Evening office view
Senior Managers & Certification Regime new rules for 2019
Julie James, Senior Manager, Regulatory Compliance 
15/11/2018
Evening office view
Insert Featured Image Caption
On 4 July 2018 the FCA published its near final rules on extending the Senior Managers & Certification Regime (SM&CR) to FCA solo regulated firms. These new rules come into force on 9 December 2019.

Who does it affect?

The regulation affects all firms authorised under the Financial Services and Markets Act (FSMA) and regulated by the FCA, as well as European Economic Area (EEA) and third-country branches.

The FCA has implemented rules in a proportionate manner depending upon the type of firm classification.

What is your firm type?

The FCA has categorised firms into three types:

  1. Limited Scope Firm – Firms that have fewer requirements than Core firms, such as limited permission consumer credit firms, all sole traders etc.
  2. Core Firm – Firms that will have a baseline of SM&CR requirements applied
  3. Enhanced Firm – A small proportion of solo-regulated firms that will have to apply extra rules.

Senior Management Functions & Prescribed Responsibilities

Prescribed Responsibilities (PRs) are specific responsibilities that a firm must allocate to a senior manager. The FCA has identified a ‘core’ set of Senior Management Functions that will apply to all firms, although there are some exemptions.

Statements of Responsibility (SoR)

The SoR is a single document that every senior manager will need to have, setting out their role and responsibilities.

Prescribed Responsibilities

Under FSMA every Senior Manager will need to have a Statement of Responsibilities clearly setting out their role and their responsibilities.

Limited Scope firm – Prescribed Responsibilities (PRs) do not apply.

Core firm – There are four main PRs and two further responsibilities depending upon whether a firm is subject to Client Money and Assets (CASS) or Authorised Fund Managers (AFMs).

Enhanced firms - Will need to ensure that every activity, business area and management function has a Senior Manager with Overall Responsibility for it.

Prescribed Responsibilities for all Core and Enhanced firms are:

  • performance by the firm of its obligations under the SMR, including implementation and oversight.
  • performance by the firm of its obligations under the Certification Regime
  • performance by the firm of its obligations in respect of notifications and training of the Conduct Rules
  • responsibility for the firm’s policies and procedures for countering the risk that the firm might be used to further financial crime.
  • responsibility for the firm’s compliance with CASS (if applicable)
  • responsibility for an AFM’s value for money assessments, independent director representation and acting in investors’ best interest. This PR only applies to AFM’s.

Additional PRs apply for Enhanced firms including:

  • compliance with the rules relating to the firm’s Responsibilities Map
  • safeguarding and overseeing the independence and performance of the internal audit function
  • safeguarding and overseeing the independence and performance of the compliance function
  • safeguarding and overseeing the independence and performance of the risk function
  • if the firm outsources its internal audit function, taking reasonable steps to make sure that every person involved in the performance of the service is independent from the persons who perform external audit, including:
  • supervision and management of the work of outsourced internal auditors
  • management of potential conflicts of interest between the provision of external audit and internal audit services
  • developing and maintaining the firm’s business model
  • managing the firm’s internal stress-tests and ensuring the accuracy and timeliness of information provided to the FCA for stress-testing.

Certification Regime

The Certification Regime covers people who are not Senior Managers, but who have a job that means that they can have a significant impact on customers, the firm or market integrity. The FCA has confirmed eight Certification Functions which build on the existing functions in the Approved Persons regime.

Certification Function

Overview

Significant Management Function 
(currently CF29)
These individuals perform functions that would have been Significant Influence Functions under the Approved Person Regime (APR).

These important roles can seriously affect how 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 advisers, retail investment advisers and pension transfer specialists. The full list is set out in the FCA's Training and Competence Sourcebook.
The client dealing function This function has been expanded from the CF30 function under APR to apply to any person dealing with clients, including retail and professional clients and eligible counterparties.

This will cover people who:

  • advise on investments (other than a non-investment insurance contract) and perform other related functions, such as dealing and arranging.
  • deal, as principal or agent, and arrange (bring about) deals in investments.
  • act in the capacity of an investment manager and all functions connected with this.
  • act as bidder’s representative.
Anyone who supervises or manages a Certified Function (directly or indirectly), but isn’t 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 or accountability between junior certified employees and the Senior Manager ultimately responsible for that area. For example, if a firm employs a customer-facing financial adviser, 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 for firms under the FCA remuneration rules (SYSC 19).

They are a category of staff that all firms under AIFMD, UCITS, IFPRU and BIPRU are already required to identify under the remuneration regime.

These firms need to consider all types of risk when identifying their Material Risk Takers. This includes prudential, operational, conduct and reputational risks. All of these Material Risk Takers will be covered by this certification function.

Algorithmic trading
This function includes people with responsibility for:
  • approving the deployment of a trading algorithm or a material part of one
  • approving the deployment of a material amendment to a trading algorithm or a material part of one, or the combination of trading algorithms
  • monitoring or deciding whether or not the use or deployment of a trading algorithm is or remains compliant with the firm’s obligations.



























































Fitness and Propriety (F&P)

Applicable to all Firm types. Firms must take responsibility for validating that their Senior Managers, Non-Executive Directors and Certification individuals are fit and proper to perform their roles.

Regulatory References

Applicable to all Firm types. Firms must request and provide a regulatory reference for both incoming and departing Senior Managers and Certified individuals. Requests from past employers should go back six years unless it is for serious misconduct, where there is no time limit. 

When asked for a regulatory reference, past employers must disclose:

  • Details of any disciplinary action taken due to breach of conduct rules
  • Any finding that the person was not fit and proper
  • Any other information relevant to assessing whether a candidate is fit and proper.

Conduct rules

The Individual Conduct Rules apply to all firms and all staff (except those performing ancillary roles). The Conduct Rules are intended to improve standards of individual behaviour in financial services. In addition, there are a set of Senior Manager Conduct Rules applicable only to Senior Managers.

Training

Firms must train relevant staff on how the Conduct Rules apply to their role.  Senior managers and certification staff must be trained, and abide by the Conduct Rules from the commencement of the new regime on 9 December 2019.

Firms have 12 months from the start of the new regime to put in place processes to comply with the training and reporting requirements and to train other staff on the Conduct Rules.

Reporting

Where firms take disciplinary action against a person for breaches of the Conduct Rules the FCA must be notified.  If disciplinary action is against a senior manager the FCA must be notified with seven business days of concluding disciplinary action.  The notification of other individuals should be made within the firm’s annual reporting.

steps to beach

Next steps

  • Determine your firm type
  • Identify Senior Managers and document Prescribed Responsibilities
  • Identify which members of staff will become certification staff
  • Ensure a process is in place to complete the certification process within 12 months of the new regime coming into force.
  • Make arrangements to train all relevant staff on the Conduct Rules within 12 months of the start of the new regime.

If you would like to discuss any of the above changes please contact us.

Contact us

John Glasby
John Glasby
Partner, Corporate Audit
London