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Consultation on extension of the Senior Managers and Certification Regime Part 1 – 17/16

18th August 2017

FCA proposals to extend the Senior Managers and Certification Regime to all financial services firms

The Financial Services Banking (Reform) Act 2013 will extend the Senior Managers and Certification Regime (SM&CR) to all sectors of the financial services industry. In relation to the SMCR, on July 26th 2017 the FCA consulted in CP17/25 and made proposals to extend the SM&CR to almost all regulated firms. The new regime will essentially replace the Approved Persons Regime and will be implemented in 2018, a more exact date will be specified nearer the time.

The aim of the new regime is to reduce harm to consumers and strengthen market integrity by making individuals more accountable for their conduct and competence. As part of this, the SM&CR aims to:

  • encourage a culture of staff at all levels taking personal responsibility for their actions; and
  • make sure firms and staff clearly understand and can demonstrate where responsibility lies.

The FCA propose to apply a baseline of requirements to every firm, known as the ‘core regime’. This means that the three main elements of the SM&CR will apply to every firm: The Senior Managers Regime, Certification Regime and Conduct Rules:

  • Five Conduct Rules that will apply to all financial services staff at FCA authorised firms. This simple set of rules means that individuals must act with integrity, act with due care, skill and diligence, be open and cooperative with regulators, pay due regard to customer interests and treat them fairly, and observe proper standards of market conduct.
  • The responsibilities of Senior Managers will be clearly set out and, should something in their area of responsibility go wrong, they can personally be held to account. The Senior Managers will be approved by the FCA and appear on the FCA Register.
  • Under the Certification Regime, firms will certify individuals for their fitness, skill and propriety at least once a year if they are not covered by the Senior Managers Regime but their jobs significantly impact customers or firms.

Additionally, there will be extra requirements for a very small number of solo-regulated firms whose size, complexity and potential impact on consumers warrant more attention, this will be known as the ‘enhanced regime’. Finally, a reduced set of requirements will be applicable to a group of firms that the FCA define as being ‘Limited Scope’.

A useful diagram to determine your firm’s type is available on Page 14 of the consultation document.

Guide to the regime

In order to help firms understand the implications of the SM&CR, Chapter 3 of the consultation provides three informative diagrams including:

  • a Firm Checker – this enables firms to check what type of firm they are, and whether the ‘limited scope’, ‘core’ or the ‘enhanced regime’ applies to them
  • a diagram showing the key elements of the regime for all firms
  • a Glossary of Terms with a short description of each tool

Senior Managers Regime

This focuses on the most senior people in the firm. The FCA’s rules will define which roles are ‘Senior Management Functions’ depending on the type of firm involved. Anyone who holds a Senior Management Function needs to be approved by the FCA before they start their role, the same as under the Approved Persons Regime. Firms also need to make sure that Senior Managers are suitable to do their jobs.

Statement of responsibilities

Every Senior Manager will need to have a document that says what they are responsible and accountable for (a ‘Statement of Responsibilities’). Firms need to submit this statement to the FCA when a senior manager applies to be approved, and whenever there is a major change to their responsibilities. They will also need to keep Statements of Responsibilities up to date, and resubmit them to the FCA whenever there is a significant change to a Senior Manager’s responsibilities.

Duty of responsibilities

Every Senior Manager will also have a ‘Duty of Responsibility’ – which means if something goes wrong in an area that they are responsible for, the FCA will consider whether the Senior Manager took ‘reasonable steps’ to prevent this from happening.

In bringing enforcement action against Senior Managers – whether under the duty of responsibility, the Conduct Rules or otherwise – the FCA will consider the individual’s Statement of Responsibilities when determining the extent of the Senior Manager’s responsibilities.

Prescribed responsibilities

The FCA also propose some new responsibilities that firms will need to give their Senior Managers (‘Prescribed Responsibilities’). This will not apply to some firms (such as sole traders or firms with limited permissions, and EEA branches), and more responsibilities will apply to bigger firms.

