August 9, 2018
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.
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.
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.
Important: There is no territoriality limitation under SMR; Senior Managers performing a role overseas would still remain in scope.
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.
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|
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:
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’).