The UK’s financial regulator recently announced 9 December 2019 as the deadline for the implementation of the Senior Managers & Certification Regime (SM&CR) for solo-regulated firms. Firms should now ascertain which SM&CR firm type they are and begin preparations for compliance.
SM&CR was designed to improve accountability and enhance the focus on culture within financial services firms. The Financial Conduct Authority (FCA) has already implemented this regime for banks – and is serious about enforcement.
With the regulation set to impact 47,000 financial firms, Paul Henshaw, one of our senior compliance consultants, answers some common questions that firms may have on the upcoming SM&CR.
Q. Specifically, what does the new Senior Managers and Certification Regime look like?
A. There are two distinct, complementary frameworks that the SM&CR introduces for certain employees of financial services firms.
- Senior Managers Regime – The most senior people (‘senior managers’) who perform key roles in the firm (‘senior management functions’) will need FCA approval before starting their roles. Every senior manager will need to have a ‘statement of responsibilities’ that clearly explains what they are responsible and accountable for.
- Certification Regime – This applies to specific employees who are not senior managers but can have a significant impact on the firm or its customers. Firms will need to confirm (‘certify’) that these individuals are fit and proper to perform their role at least once a year. Firms will need to put in place policies and procedures around a certification program.
For both regimes, impacted firms need to identify the roles that these new requirements apply to. Compliance should work closely with Human Resources to identify areas such as organisational structure, HR operational policies and arrangements that may need to be adapted.
Q. What are the firm types within the regime?
A. Under SM&CR, there are three different firm types that firms could fall under:
- Core – baseline requirements for firms to comply with;
- Enhanced – extra requirements for a number of the largest and most complex firms with maximum potential consumer impact; and
- Limited Scope – impacting firms that currently have a limited application of the Approved Person’s Regime
To determine which firm type a firm falls under, the compliance team should use the firm checker tool that the FCA has supplied. The SM&CR will require all firms to make changes, and while most will not start this project until early 2019, larger firms may want to start their planning sooner.
Q. What does the regulator expect of firms under the SM&CR?
A. To abide by the rules. There are two tiers of Conduct Rules that apply to all impacted firms. The first is a general set of rules that apply to most employees in a firm:
First Tier – Individual Conduct Rules
- You must act with integrity
- You must act with due care, skill and diligence
- You must be open and cooperative with the FCA, the PRA and other regulators
- You must pay due regard to the interests of customers and treat them fairly
- You must observe proper standards of market conduct
The second tier consists of rules that only apply to senior managers:
Second Tier – Senior Manager Conduct Rules
- SC1 – You must take reasonable steps to ensure that the business of the firm for which you are 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 would reasonably expect notice.
Firms will need to familiarise themselves with these rules as part of their preparations for SM&CR. Compliance teams should think about how they will implement these rules. All employees will need to be made aware of the first tier of rules through training and/or communications. For the second tier of rules, the firm will need to identify the Senior Managers that these apply to, and educate them about these obligations.
Q. Who does the SM&CR apply to?
A. The SM&CR replaces the Approved Persons Regime and will apply to all firms that are currently subject to these requirements. Banks have already had to comply with SM&CR since March 2016.
It’s important to be aware that the SM&CR contains significantly different obligations from the approved person regime it replaces. Effective implementation will require early consideration and intelligent collaboration between HR, compliance and senior management. Together, these teams will have to identify, assess and map responsibilities, as well as establish HR processes to assess senior management and certify relevant individuals.
Firms may also wish to consider how the new rules will impact their approach to building a robust compliance culture, and how they may wish to modify their governance, risk and compliance (GRC) program to incorporate and support the SM&CR.
Q. What tools are available to help firms comply with SM&CR?
A. The FCA published three key updates and a useful video explaining how the SM&CR will be extended to all regulated firms:
- A policy statement, PS18/14, which summarises the feedback the FCA received to its consultation on extending the SM&CR, and includes the FCA’s response to that feedback;
- The SM&CR guide for implementing the regime at solo-regulated firms. Annex 2 of the guide contains a useful ‘SM&CR readiness checklist’ – examine it carefully; and
- A firm checker tool to establish which tier of the regime a firm belongs.
Our Q&A on the SM&CR also provides useful background information.
Overall, the SM&CR may present a considerable amount of work for some firms. For most, this is a project that will commence in early 2019. But as a first step, compliance teams should familiarise themselves with the upcoming regulation, review the tools provided by the FCA and arrange a gap analysis to assess the impact that the SM&CR may have on their businesses.
For More Information
Contact us to learn more about the SM&CR training courses we provide or to discuss your firm’s preparations for the SM&CR. We offer assistance with the creation of collateral, policies and procedures, and provide regulatory technical solutions to simplify your SM&CR challenges and responsibilities.
About the Author
Paul is a Senior Principal Consultant focused on UK compliance. He is responsible for regulatory support, and monitoring clients comprising of investment advisers and managers in the private and listed equity space.
Prior to the acquisition by ACA, Paul was a Senior Consultant at Cordium. Before joining Cordium, he was a Senior Compliance Consultant at Moore Stephens, a top 10 accountancy firm. Paul also gained experience as a Group Compliance Officer at Salamanca, an investment advisory firm. Preceding this, Paul ran his own consultancy business serving a variety of small private equity LLPs.
Paul holds a postgraduate diploma in Law, Legal Practice, and is a Chartered Insurer.