FCA solo regulated firms and the extension of the Senior Managers and Certification Regime: Are you ready?

With the extension of the SMCR to all FCA regulated firms little more than six months away, employment solicitor Anna Law looks at what steps firms should be taking now to ensure they are ready for implementation on 9 December 2019.

Following the financial crisis of 2008, the FCA introduced a new individual accountability regime – the SMCR. It is intended to allow the FCA to more easily assign responsibility for regulatory breaches to individuals. The SMCR, which already applies to the banks and insurers, will replace the existing Approved Persons Regime (APR) in all FCA regulated firms from 9 December 2019. Those firms should be planning now to ensure a smooth transition.

What is the SMCR?

The SMCR has three elements:

• The Senior Managers Regime: Senior Managers will require pre-approval by the FCA. Firms must set out in a Statement of Responsibility the scope of each Senior Manager’s functions and responsibilities. Senior Managers will owe a “duty of responsibility”, meaning they must take reasonable steps to discharge their regulatory obligations and will be held accountable if they do not.
• The Certification Regime: Individuals who are performing functions which could cause significant harm to the firm or its customers must be certified by the firm annually as being fit and proper to carry out the role.
• The Conduct Rules: These high-level standards of behaviour will apply to almost all staff at regulated firms. The firm must ensure staff are trained on how the Conduct Rules apply to them. Breaches must be reported to the FCA.

Different SMCR requirements apply depending on which of three “tiers” a firm falls within: Enhanced (the biggest and most complex firms), Limited Scope (those that are currently subject to limited application of the APR) or Core (all other firms). The first step for all firms is to establish which tier they are in.

The key preparatory steps will then be:

1. Identify and train Senior Managers and draft Statements of Responsibility

   Before 9 December 2019 all firms must identify who will be Senior Managers and train them on the requirements of the new regime (including the Conduct Rules).

   Responsibility for all business areas and the FCA “prescribed responsibilities” must be allocated amongst the Senior Managers and a Statement of Responsibility completed for each of them. Firms in the Enhanced tier must also prepare a Responsibilities Map showing the allocation of responsibilities, management and governance arrangements.

2. Amend HR documentation

   Template employment contracts for new hires will need to be updated to take account of the SMCR. Firms should also consider if amendments are needed to the contracts of existing employees – particularly the Senior Managers. Other template HR documents (such as references and settlement agreements) should also be amended to meet the requirements of the new regime.

   Disciplinary and performance management policies and procedures will need to refer to conduct rule breaches and expressly deal with the interaction between those policies and the firm’s requirement to assess fitness and propriety under the SMCR. Remuneration policies and bonus scheme rules may also need updating to refer to the impact of conduct rule breaches when determining variable remuneration.

3. Review recruitment processes

   Firms themselves (rather than the FCA) will need to assess the fitness and propriety of individuals recruited into Certified Person roles before they start working. Recruitment processes must be robust to meet these new requirements; regulatory references must be sought for the previous 6 years of employment and external checks (e.g. basic criminal record checks, Companies House searches, financial services register, credit checks) should be completed.

   For Senior Managers, while pre-approval from the FCA will be required (as under the APR currently), there are additional requirements on firms to ensure that appropriate “handover” information is provided to an incoming Senior Manager. Firms will need to decide what this material will contain and when in the recruitment process it is provided, taking account of commercial confidentiality.

4. Put in place a process for annual certification

   Firms have until December 2020 to issue certificates to existing Certified Persons but as it is sensible to align this with existing performance appraisal processes, ensuring the timing works will be key.

   The certificate must confirm that the person is fit and proper to perform their role taking account of all issues such as their qualifications, training, honesty, integrity and reputation, competence and capability and financial soundness. Therefore, firms should design a process to collate and assess the necessary information. This may include using a questionnaire completed by individuals themselves alongside performance appraisals, compliance records and external checks which will be assessed by a line or compliance manager.

5. Ensure record keeping allows the firm to comply with the SMCR requirements

   SMCR requires regulatory references (in the prescribed format) to be given for up to 6 years after an individual has left employment and for an updated reference to be provided if a firm becomes aware of matters which would cause them to draft the reference differently. With this in mind, records of why references have been drafted in a particular way will be vital.

   Conduct rule breaches must be reported to the FCA (within 7 days for Senior Managers and annually for other staff). Records of such breaches will therefore need to be kept, including the evidence relied on.

Experience has shown that the necessary steps to ensure a smooth implementation of the SMCR vary depending on the complexity, structure and nature of the business. However, in all cases the key is in planning and the two top tips for ensuring successful implementation are:

1. Make sure that Senior Managers “buy in” to the approach for implementation; “tone from the top” will be vital.
2. Start preparation now; it can be a time-consuming process to ensure the necessary documentation and procedures are in place.

We are delighted to be hosting a seminar on the Senior Managers and Certification Regime on 17 June 2019. This event will provide practical guidance on the SMCR for legal counsel, compliance and HR teams and senior management of financial services firms. For more information or to claim your complementary place, please click here.