Senior Managers and Certification Regime (SM&CR): Extension to all FSMA Authorized Persons

Aim: To enhance personal responsibility for senior managers and provide a more effective and proportionate means to raise standards of conduct for key staff more broadly. The new regime is intended to be stronger, more comprehensive and consistent which will also support a level playing field for competition across the financial industry.

Key features:

• an approval regime focused on senior management, with requirements on firms to submit robust documentation on the scope of these individuals’ responsibilities;
• a statutory requirement for senior managers to take reasonable steps to prevent regulatory breaches in their areas of responsibility;
• a requirement on firms to certify as fit and proper any individual who performs a function that could cause significant harm to the firm or its customers, both on recruitment and annually thereafter; and
• a power for the regulators to apply enforceable Rules of Conduct to any individual who can impact their respective statutory objectives.

Three sections:

1. Senior Managers Regime – directly replaces Approved Persons Regime (APR) for persons performing senior roles. Firms will need to ‘grandfather’ already approved persons over into the new regime. New applications are via the new regime;
2. Certification Regime – applicable to persons carrying out roles deemed to be capable of causing significant harm to the firm or customers. Requires firms to assess and formally certify the fitness and propriety of these persons annually. Appointment to these roles does not require pre-approval from regulator; and
3. Rules of Conduct – replace statements of principle made under APR.

Statutory responsibility:
The grounds for enforcement action under APR are:

• Contravention of statement of principle applicable directly to them
• If approved person is knowingly concerned in a breach of regulatory requirements by the Firm

The Financial Services (Banking Reform) Act 2013 introduced a third ground of enforcement under the SM&CR:

• First part: firm has contravened regulatory requirements and breach occurred as part of business for which senior manager is responsible
• Second part (reverse burden of proof): senior manager is liable if they cannot show the regulator that they took steps reasonable for a person in that position to take to prevent the breach occurring or continuing

To take enforcement action both parts need to be met.

However, the Government has decided to make changes to the Financial Services (Banking Reform) Act 2013 and introduce a statutory duty of responsibility across the financial services industry. This will supersede the ‘reverse burden of proof’ which would have applied to banking sector firms when they become subject to the SM&CR in March 2016.

The new statutory duty for senior managers, across financial services, is to ensure that they take reasonable steps to prevent regulatory breaches in the areas of the firm for which they are responsible. However, the burden will be on the regulators to prove that a senior manager has failed to do this. The approach is consistent with other regulatory enforcement actions.

Application beyond banking:

• principle of proportionality will be important when extending the regime and the size and complexity of firms will be driving forces in ensuring the regime is appropriate for the diverse business models operating in the UK market; and
• SM&CR will replace APR.

Main Effects

1. There will be a reduced number of appointments that are subject to prior regulatory approval. However, firms will be required to prepare additional documentation including ‘statements of responsibility’ and other required information which may result in an increase of costs per application;
2. Most current approved persons below senior management level are expected to become certified persons. Some roles in firms where prior regulatory approval is not currently required may also become certified person roles. There will be some costs for firms in complying with certification requirements but these are not expected to be large since firms will already have systems in place for monitoring and recording information about employees’ performance and suitability to meet their own Human Resources needs;
3. Firms may incur some additional costs from putting in place systems to ensure employees are notified about, and receive suitable training in, the Rules of Conduct that will apply to them; and
4. The number of staff that are considered Remuneration Code Staff could potentially be impacted. The FCA has stated that senior managers holding an FCA only senior management function will only be subject to the Remuneration rules if they are a material risk taker.

Implementation

• Banks, building societies, credit unions and PRA- regulated investment firms: 7 March 2016; and
• Financial advisers, asset managers, stock brokers and consumer credit: during 2018.

It has been recognized that wider implementation will be challenging. Therefore, a stretching but realistic plan is to be set. The timeframe will allow regulators to engage effectively with all affected stakeholders and consider proportionality, as well as lessons learned through implementation of SM&CR for banking sector firms. Regulators’ proposals on extending the regime will involve the passage of legislation setting out how the regime will be implemented. However, the proposed rules will be subject to consultation prior to them coming into force.