The FCA last week published proposals to extend the SM&CR to almost all regulated firms – FCA Consultation Paper (CP17/25) – Senior Managers and Certification Regime (“SM&CR”)

Why

Jonathan Davidson, Executive Director of Supervision- Retail & Authorisations at the FCA, said:

1. “Culture and governance in financial services and its impact on consumer outcomes is a priority for the FCA. The extension of the Senior Managers and Certification Regime is key to driving forward culture change in firms.
2. “This is about individuals, not just institutions. The new Conduct Rules will ensure that individuals in financial services are held to high standards, and that consumers know what is required of the individuals they deal with.  The regime will also ensure that Senior Managers are accountable both for their own actions, and for the actions of staff in the business areas that they lead.”
3. The FCA is committed to ensuring that the regime is proportionate according to the size of the firm, and therefore proposes applying a baseline of specific requirements to all regulated firms, called the “core regime”. For the largest and most complex firms (fewer than 1% of regulated firms) the FCA proposes some extra requirements, under the “enhanced regime”.

Context

1. To provide some practical context to this, seven enforcement actions each day were taken against individuals by global financial regulators in 2016, with individuals four times more likely to be disciplined than firms, according to research from Duff & Phelps.
2. The law firm’s report, Global Enforcement Review 2017, found that 1,761 individuals had proceedings brought against them by financial regulators across the UK, USA and Hong Kong.
3. The UK saw the most dramatic relative increase in individual enforcement action, with 64% of all regulatory clampdowns being aimed at individuals, up from just 37% in 2014. Similarly, although a much less active regulator with regards to enforcement, 60% of the Prudential Regulation Authority’s (PRA’s) enforcement actions in 2016 were targeted at individuals. Duff & Phelps attributed this increase to the introduction of legislation that increases individual accountability.

The new regime will essentially replace the Approved Persons Regime. The aim of the new regime is to reduce harm to consumers and strengthen market integrity by making individuals more accountable for their conduct and competence. As part of this, the SM&CR aims to:

• encourage a culture of staff at all levels taking personal responsibility for their actions.
• make sure firms and staff clearly understand and can demonstrate where responsibility lies.

The FCA proposes essentially three parts to the SM&CR:

1. Five Conduct Rules that will apply to all financial services staff at FCA authorised firms. This set of rules means 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.
2. The responsibilities of Senior Managers will be clearly set out and, should something in their area of responsibility go wrong, they can be personally held to account. The Senior Managers will be approved by the FCA and appear on the FCA Register.
3. Under the Certification Regime, firms will certify individuals for their fitness, skill and propriety at least once a year, if they are not covered by the Senior Managers Regime but their jobs significantly impact customers or firms, and might result in significant harm.

There are three main areas of change:

• Senior Managers Regime – all existing controlled functions go, to be replaced with new definitions;
• Certification Regime – replacing the current CF30 roles and others;
• Conduct Rules – which will apply to all staff (plus extras ones for Senior Management).

Key Proposals

The FCA proposes to:

• apply a standard set of requirements to all FCA solo-regulated firms known as the ‘core regime’;
• have extra requirements for a small number (fewer than 1%) of solo-regulated firms whose size, complexity and potential impact on consumers warrant more attention – these additions are called the ‘enhanced regime’; and
• apply a reduced set of requirements for a group of firms seen as ‘limited scope’.

Key elements of core regime

• FCA has defined Senior Management Functions. Senior Managers – those that perform these functions – must be approved by the FCA before they can begin their role.
• Every Senior Manager will need to have a Statement of Responsibilities that clearly says what they are responsible and accountable for.
• There are also specific responsibilities that firms will need to allocate to specific Senior Managers (known as Prescribed Responsibilities).
• Firms need to certify individuals subject to the Certification Regime are ‘fit and proper’ to perform their role at least once per year.
• A new set of Conduct Rules will apply to virtually all individuals within a firm.

Key elements of enhanced regime

As above plus:

• Additional Senior Management Functions
• Additional Prescribed Responsibilities
• Overall Responsibility – Enhanced firms will need to make sure that there is a Senior Manager with overall responsibility for every area, business activity and management function of the firm.
• Responsibilities Maps – Enhanced firms will need to have a single document that sets out the firm’s management and governance arrangements.
• Handover Procedures – Enhanced firms will need to make sure that a person who is becoming a Senior Manager has all the information and material that they could reasonably expect in order to do their job.

Each SMF will need a Statement of Responsibility, clearly setting out the scope and responsibilities of the role (which is submitted to the FCA on application for SMF status, and re-submitted after any change to responsibilities). If a firm breaks any FCA requirement, the SMF responsible for the area has a “duty of responsibility”, and so could be held responsible if they did not take reasonable steps to prevent/stop the breach.

 Certification Regime

• The Certification Regime covers people who are not SMFs, but whose jobs mean that they can have a big impact on the firm, customers or market integrity. These roles are no longer registered with the FCA, but the firm will need to check and confirm (“certify”) that the people are competent and suitable to do their job. The job holder is given a certificate at least annually and that can be withdrawn by the firm at any time.
• The firm will need to robustly train staff on the new regime, and any breach of the conduct rules by a member of staff that results in disciplinary action being taken must be notified to the FCA.