A Senior Management Function is a new type of controlled function under FSMA. It is defined as “in relation to the carrying on of a regulated activity by a firm, [a] function [which] will require the person performing it to be responsible for managing one or more aspects of the [firm’s] affairs, so far as relating to the activity, and those aspects involve, or might involve, a risk of serious consequences for the [firm]. or for business or other interests in the United Kingdom”.

The purpose of making a particular function a Senior Management Function is to enable the FCA to identify a firms’ most senior decision makers, and to make sure firms clearly allocate responsibilities to those key decision makers.

The FCA has proposed 6 prescribed responsibilities that core firms must give to a Senior Manager:

  • Performance by the firm of its obligations under the Certification Regime
  • Performance by the firm of its obligations in respect of notifications and training of the Conduct Rules
  • Responsibility for the firm’s policies and procedures for countering the risk that the firm might be used to further financial crime
  • Responsibility for the firm’s compliance with CASS (if applicable)
  • Responsibility for ensuring the governing body is informed of its legal and regulatory obligations
  • Responsibility for an AFM’s value for money assessments, independent director representation and acting in investors’ best interests

Each Prescribed Responsibility should be allocated to the Senior Manager who is the most senior person responsible for that issue. They will also need to have sufficient authority and an appropriate level of knowledge and competence to carry out the responsibility. Where there is only one Senior Manager, all the Prescribed Responsibilities need to be allocated to this person.

Apportioning to a Senior Manager a Prescribed Responsibility will not mean the FCA need to re-approve them. But when a firm moves a Prescribed Responsibility from one Senior Manager to another, the relevant Statements of Responsibilities will need to be updated to reflect these changes. Firms should also ensure they have the necessary skills and capability to carry out the role.

Importantly, each Prescribed Responsibility should normally be held by only one person. Firms will only be able to divide or share a Prescribed Responsibility in limited circumstances where a firm can show that this is appropriate and justifiable and that this will prevent a gap in responsibilities in the firm.

Senior Manager functions (such as information technology) may be outsourced, however the responsibility for such areas cannot be. Responsibilities always lie with the position holder in the firm.

Partnerships under the Senior Managers Regime

The FCA propose that all partners in a firm will be Senior Managers, which is the same as under the current Approved Persons Regime. This is because a partner is likely to have influence over how the firm is run.

However, if a partner has no involvement in managing the firm and therefore does not meet the overarching FSMA definition of a Senior Manager, then the partner function will not apply and the partner will not need to be a Senior Manager.

Impact on firms’ structure and governance

In response to roles being made Senior Management Functions, firms do not need to reorganise themselves or hire new people to fill specific functions. The FCA have advised that where firms do not have anyone performing what would be a Senior Management Function, the function will not apply to them.

Two of the main changes introduced by the SM&CR are that every Senior Manager will need a Statement of Responsibilities, and they will also have a duty of responsibility.

What firms need to do under the Senior Managers Regime

If a person will be performing a Senior Management Function, the firm will need to:

  • satisfy themselves that the candidate is suitable, or ’fit and proper’, to carry out a Senior Management Function
  • apply for that person to be approved by the FCA, before they take up their role
  • send the FCA a Statement of Responsibilities as part of the application

After a Senior Manager has been approved, the firm will need to:

  • update and resubmit Statements of Responsibilities to the FCA whenever there is a significant change to a Senior Manager’s responsibilities
  • assess that all their Senior Managers are fit and proper to carry out their job at least once a year (see Chapter 6 of the consultation for more information on fit and proper assessments)

In addition, firms will need to make sure they have appropriately allocated all of the Prescribed Responsibilities to their Senior Managers, unless they are a Limited Scope Firm where Prescribed Responsibilities do not apply.

