The impact on onboarding and exit procedures of Senior Managers

14th November 2019

This briefing is part of a series in which we explore some of the practical considerations and realities for solo-regulated firms in light of the incoming Senior Managers and Certification Regime.

With the introduction of the Senior Managers and Certification Regime (SMCR) on 9 December 2019 for Financial Conduct Authority (FCA) solo-regulated firms, firms will need to consider additional requirements both when onboarding a new individual who holds a Senior Management Function (a Senior Manager) and when a Senior Manager departs the business.

The proportional application of SMCR means that some firms will be subject to fewer prescribed requirements, while others will be subject to all the necessary requirements. This briefing is written from the perspective of a firm subject to the Enhanced Scope of SMCR, however firms subject to the Limited Scope and Core Scope application may nevertheless consider all the points covered as examples of good practice, even if they are not strictly required. Some of the requirements will also apply in relation to employees carrying out a Certification Function.

The FCA’s comprehensive Guide for FCA solo-regulated firms sets out further detail. Many of the sections in that guidance contain helpful “Things to consider” bullet points. Firms should also consult the FCA’s dedicated webpage for solo-regulated firms.

Onboarding process

While the appointment of a Senior Manager will likely be led at committee or board level, the practicalities around onboarding the prospective Senior Manager will likely rest with the Human Resources department.

The recruitment and onboarding process for Senior Managers should look different to the process for recruiting and onboarding the rest of the employees in the firm. The process itself will be considerably more protracted given the need to undertake appropriate due diligence on the fitness and propriety of a prospective Senior Manager, carry out a criminal record check and apply for FCA approval (including a Statement of Responsibilities document clearly setting out the Senior Manager’s role and responsibilities).

A firm hiring a new Senior Manager will be required to request regulatory references of the individual from their previous employer going back six years. Regulatory references must be provided in a prescribed form. Firms should ensure that their systems and processes have been updated to complete and provide regulatory references when requested in the prescribed manner.

A Human Resources department should have a defined induction process for any new Senior Manager. It is vital that the induction considers the implications of the departure of the outgoing Senior Manager on the incoming Senior Manager, including the facilitation of a handover meeting as described below. For Senior Managers who have not been Senior Managers previously, an induction on the expectations and responsibilities under SMCR and the Conduct Rules should be provided.

Outgoing process

Change is inevitable and, where a Senior Manager has made the decision to move on, a defined framework should be in place to ensure an orderly transition.

Firms subject to the Enhanced Scope of SMCR are required to take all reasonable steps to ensure that a person taking a Senior Manager role has all the information and materials they could reasonably expect to have to do their job effectively. This handover procedure will often be done through a formal document, the form of which should be agreed between the outgoing Senior Manager and the appropriate governance committee, including the board of directors if necessary. The temptation may be for the outgoing Senior Manager to draft this document as part of their exit process, however far better practice is to mandate that Senior Managers treat this document as a “living will” document which is updated on an ongoing basis throughout the Senior Manager’s time at the firm. This allows for a more complete and accurate record of the risks and issues relevant to their business area. It can also act as a contingency plan should the Senior Manager leave the firm unexpectedly.

A good handover document may include the following:

• a judgement of the risks in the business area
• the level of resourcing and capabilities within the team
• how the Senior Manager discharges their duties
• any regulator interaction or scrutiny that has occurred within the business area (or the business as a whole if relevant)
• any concerns the Senior Manager has about a particular part of the business area or the business as a whole
• the reporting lines, both for the Senior Manager themselves and the employees working within the business area.

Many incoming Senior Managers will benefit from supplementing this handover document with a meeting to discuss pertinent issues with the outgoing Senior Manager. Where possible, the firm should attempt to facilitate a handover meeting to ensure that the incoming Senior Manager is fully aware of and understands the risks relevant to their area of the business.

Firms should clearly document the requirements of handover procedures in their suite of policies to ensure that all Senior Managers are aware of the steps they will need to take.

As already discussed, if an outgoing Senior Manager leaves to join another firm subject to SMCR, firms will be required to provide a regulatory reference going back six years. One practical consideration to note is the need to update regulatory references if new information comes to light about the former Senior Manager. For example if it is discovered that serious misconduct occurred while the Senior Manager was at the firm, the regulatory reference that was provided to the Senior Manager’s new firm may now need to be updated. Firms should establish a process to ensure the timely and accurate reporting of changes to regulatory references to other regulated firms.

Notifying the FCA of changes to Senior Managers

SMCR maintains the requirement that prospective Senior Managers must be approved by the FCA. Similarly a firm should attach the same level of care in respect of outgoing Senior Managers and ensuring the appropriate notification is made to the FCA.

Diligence around the notification process prevents issues in the future, such as where it is discovered that a former Senior Manager was not removed at the time of their departure and the current Senior Manager has been performing their duties for a number of years without the requisite FCA approval.

Note that Statements of Responsibilities must be kept up to date and resubmitted to the FCA whenever there is a significant change to a Senior Manager’s responsibilities. A list of this and other relevant notification forms can be found at Annex 3 of the FCA’s Guide.

How Walker Morris can help

We have extensive experience of assisting firms with their implementation of SMCR requirements and providing advice on the governance and other arrangements firms and Senior Managers can make to ensure compliance with the FCA’s rules and expectations. Should you have any queries arising from any of the points covered in this briefing, or require any assistance, please do not hesitate to contact Jeanette, who will be very happy to help.