All change here: extending the Senior Managers and Certification Regime

On the 26 July 2017, the FCA published outline proposals to fundamentally change the manner in which people working in financial services are regulated.

At present, there are two separate regulatory regimes in existence – the Senior Managers and Certification Regime (“SMCR”) which applies to those involved in banking, and the Approved Persons Regime (“APR”) which applies to all other FCA regulated financial services.  The proposals, to extend the SMCR and terminate the APR, will affect almost every FCA regulated firm, from large asset managers to small one person firms.

Originating in the 2013 “Changing Banking for Good” report, prepared and written by the Parliamentary Commission on Banking Standards (“PCBS”), the aim of the SMCR was to replace the much maligned APR and to improve individual accountability in numerous areas of banking through an improved focus on senior management and individual responsibility.  It came into effect for the banking industry on 7 March 2016.

Fast forward to 2017, and the roll out of the SMCR to all financial services firms does not come as a surprise. It was clearly not desirable for the FCA to continue operating two completely separate regulatory frameworks.

The proposals

Under the proposed changes, most firms will be subject to a base line of requirements which will be known as the SMCR “core regime”.  A small number of the largest and most complex firms, such as those that have £50 Billion of assets under management, will be subject to an “enhanced regime” consisting of a number of additional requirements. Finally, a reduced set of requirements will apply to firms who are currently subject to a limited application of the APR.  They will be known as a “limited scope” firms for the SMCR.

The core regime, to which the vast majority of firms and their employees will be subject to consists of three key elements.

First, certain roles will be designated as Senior Management Functions (“SMF”).   Some SMFs will be mandatory, meaning each firm will have to have somebody responsible for the role.   Any person responsible for exercising SMFs must be specifically approved by the regulator to do so.

All SMFs must have written Statements of Responsibilities, setting out the areas for which they are accountable.  They will also be subject to a “duty of responsibility” to prevent regulatory breaches from occurring, and four specific SMF Conduct Rules.   The result of these requirements will be to make it easier for the FCA to attribute blame to senior members of staff in circumstances where breaches occur.

Secondly, those individuals who carry out roles that involve a risk of significant harm to the firm or any of its customers, will be subject to the Certification Regime.   Unlike those exercising SMF’s, these individuals do not require pre approval from the FCA. The burden – both financially and administratively – instead lies upon the firm who will be responsible for identifying these employees, determining whether they are fit and proper to carry out their relevant role, before annually issuing a certificate to certify this.

Finally, and for many individuals, the change that will be felt most keenly, is the imposition of five Conduct Rules, setting out high level standards for nearly all employees of firms.  Any breach of the rules will enable the FCA to take enforcement action against the individual.  This is a radical new development for a number of staff who would never have before fallen within the grasp of the regulator, having not exercised Controlled Functions under APR.

A flexible approach

There is an inherent tension in trying to apply a system designed for large banking institutions to the hugely diverse range of firms that will now fall under the SMCR.  Whilst an approach that seeks to improve standards and public faith in the financial services sector is to be welcomed, small firms and their employees in particular will be concerned by the new burdens that the SMCR will lay at their door.

The regulator will need to adopt a flexible attitude in order to extend the SMCR effectively, and it is therefore reassuring to hear that the FCA has already stated its intention is to take a “proportionate” approach.  The relevant consultation paper, CP17/25 (https://www.fca.org.uk/publication/consultation/cp17-25.pdf) contains valuable information and affords those who are concerned about the effect of the extension an opportunity to air their concerns and to help shape the regime.   It is essential reading for large and small firms alike.

This article was originally published in Criminal Law & Justice Weekly and can be found here, behind a paywall.