What Senior Managers need to do

  • Anyone who is a Senior Manager will have a ‘duty of responsibility’. Senior Managers should understand what this means in the context of their job.
  • Senior Managers must ensure that their Statements of Responsibilities are accurate and up to date.
  • There are also Conduct Rules that will apply to Senior Managers. Senior Managers will need to understand and comply with the Conduct Rules

Senior Management Functions – Core Regime

Function name Description
Governing Functions
SMF1 – Chief Executive This is the person(s) with responsibility, under the immediate authority of the governing body, for the conduct of the whole of the business (or relevant activities)

Note: Although the Chief Executive is the most senior member of an executive team, it does not mean that a firm’s governing body cannot allocate specific responsibilities to other Senior Managers

SMF3 – Executive Director A director of a firm, other than a Non-Executive Director.
SMF27 – Partner A partner in a firm, other than a limited partner in a partnership registered under the Limited Partnership Act 1907.
Governing Function – Non-Executive
SMF9 – Chair The person with responsibility for chairing, and overseeing the performance of the role of, the governing body of the firm.
Required Functions
SMF16 – Compliance Oversight This is the person responsible for the compliance function in the firm and reporting to the governing body on this.
SMF17 – Money Laundering Reporting Officer This is the person who has responsibility for overseeing the firm’s compliance with the FCA’s rules on systems and controls against money laundering.
SMF29 – Limited Scope Function (relevant to some Limited Scope Firms only) This is currently called the ‘Apportionment and Oversight Function’ under the Approved Persons Regime. It is the person who deals with the apportionment of responsibilities under SYSC 4.4.3 R and oversees the establishment and maintenance of controls under SYSC 4.1.1 R.

Certification Regime

This covers people who are not Senior Managers, but whose jobs mean they can have a big impact on customers, markets or the firm. Pending final rules will explain what these roles are. The FCA will not approve these people, and instead firms, at least annually, will need to check and confirm (‘certify’) that they are suitable to perform their function.

The Certification Regime only applies to employees of firms. It does not apply to Non-Executive Directors, for example.

Certification Functions

The FCA propose to make the following roles Certification Functions, building on existing functions in the Approved Persons Regime:

Certification Function Overview
Significant Management Function (based on current CF29) These individuals perform functions that would have been Significant Influence Functions under the FCA’s Approved Persons Regime.

These important roles can seriously impact the way the firm conducts its business.

Proprietary traders (also covered by current CF29)
CASS oversight function (current CF10a)
Functions subject to

Qualification requirements

This includes, for example, mortgage advisers, retail investment advisers and pension transfer specialists. The full list is set out in the FCA’s Training and Competence Sourcebook.
The client dealing function This function will be expanded from the current CF30 function to apply to any person dealing with clients, including retail and professional clients and eligible counterparties.

This will cover people who:

  • advise on investments (other than a non‑investment insurance contract) and perform other related functions, such as dealing and arranging
  • deal, as principal or agent, and arrange (bring about) deals in investments
  • act in the capacity of an investment manager and all functions connected with this
  • act as a bidder’s representative
Anyone who supervises or manages a Certified Function (directly or indirectly), but isn’t a Senior Manager This will ensure that people who supervise certified employees are held to the same standard of accountability. It also ensures a clear chain of accountability between junior certified employees and the Senior Manager ultimately responsible for that area. For example, if a firm employs a customer‑facing financial adviser, every manager above them in the same chain of responsibility will have to be certified (until the Senior Manager approved under the SMR is reached).
Material Risk Takers The concept of material risk takers (also known as Remuneration Code staff) already exists for firms under the FCA’s remuneration rules (SYSC 19), but they are not currently controlled functions that the FCA approve. Instead, they are a category of staff that all firms under AIFMD, UCITS, IFPRU and BIPRU are required to identify under the FCA’s remuneration regime. These firms need to consider all types of risk when identifying their material risk takers, including those of a prudential, operational, conduct and reputational nature. All of these material risk takers will be covered by this certification function.
Algorithmic trading This function includes people with responsibility for:

  • approving the deployment of a trading algorithm or a material part of one
  • approving the deployment of a material amendment to a trading algorithm or a material part of one, or the combination of trading algorithms
  • monitoring or deciding whether or not the use or deployment of a trading algorithm is or remains compliant with the firm’s obligations

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