Senior Managers and Certification Regime (SM&CR)

Senior Managers and Certification Regime (SM&CR)

August 9, 2018

Background

Following the 2008 financial crisis and subsequent review of the financial services industry, parliament sought to replace the UK Approved Persons Regime (APR) with a regime that was more focused on senior managers and individual responsibility. This resulted in the creation of a new Senior Managers and Certification Regime (SM&CR).

The SM&CR has been in force for banks, building societies, credit unions and PRA-designated investment firms (Relevant Authorised Persons) since March 2016. The SM&CR is due to be extended to cover all FCA (Financial Conduct Authority) solo-regulated financial services firms from 9 December 2019 and will replace the APR entirely.

Overview

The SM&CR’s overarching aim is to reduce harm to consumers and to strengthen market integrity. This is achieved by raising the standards of conduct for everyone who works in financial services, and by making senior people in firms more responsible and accountable for their conduct, actions and competence. The regime shifts the responsibility of activities within a firm onto senior managers and brings into scope Non-Executive Directors.

Core Objectives

  • To restore confidence in the financial services industry;
  • To increase individual accountability, in particular at the senior management level;
  • To raise the standards of governance;
  • To ensure firms and internal teams clearly understand and can demonstrate where their responsibility lies; and
  • To evoke a cultural change within firms whereby internal teams take personal responsibility for their actions.

How Will the Regime Apply to Different Firms?

The FCA proposes to take the principles and tools from ‘the regime already in place for Relevant Authorised Persons to create consistency across financial services, but tailor them to reflect the different risks, impact and complexity of firms subject to the extension’. Firms will be categorised depending on size and profile into Core, Enhanced or Limited Scope Firms. Depending on the firm categorisation the regime will apply differently.

The Core Regime

There will be a core regime applicable to the majority of firms, which consists of three elements: Senior Managers Regime (SMR), Certification Regime (CR), and Conduct Rules.

  1. Senior Managers Regime (SMR)
    • Reserved for the most Senior Management Functions (SMF) and individuals. The FCA has designated a number of defined senior management function roles to cover the individuals deemed by the regulator to pose the greatest potential risk to customers or market integrity. SMFs cover a narrower group of people than the current APR;
    • Pre-approval: Those individuals who hold an SMF position must be approved by the FCA before they are appointed to their new role. (This is currently applicable under APR);
    • Regular Assessment of Fitness and Propriety: Firms need to take responsibility for their staff being fit and proper to perform their role. Assessments must be conducted on an ongoing basis, and at least once a year;
    • Statements of Responsibility: Every Senior Manager will require a document that states what they are responsible and accountable for;
    • Prescribed Responsibilities: In addition to the inherent responsibilities of a Senior Manager that relate to his/her SMF function, the FCA proposes that firms must allocate several ‘prescribed responsibilities’ to their Senior Managers. These will vary depending on the size and complexity of the firm;
    • Responsibility Maps: Enhanced firms must prepare and maintain a single document that sets out the firm’s management and governance responsibilities; and
    • Overall Responsibility: Enhanced firms will need to ensure that every activity, business area and management function has a Senior Manager with overall responsibility for it.

    Important: There is no territoriality limitation under SMR; Senior Managers performing a role overseas would still remain in scope.

  2. Certification Regime (CR)
    • ‘People who are not Senior Managers but whose job can cause significant harm to the firm or its customers’;
    • The following functions will be Certified Functions under the SM&CR:
      - Significant management function;
      - Proprietary traders;
      - CASS oversight function;
      - Functions subject to qualification requirements under the T&C regime;
      - Client dealing function;
      - Anyone who supervises or manages a Certified Function (directly or indirectly), but isn’t a Senior Manager;
      - Those meeting the definition of a Material Risk Taker (MRT); and
      - Algorithmic trading.

    Under the current APR, some of these roles are pre-approved by the FCA. This will not be the case under the CR as the responsibility for assessing fitness and propriety is to shift to firms.

    • Annual Certification: Firms will be required to check and confirm (‘certify’) that certified staff are suitable to do their job on an annual basis;
    • The CR is limited to UK based employees (with the exception of Material Risk Takers or those dealing with UK clients, where no territorial limitation applies); and
    • Responsibility for the CR must be allocated to a Senior Manager, who will be personally accountable for the regime.
  3. Conduct Rules

    There are two sets of basic rules, which apply to almost every person who works in financial services, apart from ancillary staff (e.g. receptionists, cleaners, caretakers, and security staff). They are listed below:

    Tier 1: Individual Conduct Rules
    CR1 You must act with integrity
    CR2 You must act with due skill, care and diligence
    CR3 You must be open and co-operative with the FCA, the PRA and other regulators
    CR4 You must pay due regard to the interests of customers and treat them fairly
    CR5 You must observe proper standards of market conduct
    Tier 2: Senior Manager Conduct Rules
    SM1 You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively
    SM2 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
    SM3 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
    SM4 You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice
    • Firms must train staff to understand how the conduct rules are relevant to their individual roles. A Senior Manager will be personally responsible for ensuring compliance with this;
    • Firms must report disciplinary actions taken due to a breach of the conduct rules to the FCA. This must be completed within seven days for Senior Managers, and on an annual basis for all other staff; and
    • SMF and Certification Regime staff will need to be trained and abide by the Conduct Rules from the start of the new regime, but firms will have a further 12 months to train their other staff on the Conduct Rules.

The Enhanced Regime

There is also an Enhanced Regime that will only apply to the largest and most complex firms (less than 1% of firms regulated by the FCA). The FCA proposes that firms that meet one or more of the following criteria will be subject to the enhanced regime:

  • A firm that is a significant IFPRU firm;
  • A firm that is a CASS large firm;
  • Firms with Assets Under Management of £50 billion or more as a three year rolling average;
  • Firms with current total intermediary regulated business revenue of £35million or more per annum, calculated as a three year rolling average;
  • Firms with an annual regulated revenue generated by consumer credit lending of £100m or more, calculated as a three year rolling average; and
  • Mortgage lenders or administrators (that are not banks) with 10,000 or more regulated mortgages outstanding.

The Enhanced Regime will consist of the same three elements as the Core Regime but will have additional requirements that reflect more closely the regime as it applies to dual PRA/FCA regulated firms.

Firms subject to the Enhanced Regime will need to have in place a Responsibility Map and handover procedures for all Senior Manager roles, and will need to make sure that there is a Senior Manager responsible for every area of their firm (‘Overall Responsibility’).

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