Consultation on Senior Managers and Certification Regime 17/15

21st July 2017

Introduction

The Financial Services Act 2016 will extend the Senior Managers and Certification Regime to all firms who are authorised under the Financial Services and Markets Act 2000 (“FSMA”), previously only banks were caught by the regime. It is due to be implemented by 2018. As a result of the future widened scope, a large number of firms and individuals working in those firms will become subject to a set of governing regulations and legislations which they will need to familiarise themselves with as soon as possible.

This briefing will be of interest to all FSMA authorised firms and individuals who are already subject to the Senior Managers and Certification Regime as well as those who are uncertain as to whether they will be caught by the new impending regulation.

Background

The SMCR was implemented under the Financial Services (Banking Reform) Act 2013 with the idea of encouraging individual accountability for persons offering advice and making decisions in financial services firms. It was designed to replace the existing Approved Persons Regime (APR), which had become discredited due to certain flaws in its regulatory power following high profile governance failures at certain major financial institutions.

The Senior Managers regime will now capture all FSMA-authorised firms in the UK, including banks, building societies, credit unions and PRA-designated investment firms, branches of foreign banks and large insurance and reinsurance firms.

The purpose of the expansion to all financial services firms is to intensify personal responsibility for Senior Managers as well as improve the standards of conduct by key staff in a firm which might not necessarily fall into the Senior Managers bracket. It also ensures a level playing field for competition by ensuring that the standards applied in the banking sector will be applied in so-called ‘shadow banking’ sectors.

Key features of the consultation

  • A broad focus on the obligations and reforms contained within the revised Senior Managers Regime
  • Clarification on the need to ‘certify’ certain employees as fit and proper in the Certification Regime
  • Outline of the introduction of the Conduct Rules and the result of a breach of those rules

Senior Managers Regime

Roles included but not limited to:

  • Chief Executive function
  • Executive Directive function
  • Chief Risk function
  • Head of Key Business Area function
  • Compliance Officer function
  • Money Laundering Reporting Officer function

The Senior Managers Regime will replace the Approved Persons Regime (APR) and its direction to persons performing senior roles in a firm. Persons who are already approved by the FCA or PRA under the new regime must be approved again, this is known as being ‘grandfathered’. Firms who plan on appointing a new senior manager or changing a role for currently approved persons will need to submit an application for approval.

There is also the new “sweep-up” Senior Management Function, known as the “Other Overall Responsibility” function that captures persons which have overall responsibility for one or more activities, business areas or management functions within the firm, who have not in effect been allocated one of the SMFs roles. A role such as being a chairman within a firm fall within this bracket. In such case the individual must also be approved as a senior manager.

Statement of responsibilities

When applying for approval of an SMF, firms will need to include in the individual’s application a ‘statement of responsibilities’ setting out which areas of the firm the individual will be responsible for. The rationale for the statement of responsibilities focused on making it easier to identify the individuals who are accountable for any breaches occurring.

Duty of responsibility

Senior Managers now have a ‘duty of responsibility’, which will be extended to SMFs under the non-bank Senior Managers and Certification Regime. This requires senior managers to take the steps reasonably expected to be taken by a person in their position to ensure that a regulatory breach does not occur. It will be the FCA’s duty to show that the SMF manager failed to take the necessary measures.

Allocation of prescribed responsibilities

Under the new regulation, firms are now required to allocate a number of prescribed responsibilities to a number of Senior Managers. Such responsibilities include, but are not limited to:

  •  Anti-financial crime policies and procedures
  • The firm’s compliance with regulatory requirements relating to the management responsibilities map
  • Ongoing training and professional development of the firm’s governing body

Given the wide range of FCA firms it may be that the list of prescribed responsibilities becomes simplified under the non-bank regime. The FCA may publish a list of prescribed responsibilities which only need to be allocated in the event they are applicable to the relevant firm.

Certification Regime

Persons in a firm who do not carry out Senior Management Functions (SMFs) but whose roles in a firm can be perceived as having the potential to cause significant harm to the financial market and its customers, will need to be assessed by the firms themselves in determination whether those persons are fit and proper to carry out their roles. Such roles are referred to as Significant Harm Functions (SHFs). This will be required to be done formally and annually by the firm to ensure those persons remain fit to execute the relevant functions.

These roles are not subject to prior regulatory approval. The assessment will focus on a person’s honesty, integrity and reputation, as well as whether the person in question has the necessary qualifications, training, competence and training to fulfil the role.

Such functions include but are not limited to:

  • CASS oversight
  • Acting as a proprietary trader
  • Being a material risk taker under the banking remuneration rules
  • Undertaking a client dealing function

In addition, under the SMCR, persons who are not performing SMFs or SHF’s may well still be within the scope of certain conduct rules, unless they are only performing certain administrative or ancillary roles, amongst others:

  • Receptionists
  • Post room staff
  • Security guards
  • Medical staff

The inclusion of such a broad framework is to make sure that all persons which may have possibly be caught will be able to face enforceable action.

Rules of Conduct

These rules are contained within the Code of Conduct (COCON) sourcebook in the FCA handbook. They will apply to:

  • SMF managers
  • Certified employees
  • and other employees, except persons who only perform one or more ancillary or administrative roles which fall outside of SMCR

The Rules of Conduct are designed to indicate the standards expected of staff working in the financial services industry, hold individuals to account, and replace the Statements of Principle for senior managers and other approved persons. It focuses on the values of working with integrity, skill, care and diligence alongside having regards to the interests of the consumers as well as abiding by the rules set in place by the regulators by observing proper standards of market conduct.

The scope and application of the conduct rules within non-bank firms is likely to be similar, however the regulators have said that the principles of proportionality with regards to smaller banking institutions, including some building societies and other small financial institutions will be extended in order to acknowledge and accommodate a wider range of firms who operate in the financial services industry, thus reflecting the diversity in business models, size and complexity the Senior Managers Regime intends to capture.

Consequence of breach of Rules of Conduct

Breaches which have in fact been committed or which are suspected of being committed by a Senior Manager under the Regime must be submitted by the firm to the FCA within seven working days of the firm becoming aware of the actual or suspected breach. This approach differs for any other staff members where there has been a breach of the Conduct Rules or where there is a suspicion of them being breached, in this case they must be reported annually, allowing firms to assess whether there are justified grounds to suspect any possible misconduct.

Individuals found to be in breach of their responsibilities can be subjected to lifetime bans, remuneration clawbacks or unlimited fines. A prison sentence of up to seven years can also be imposed if it is found that a senior manager has taken a decision, or has failed to take steps that prevent that particular decision being made, which has resulted in a failure of the financial institution.

Next steps

In anticipation of FCA’s concrete proposals, firms are encouraged to undergo a compliance review of their governance and job descriptions in order to identify the individuals who might be caught by the new Senior Managers Regime.

They must identify those holding senior manager roles and have in place certain guidelines which set out each person’s ambit with regards to their respective responsibilities.

In accordance with the Certification Regime, firms must also consider putting systems in place that will enable them to identify the functions and staff likely to be caught by the regime, and also put in place systems that would help them determine whether those caught by the regime will satisfy the requirement of being fit and proper.

Finally, firms are advised to review their current policies and procedures in order to ensure compliance with the new Conduct Rules, and ensure that there is provision for appropriate action to be taken in case of any breach of those rules.

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