Senior Managers and Certification Regime (SM&CR)

Senior Managers and Certification Regime (SM&CR)

September 21, 2017

Background

Following the 2008 financial crisis and subsequent review of the financial services industry, Parliament sought to replace the UK Approved Persons Regime 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 by the FCA to cover all financial services firms in 2018. The FCA has recently published two consultation papers (CP17/25 and CP17/26 ) on the proposed extension of the SM&CR to all financial services firms.

Final FCA rules are expected to be published sometime within 2018.

Overview

The SM&CR’s overarching aim is to reduce harm to consumers. 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 actions. The SM&CR aims to raise the standards of governance, increase individual accountability and help restore confidence in the financial industry. The regime shifts the responsibility of activities within the firm onto senior managers and brings into scope Non-Executive Directors.

Core Objectives

  • To raise standard of governance
  • To increase individual accountability

How Will the Regime Apply to Different Firms?

The FCA proposes to take the principals 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.”

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

  1. The Senior Managers Regime
    • Reserved for the most Senior Management Functions (SMF) and individuals
    • Pre-Approval: Those individuals who hold an SMF position must be approved by the FCA, before they start their role. (This is currently applicable under the Approved Persons Regime)
    • Annual Assessment of Fitness and Propriety: There is now an annual assessment of fitness and propriety, ensuring the SMF are suitable at doing their jobs
    • Statements of Responsibility: Every senior manager will require a document that says what they are responsible and accountable for
    • Responsibility Maps: The FCA proposes extra requirements that will only apply to the largest and most complex firms (fewer than 1% of firms regulated by the FCA). For example, these firms will need to have Responsibilities Maps, Handover Procedures, and will need to make sure that there is a Senior Manager responsible for every area of their firm (‘Overall Responsibility’)
    • Prescribed Responsibilities: The FCA proposes new responsibilities that firms are required to give to their Senior Managers. This only applies to some firms, such as sole traders or firms with limited permissions, and EEA branches. More responsibilities will apply to bigger firms
  2. Certification Regime
    • “People who are not Senior Managers but whose job can cause significant harm to the firm or its customers”
    • The FCA has currently stipulated this covers:
      • Customer facing roles with T&C requirement
      • Significant management
      • Line managers of certified persons
    • Annual Certification: Firms will be required to check and confirm (‘certify’) that they are suitable to do their job at least once a year
    • This regime is overseen by the SMF
  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 (i.e. cleaners, caretakers).

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 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 (at any time in the previous 3 years);
  • Firms with current total intermediary regulated business revenue of £35million or more per annum;
  • Firms with an annual regulated revenue generated by consumer credit lending of £100m or more;
  • Mortgage lenders (that are not banks) with 10,000 or more regulated mortgages outstanding.

Firms subject to the Enhanced Regime will need to have in place Responsibilities Maps, Handover Procedures, and will need to make sure that there is a Senior Manager responsible for every area of their firm (‘Overall Responsibility’).

The enhanced regime will apply to Pershing as a large CASS firm and a significant IFPRU firm.