Senior Manager and Certification Regime (SM&CR)

Conversion of Controlled Functions (grandfathering) and the the regime's impact on SMFs, including no-executive directors (NEDs).

Introducing SM&CR.

With less than three months until the implementation of SM&CR, firms should be nearing the end of their preparation for SM&CR. In this article, we opted to review how the Senior Managers and Certification regime will be implemented for core firms, and what are the key compliance requirements which must be in place by 9 December 2019.

The SM&CR will replace the APR system for all FCA solo-regulated firms from 9 December 2019.

Implementation timeline - SMFs and Certified Roles (CRs)

As mentioned in our previous article, SM&CR is being extended to capture all solo-regulated firms, from 9 December 2019. This implementation will be done in two stages:

  1. by 9 December 2019 - firms’ SMFs must be clearly identified, the relevant SoRs completed and kept on file, along with the Conduct Rule training having been delivered to all SMFs (and NEDs where required). Firms are also required to identify which staff will be subject to the certification regime (if any) and have all relevant processes and policies updated.

  2. by 9 December 2020 - firms will be provided 12 months to ensure full compliance with the Certification Regime, and the training requirements for all remaining staff (conduct rule).

 

Conversion of Controlled Function (CFs) to Senior Managers Functions (SMFs)

In relation to Core Firms, the FCA indicated that only directors (and where required, the heads of compliance and the MLRO) are permitted to be SMF. To further simplify the implementation, the process of conversion will be somewhat automatic, as most existing controlled functions (CFs) will be automatically converted to the relevant senior managers functions (SMFs). This automatic conversion will be done as:

Source: The Senior Managers and Certification Regime: Guide for FCA solo-regulated firms - available here

SMFs - Statement of Responsibilities

From 9 December 2019, every SMF will have to have an up-to-date Statement of Responsibility (SoR) on file which clearly sets out their roles and responsibilities. The FCA has issued guidance regarding how a SoR should look like. The key principles are:

  • The SoRs should only state the responsibilities and accountabilities (not how they are executed)

  • Each SMF must have one SoR, even if they hold multiple SM functions within the same firm

  • The SoR must be self-contained (not refer to other documents) and should not exceed three pages.

  • The SoR should clearly reflect: Prescribed responsibilities, Other Responsibilities and Supporting information

 

Duty of Responsibility

The extension of SM&CR introduces the new ‘Duty of Responsibility’ for Senior Managers. This enables the FCA to hold individuals directly accountable for a regulatory breach, where the FCA can evidence that the SMF(s) failed to take ‘reasonable steps’ to prevent the breach happening.

 

For further information about this duty of responsibility, the FCA has published final guidance on enforcing the Duty of Responsibility in solo regulated firms and insurers in PS18/16. This includes information on factors they will consider when assessing whether a Senior Manager has taken "reasonable steps". The guidance is available here.

 

SMFs may wish to keep records of relevant steps they take in case questions are raised; whether by their firm, auditors, insurers or the FCA.

 

SMFs - Fit and Proper Requirements

It should be noted that the fit and proper requirements do extend beyond SMFs, as the FCA expect all individuals within the firms (SMFs, CRs, NEDs and all other staff) to be of good character and competent to discharge their roles.

 

To this end, the Regulatory has provided detailed guidance about how firms should assess a person’s fitness and propriety which should include:

  • Honesty, integrity and reputation,

  • Competence and capability, including whether the person satisfies any relevant FCA training and competence requirements, and

  • Financial soundness.

In light of the requirements, it is expected of firms to retain additional evidence of the checks they conduct, in particular to:

  • Criminal records checks (SMFs and NEDs): Firms must also undertake a criminal records check as part of each Senior Manager application for approval. This requirement also applies to NEDs who are not Senior Managers.

  • Regulatory reference: firms must request a reference from Senior Manager and Certification Function candidates’ past employers – known as regulatory references. This will also apply to NEDs who aren’t Senior Managers. As a considerable change, firms are also required to provide update on references (post-issuance) where additional and relevant information comes to light.

As a result of the new requirements, all firms should:

  • Review the disciplinary procedures to ensure that any qualifying issue or incident is captured and such matters are reported on the FCA (where required).

  • Review HR procedures (including recruitment procedures) to ensure that the firm can comply with the requirement to provide information on disciplinary procedures, etc where applicable, for regulatory references.

Impact on Non-executive Directors (NEDs) - Core Firms

The SM&CR Regime does not recognise the “Non-Executive Director” to be a senior manager function (SMF) on its own, and therefore (unlike the current regime), they will not need to be approved by the FCA. Therefore, NEDs who have no other responsibilities, will fall off the FCA register.

 

However, some NEDs also act as Chair which is a recognised Senior Management Function (SMF 9) and thus, such NEDs need to be treated as a Senior Managers.

 

In addition, irrespective to whether NEDs are also SMFs, they will be subject to both the Conduct Rules and fitness and propriety requirements. This means that they will need to be assessed on their fitness and propriety (considering their honesty, integrity and reputation, their competence and capability, and their financial soundness) as well as being subject to criminal records checks and regulatory references requirements.

 

Please note, Core firms with a Non-Executive Chair (currently approved as a CF2) will need to submit Form K to convert that individual to an SMF9 (Chair) under the SM&CR.

 

The FCA has prepared guidance on the typical responsibilities of a NED (under the SM&CR regime), which we suggest all NEDs read. In brief, the role of a NED is to:

  • Provide effective oversight and challenge – but not to execute,

  • Help develop proposals on strategy.

Their responsibilities include:

  • Taking part in collective board and committee decisions, including voting and providing input and challenge

  • Ensuring they are sufficiently and appropriately informed of the relevant matters prior to taking part in board or committee discussions and decisions.

Before implementation on 19 December 2019, all Core and Enhanced firms should ensure:

  • Their NEDs have been trained on how the Conduct Rules affect them personally

  • The relevant policies and procedures are updated for ongoing fitness and propriety assessments,

  • The relevant policies and procedures are in place for the request of regulatory references for

  • Policies and procedures are in place for the undertaking of criminal records checks for

 

Prescribed Responsibilities (PRs)

PRs are specific responsibilities defined in SYSC 24 of the FCA Handbook which must be allocated to the relevant Senior Manager within the firm. Typically, Core firms have five prescribed responsibilities, with an additional one for authorised fund managers. The 5 relevant prescribed responsibilities are:

Source: The Senior Managers and Certification Regime: Guide for FCA solo-regulated firms - available here

It is important to note that the FCA only allows sharing of PRs in exceptional circumstances, such as handover period. Under normal circumstances, firms are required to establish who is the most senior individual responsible for the given area, therefore in the case of job-sharing arrangements, the PRs should still not be shared.

 

The PRs are in addition to the inherent responsibilities that are an essential part of a Senior Manager’s role. The FCA have prescribed these responsibilities to make sure a Senior Manager is accountable for key conduct and prudential risks within the firms. As a result, we strongly recommend that SMFs who obtain such PRs review the internal arrangements to ensure:

  • They receive appropriate and reliable MI

  • They are able to scrutinise and question internal reports and arrangements

  • Have appropriate oversight, authority and understanding of the requirements

 

 

At RRCA, we have extensive experience in understanding various Board arrangements. Whether you are starting out with your project or just prefer to have a formal check completed to evidence your readiness, we can certainly support you.

We can provide you with a free checklist to review your arrangement. Just simply get in touch and request a copy. However, if you have any questions about how the SM&CR impact you, your firm or merely you want us to confirm your understanding or arrangements, please feel free to get in touch!

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