FCA consults on extension of Senior Managers and Certification Regime to all FSMA-authorised firms

31st July 2017

On 26 July 2017 the Financial Conduct Authority (FCA) published its keenly-anticipated consultation paper Individual Accountability: Extending the Senior Managers & Certification Regime to all FCA firms.

The Senior Managers and Certification Regime (SM&CR) replaced the Approved Persons Regime (APR) for banking firms in March 2016 and this consultation proposes extending SM&CR to all firms authorised under the Financial Services and Markets Act 2000 (FSMA).  It will affect almost all financial services firms (including limited permission consumer credit firms) and their staff.  The FCA is consulting separately in relation to insurers.

Background and summary of proposals

The new regime is all about accountability. The stated aim is to reduce harm to consumers and strengthen market integrity by creating a system that enables firms and regulators to hold people to account.  SM&CR is a product of the financial crisis.  The FCA created it following Parliament’s recommendation to develop a new accountability system more focused on senior managers and individual accountability.  FSMA was amended in May 2016 to extend SM&CR to all FSMA-authorised firms.  Those working in financial services are currently regulated through the APR.  SM&CR will replace that system.

While the FCA wants to ensure the application of consistent principles across financial services as a whole, it is conscious that a wide variety of firms fall within SM&CR’s scope and wants the regime to be flexible and proportionate enough to accommodate the different business models and governance structures of those affected. It proposes:

• a core regime with a standard set of requirements for all firms
• an enhanced regime with extra requirements for the largest and most complex firms; and
• a reduced set of requirements for firms with limited scope.

Chapter 3 of the paper contains a glossary of terms, a summary diagram of the key elements and a ‘Firm Checker’ to help firms identify what applies to them. For example, a firm with annual regulated revenue generated by consumer credit lending of £100 million or more will fall under the enhanced regime.  Proposed changes affecting dual-regulated firms are covered in chapter 10.

The core regime comprises the:

• Senior Managers Regime
• Certification Regime; and
• Conduct Rules.

Senior Managers Regime

This is covered in chapter 4. A ‘Senior Manager’ is someone who holds a ‘Senior Management Function’ (the FCA sets out a proposed list).  Senior Managers are “the most senior people in a firm with the greatest potential to cause harm or impact upon market integrity” and they need FCA approval.  There is no requirement on firms to fill specific roles.  Extra Senior Management Functions will apply to firms under the enhanced regime.  It is proposed that limited scope firms will have fewer functions.

Under the new regime, every Senior Manager needs a Statement of Responsibilities.  This is a document setting out their role and what they are responsible for.  Firms will be required to submit this to the FCA when they apply for Senior Manager approval.  It must also be kept updated and resubmitted whenever there is a significant change to the responsibilities.

Senior Managers will also have a duty of responsibility, which means that they could be held accountable if they did not take ‘reasonable steps’ to prevent or stop a breach of requirements.

The FCA proposes a list of new Prescribed Responsibilities that firms will need to give their Senior Managers, to ensure that they are accountable for SM&CR and key conduct and prudential risks.  This includes responsibility for the firm’s compliance with the FCA’s Client Assets sourcebook (CASS).  They will not apply to limited scope firms.  Firms will need to consider carefully to whom each of the new responsibilities should be allocated.

Certification Regime

This is covered in chapter 5. It applies to employees who are not Senior Managers but whose jobs “mean they can have a big impact on customers, the firm and/or market integrity.”  They perform functions known as ‘Certification Functions’ (the FCA sets out a proposed list).  Firms will need to certify these individuals themselves, which means checking and confirming that they are ‘fit and proper’ to carry out the function.  The firm will issue a certificate to be renewed at least annually.  The individuals will not appear on the FCA Register or require FCA approval.

‘Significant Management Function’ is one of the proposed functions. This applies to those below Senior Manager level who are responsible for business units that the firm considers to be ‘significant’ due to their size, nature or impact.  The Handbook sets out relevant factors to consider.  Note that a ‘business unit’ could be an internal support department such as human resources.  The FCA gives the example that it would expect a complex consumer credit firm with a large collections unit to have someone certified as a ‘Significant Management Function’ for that unit.

Page 33 in this chapter considers how the CASS Oversight Certification Function interacts with the CASS Prescribed Responsibility (for Senior Managers). The FCA will consult separately on consequential amendments to CASS and other parts of the Handbook required as a result of the current consultation (it will be a technical paper on the operational aspects of the new regime).

‘Fit and proper’ requirements

These are covered in chapter 6. FSMA requires firms to ensure that anyone performing a ‘Senior Management Function’ or ‘Certification Function’ is fit and proper for their role. The FCA proposes to extend this to apply to Non-Executive Directors.  Firms will need to assess individuals at least annually, having regard to any general FCA rules concerning qualifications, training, competence and personal characteristics.  The FCA proposes new evidence requirements, in relation to criminal records checks and regulatory references.

Conduct Rules

These are covered in chapter 7. They are a new set of enforceable rules aimed at improving the behaviour of all staff across financial services.  The FCA proposes a two-tier system, with a general set of rules applying to most employees and a second set applying to Senior Managers.  It proposes applying the Conduct Rules to a firm’s regulated and unregulated financial services activities, including any related ancillary activities.  Ancillary staff, such as receptionists and IT support, are outside the scope.  FSMA prescribes certain training and notification requirements in relation to the Conduct Rules.

The enhanced regime

This is covered in chapter 8. In addition to the extra Senior Management Functions and Prescribed Responsibilities under the enhanced regime, the FCA proposes introducing an Overall Responsibility Requirement on firms to ensure that every activity, business area and management function has a designated Senior Manager in whom overall responsibility vests.  This would apply to a firm’s regulated and unregulated financial services activities, including any related ancillary activities. Overseas branches come within the scope.

The FCA also proposes introducing a requirement to prepare and maintain a Responsibilities Map, a single document setting out the enhanced firm’s management and governance arrangements.

Finally, there is a proposal to apply handover procedures to enhanced firms, in relation to Senior Managers having all the information and materials they could reasonably expect to carry out their role effectively.

Next steps

Comments are requested by 3 November 2017. The FCA aims to publish a summary of responses, policy statement and final rules in 2018.  The draft Handbook text is set out at Appendix 1 of the paper.  The new regime will not come into effect until the final rules are published and a commencement date is set, which is likely to be in late 2018.

How Walker Morris can help

If you would like to find out more about how the proposals could impact your business, or you require any assistance in responding to the consultation, please contact Jeanette Burgess or any member of Walker Morris’ Regulatory and Compliance team, who will be very happy to help.