senior Manager||This will ensure that people who supervise certified employees are held to the same standard of accountability. It also ensures a clear chain of accountability between junior certified employees and the Senior Manager ultimately responsible for that area. For example, if a firm employs a customer-facing advisor, every manager above them in the same chain of responsibility will have to be certified (until the Senior Manager approved under the SMR is reached).|
|Material Risk Takers||The concept of material risk takers (also known as Remuneration Code staff) already exists under SYSC 19 but they are not currently controlled functions that the FCA approve. They are a category of staff that fall under AIFMD, UCITS, IFPRU and BIPRU are required to identify under the current FCA regime. These firms need to consider all types of risk when identifying their material risk takers, including those of a prudential, operational and reputational nature. All of these material risk takers will be covered by this certification function.|
This function includes people with responsibility for:
The Certification Regime only applies to employees of firms and does not apply to Non-Executive Directors. If the above roles do not apply to your firm, then you will not have any certified staff and you will not be required to apply the Certification Regime.
The FCA has proposed that Significant Management Certification Functions applies to someone with 'significant responsibility for a significant business unit'. That is people who are below Senior Managers who are responsible for business units that, on account of their size, nature or impact, are considered 'significant' by their firm.
These are basic rules that will apply to almost every person who works in financial services. They include 'acting with integrity' and 'treating customers fairly'. The Conduct Rules are about improving the behaviour of all staff in financial services firms.
FCA are proposing to apply two tiers of Conduct Rules to all firms.
|First Tier – Individual Conduct Rules|
|1||You must act with integrity.|
|2||You must act with due care, skill and diligence.|
|3||You must be open and cooperative with the FCA, the PRA and other regulators.|
|4||You must pay due regard to the interests of customers and treat them fairly.|
|5||You must observe proper standards of market conduct.|
|Second Tier – Senior Manager Conduct Rules|
|SC1||You must take reasonable steps to ensure that the business of the firm for which you ae responsible is controlled effectively.|
|SC2||You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system.|
|SC3||You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively.|
|SC4||You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice.|
The FCA propose that the Conduct Rules apply to:
There are some exceptions to these Conduct Rules and the FCA has listed a comprehensive but not exhaustive list of those roles that they consider are ancillary and therefore out of scope of the Conduct Rules. They comprise:
|Receptionists||Events management||Medical staff|
|Switchboard operators||Security guards||Active records management|
|Post room staff||Invoice processing||Drivers|
|Print room staff||Audio-visual technicians||Corporate Social Responsibility staff|
|Facilities management||Vending machine staff||Data controllers and processors under the Data Protection Act|
|Cleaners||Personal assistants and secretaries||Human Resources administrators/processors|
|Catering staff||Information Technology Support (ie helpdesk)|
One of the key features of the SM&CR is to reinforce the need for firms to take responsibility for their staff being fit and proper to undertake their roles. There are currently numerous rules around qualifications, training, competence and personal characteristics that already appear in the FCA’s Handbook, FIT. As such, the FCA has stated that at this stage they do not propose introducing any new rules. However, new requirements are outlined in the consultation paper requiring firms to collect new forms of evidence when assessing candidates for Senior Management roles, Certification Functions or Non-Executive Directors (even if they are not a Senior Manager). These new requirements comprise:
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. FSMA also requires firms to notify the FCA when disciplinary action has been taken against a person for any reason specified by the FCA. The FCA propose to require notification of disciplinary action only if that action was because of breaches of the Conduct Rules. For Senior Managers, the FCA are proposing that firms notify them of any such breaches within seven business days of the firm becoming aware of the matter. The method and forms to use for such notifications will form part of the technical consultation paper that will be published later this year.
Whilst these matters are under consultation, there are some steps a firm can take to prepare for SM&CR: