FCA confirms near final rules for SM & CR

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26 July 2018

The Financial Conduct Authority (FCA) has published a series of papers explaining how it plans to implement the Senior Managers & Certification Regime across all sectors of the financial services industry.

At present, the Regime only applies to the banking sector, but it will apply to all FCA-authorised firms from 9^th December 2019.

The Regime has three main components:

·        The Senior Managers Regime

·        The Certification Regime

·        The Conduct Rules

The Senior Managers Regime will encompass individuals carrying out the following roles:

·        SMF1 – Chief Executive

·        SMF3 – Executive Director

·        SMF27 – Partner

·        SMF9 – Chair

·        SMF16 – Compliance Oversight

·        SMF17 – Money Laundering Reporting Officer (MLRO)

It will cover individuals whose activities are equivalent to that of a chief executive, director etc. even if they do not actually have this wording in their job title.

Firms will be required to draw up a ‘statement of responsibilities’ for each of the individuals listed above, which should set out exactly what each person is responsible for. It is possible for the same person to carry out more than one of these roles, indeed this may be necessary for some smaller firms. The FCA will be able to take enforcement action against the relevant Senior Manager if there are regulatory failings in their personal area of responsibility.

Each Senior Manager’s Duty of Responsibility will mean that the FCA can take action against them where all of the following apply:

·        There was misconduct by the Senior Manager’s firm

·        At the time of the misconduct, the Senior Manager was responsible for the management of any of the firm’s activities in relation to which the misconduct occurred

·        The Senior Manager did not take steps that they could reasonably have been expected to take to prevent the misconduct occurring or continuing

Essentially, this system replaces the existing FCA Approved Persons Regime. Senior Managers will need to be approved by the FCA prior to commencing their roles, but once approved by the regulator, it will be the firm’s responsibility to carry out an annual assessment of whether the individual is ‘fit and proper’ to continue in such an important role.

The Certification Regime applies to individuals within the firm who are not Senior Managers, but who still hold positions of responsibility, especially if their actions could have a significant impact on whether the firm’s customers are treated fairly. There is no need for individuals in Certification roles to be approved by the FCA, however, firms are still required to carry out their own annual fit and proper assessments.

Suggested examples of staff who might be covered by the Certification Regime include:

·        Head of HR

·        Head of Complaints Handling

·        Head of Product Design

·        Non‑SMF Partners

The FCA suggests that a fit and proper assessment of a Senior Manager, or of a person in a Certification role, might include:

·        Criminal records checks

·        Obtaining regulatory references

An assessment of fitness and propriety must consider the individual’s honesty, integrity and reputation; competence and capability; and financial soundness.

The Conduct Rules could be said to be something of a ‘Hippocratic Oath’ for the financial services industry. These Rules will require staff at all levels to:

·        Act with integrity

·        Act with due care, skill, and diligence

·        Be open and co-operative with the FCA, PRA and other regulators

·        Pay due regard to the interests of customers and treat them fairly

·        Observe proper standards of market conduct

Once the Regime is in force, the existing Financial Services Register will only list the Senior Managers at each firm. This means that many firms will have fewer listed individuals than is the case at present. The FCA is, therefore, planning to introduce a new Directory to complement the Register and proposes that all Senior Managers and holders of Certification roles will be listed in a firm’s entry in the Directory.

Firms now have some 16 months to prepare for the new Regime.

More information can be found here: SMCR