Near-final rules on the extension of SMCR 18/8

18th September 2018

Introduction

The FCA have published near-final rules on the extension of the Senior Managers and Certification Regime (SMCR), which will be extended to insurers on 10th December 2018 and to all other firms on 9th December 2019. The FCA are aiming to increase accountability of individuals, and to influence their behaviours to an extent that would ultimately lead to a change in culture in the financial services sector. The extended regime has been enforced in order to enable a proportionate approach; dependent on the size, complexity and sector of the firm.

The new regime consists of three fundamental components: the Senior Managers Regime, the Certification Regime and Conduct Rules. The rules are then applied in a proportionate manner depending on the tier in which the firm falls (core/limited/enhanced).

Core Firms are subject to a baseline of SMCR rules, and these will apply to the majority of firms. Limited Scope Firms will mainly be focused on limited permission firms within the consumer credit sector, while larger sized firms would classify under the category of Enhanced Scope, and they would be subject to additional requirements. The changes are for firms with:

  1. £35 million or more (per annum) of regulated intermediary business revenue, calculated as a three year rolling average.
  2. £100 million or more (per annum) of regulated consumer credit lending, calculated as a three year rolling average.
  3. Non-bank mortgage lenders and administrators, who hold 10,000 or more ongoing regulated mortgage contracts.

Enhanced Tier – Criteria and Extra Requirements

The FCA is not enforcing a specific approach for groups who hold a combination of enhanced and core firms within the structure. Moreover, the FCA publication specifies that, where firms have an enhanced firm in the group and wish to apply their standards to core firms (as is often the case for operational ease), then they must apply all parts of those standards, rather than pick and choose those that they will apply. The FCA has also issued a new form, Form O, which applies to firms who voluntarily opt-in to the enhanced standard. Those who do are expected to transition within three-months, as opposed to the current twelve-months. The same transition period applies to limited scope firms moving to core firm status through a voluntary opt-in process.

Conversion – Core and Limited Scope Firms

The FCA is not proposing to create separate handbooks for different types of firms. However, different forms for different firms will be drafted and incorporated within PS18/14. When these forms are completed using the online FCA Connect system, the forms will be tailored for each specific firm type (i.e. limited scope will only see the relevant SMF functions to them).

Certification Regime

New Register and Standard NEDs

The FCA have proposed to introduce a public directory which lists all certified staff, non-SMF directors, sole traders and appointed representatives. This is in addition to the formal Financial Services register.

Standard NEDs will now also be included in the new public directory. However, they do not have to be notified to the FCA, which is opposed to Standard NEDs in the Banks, which do have to be notified.

Senior Management Functions & Prescribed Responsibilities & Certification Regime

Practical Application, Territorial Limitation and Application to Appointed Representatives (AR)

The FCA has announced that firms who conduct both regulated and unregulated activities will only have to comply with the changes in their regulated business areas, and those that support them (i.e. middle and back office). The guidance also confirms enhanced firms need only address business areas that relate to regulated activities in the Statements of Responsibility and Responsibilities Map, and not every part of their business.

The FCA will move forward with its proposed territorial limitation for certified and conduct staff. Concomitantly, the FCA confirmed that there will be no territorial limitation in allocating overall responsibility for enhanced firms, which means that non-UK business that enhanced firms conduct must be the responsibility of one or more senior manager.

The current Approved Person’s Regime will continue for appointed representatives as normal. The exception to this rule is for Limited Permission Consumer Credit firms that are also appointed representatives for other businesses, this is because the legal entity is authorised under FSMA. As a result, the governing functions at the AR side of these firms will be converted automatically to equivalent Senior Management Functions, according to the mapping table for Core and Limited Scope firms. Individuals approved as CF30s for the AR will remain approved under this function.

Importantly, only partners who meet the definition of senior management need to be put forward for approval by the FCA. Therefore corporate partners and limited partners not involved in managerial decisions in a partnership will need to cancel their approvals before the regime is implemented.

Finally, the FCA has confirmed that core firms do not hold a duty to allocate overall responsibility for every business area/function/activity of the firm to one or more senior manager. This is known as the ‘no gaps’ principal.

Prescribed Responsibilities and Allocating Responsibilities

The proposed prescribed responsibility for legal and regulatory obligations found in the initial consultation have been removed as it is already covered by the scope of other senior manager functions. In addition, the FCA have confirmed that simply being a board member does not automatically mean that person shall hold prescribed responsibilities. However if a firm does not hold any certified staff, the prescribed responsibility that relates to the certification regime has to be allocated, and on that basis, can be allocated to a board member.

The FCA shall continue with its proposal to implement prescribed responsibilities in relation to conduct rules, these will be applicable from 1 November 2018 to all employees within Banks. A full list of activities that the Conduct Rules apply to are found in COCON 11.7.A.

Guidance has been provided on how responsibilities may be allocated and prescribed, with particular focus on areas involving a process flow between different departments holding responsibility for different parts of the process chain. Responsibilities, in particular prescribed responsibilities should not be shared across different lines of defence. For example, if overall responsibility given in relation to financial crime rests with an executive director, the fact that compliance is involved in the process should not mean that the prescribed responsibility should be shared or split with the SMF16 (Compliance Oversight Function).

Head of Legal/GC and CASS Oversight Function

The FCA is due to issue a consultation paper – before the extension comes into force – which shall address if the Head of Legal is in or out of scope.

The FCA have confirmed a new SMF function for the current CASS Oversight officer will not be introduced. However, the current CASS oversight officer must either be a certified employee, or map into being a senior manager (the general SMF function).

Fit and Proper Requirements

Changes to criminal checks / Fit and Proper questions in Form A

Criminal record checks will now only be mandatory for proposed senior managers, although it was proposed to be required for all certified staff.

The FCA also introduced new questions in the Form A that relate to civil proceedings that have occurred within the past 10 years. Firms should adopt a similar timespan whilst conducting their own checks for certification staff. Furthermore, the requirement to disclose arbitration proceedings is only required to be completed by insurers and not solo-regulated firms.

Transitional Agreements

In-flight cases and implementation period

Pre-implementation applications for approved persons pre-implementation that are either ongoing, or intended to take effect upon implementation, will be treated as applications for SMFs.

The FCA have also proposed the period of time firms have to transition. Instead of the 6 months initially proposed, they now have 12 months to be compliant and ensure their fitness and propriety assessments and certification paperwork is in place (subject to commencement regulations to be made by HM Treasury).

The FCA have stated that, as soon as the new regime starts, firms must check that their approval on the Financial Services Register is correct in order to immediately identify and correct any errors that occur. Firms can submit a Form K conversion notification up to a week before commencement should there be any changes, and this will give firms enough time to finalise their documentation.

To support firms in converting to the SMCR, the FCA have planned to make the relevant forms available on Connect three months before the regime starts.

What should firms be considering now?

Firms should look at performing a gap analysis of existing SMCR plans against the near-final rules and directory consultation paper. Thereafter they should identify all areas, policies and processes and individuals who are likely to be impacted, and ensure senior managers and business areas affected have been trained and fully briefed.

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