Regulatory Update: PS18 / 14 - Extending the Senior Managers & Certification Regime to FCA firms

Posted: 17th July 2018

Background

The aim of the Senior Managers & Certification Regime (SM&CR) is to strengthen individual accountability in financial services, creating a system that will hold senior managers to account in order to strengthen market integrity and reduce harm to consumers. It will drive staff within firms to take personal responsibility for their actions, improve conduct at all levels and make sure the activities of individual roles are clearly understood.

SM&CR was applied to banks, building societies, credit unions and Prudential Regulation Authority (PRA) designated investment firms in March 2016. Changes to the Financial Services and Markets Act (FSMA) now require the SM&CR to be extended to all authorised firms.

In July 2017 the FCA consulted on extending SM&CR to almost all ‘solo‑regulated’ firms, (i.e. firms that are regulated by the FCA but not the PRA). That same month, the FCA issued CP17 / 25 – Individual Accountability: Extending the Senior Managers & Certification Regime to all FCA firms. A second consultation paper was published in December, CP17 / 40 – Individual Accountability: Transitioning FCA firms and individuals to the Senior Managers & Certification Regime. These consultation papers set out how the regulator proposed to move firms and individuals from the Approved Persons Regime (APR) to the SM&CR.

We have previously reported on the continuing updates to the SM&CR and the regulatory changes that the FCA have been proposing to align to it. Key points of consideration for firms have so far revolved around the level of thought given to governance structures, the definition of the relevant individuals’ roles and training for senior managers who could one day face FCA scrutiny.

The FCA has now published Policy Statement (PS) 18 / 14, summarising the feedback they received during previous consultations, their responses to the feedback and the resulting ‘near-final’ rules.

This policy statement applies to all solo‑regulated UK firms authorised under FSMA. Under SM&CR, firms will be defined as either:

• Limited Scope – Firms with fewer requirements than Core firms
• Core Firms – Firms that will have to comply with normal SM&CR rules
• Enhanced Firms – A small percentage of firms that will have extra rules applied to them

These ‘firm types’ will be determined by their size and the level of risk they pose to the UK financial system.

Conduct Rules

One of the key changes that SM&CR will bring is the replacement of the Statements of Principle and Code of Practice for Approved Persons. This is designed to ensure a single standard is applied across the market and will extend to almost everyone working in financial services. Senior managers will also be required to aligned with second tier rules as outlined below. The idea is that individuals shape a firm’s culture and, in turn, this should promote behaviours that actively support the FCA’s statutory objectives.  The two tiers of conduct rules for individuals and senior managers are:

These rules apply to a firm’s regulated activities. They also apply to any activities, whether regulated or unregulated, that could affect the integrity of the UK financial system, affect the ability of the firm to meet the fit and proper threshold conditions, or affect the firm’s ability to meet the requirements relating to its financial resources.

These rules will be universal for all UK firms, whether they operate under Limited Scope, Core or Enhanced criteria under the SM&CR.

Changes to the proposed rules

Following the consultation, the FCA’s proposals will be implemented broadly as they appeared in the consultation papers. However, a few relatively minor changes have been made as a result of the consultation.

• The FCA has removed the Prescribed Responsibility to inform the governing body of their legal and regulatory obligations. This only applied to Core firms.
• While the three tiers of the SM&CR (Limited Scope, Core and Enhanced) remain unchanged, most of the changes to the proposals in CP17 / 25 relate to simplifying the movement of firms between these tiers. In addition, firms moving up a tier will be allowed 12 months (instead of 6) to adjust to the requirements of their new regime.
• The proposals set out in CP17 / 40 will be implemented largely as proposed, although changes have been made to simplify some of the forms that need to be completed.

Transitional arrangements

There will be a transitional period of 12 months from the implementation date for firms to complete and embed the requirements of SM&CR, although this is subject to commencement regulations to be made by HM Treasury.

During this period, firms will need to assess all certification staff, including certification staff hired, or people who become certification staff during the transitional period. Firms will also need to train all other staff on the conduct rules.

One year from the implementation date, the conduct rules will apply to all staff and the initial certification assessments must be completed.

NEXT STEPS and implementation date

Firms should check they have the right people in approved functions before they are converted from the Approved Persons Regime to the SM&CR. This will help smooth the transition to the new regime for firms.

Implementation for affected firms will be the 9th December 2019.

These ‘near‑final’ rules are subject to commencement regulations to be made by HM Treasury. They may also be amended by subsequent Handbook changes, for example those relating to the UK’s exit from the European Union, or SM&CR optimisations. The rules are not ‘near‑final’ in respect to benchmark activities, as the FCA will consult on these separately.

Considerations FOR FIRMS

Firms may wish to evaluate their governance oversight and processes in the lead up to the 9th December 2019, to ensure they are prepared for the changes. Not only will firms need to have the right individuals in place, but those individuals will need ongoing assurance that their areas of responsibility are operating to a standard that meets the requirements of the regime.

Once the SM&CR comes into force, affected firms will need to continue to ensure that the culture within the firm, along with their standards of conduct, operating models and operational processes meet the requirements. This will, if the proposals for the FCA regulation hold true in practice, lead to better business outcomes.