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Senior Managers & Certification Regime near final rules

SMCR near final rules

Time to act now for success


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Today the Financial Conduct Authority (FCA) published its highly-anticipated near final rules on the Senior Managers & Certification Regime (SMCR) for solo-regulated firms (PS18/14). As envisaged, no material revisions have been made to the proposals the FCA consulted on last year. In order to deliver the cultural, organisational and operational changes required by the implementation date of 10 December 2018 for insurers and 9 December 2019 for asset and wealth management firms should already be formulating their SMCR strategy and building their change programmes.

The aim of SMCR is to strengthen market integrity and prevent consumer harm by focusing on robust governance, increasing senior manager accountability and setting better conduct standards for staff at all levels. The regime has been live for banks and deposit takers since March 2016, and in July 2017 the FCA and Prudential Regulatory Authority consulted on extending it to all Financial Services Markets Authority (FSMA) regulated firms.

Summary of key features

  • The concept of proportionality has been retained with firms falling into the ‘Core’ or ‘Enhanced’ regime depending on their size, business model complexity and activities. The thresholds for the assessment have not changed. Our view is that groups with entities subject to different regimes may consider ‘opting up’ to achieve consistency across their (group) governance arrangements.
  • All Senior Manager Function holders (SMFs) need to be approved by the FCA; however identification and annual ‘fitness and propriety’ assessments of Certified staff becomes the responsibility of the firm. Scope and territoriality mean that in some scenarios both overseas based senior managers and Certified persons can be captured by the regime. Identifying the SMF population is an important milestone in a firm’s implementation plan.
  • Every SMF will have a duty of responsibility. Should a firm fail to meet any of the FCA’s requirements, the SMF responsible could be held to account if they fail to take ‘reasonable steps’ to prevent or stop the breach. Failures would open individuals to sanctions, as well as regulatory censure and reputational damage. From our experience of working with over 40 firms, we observed the development of a reasonable steps framework consumed significant resource and effort, and was challenging to embed within existing arrangements. 
  • Firms need to allocate all Prescribed Responsibilities (PRs), including the hotly debated yet retained PR for Value Assessment which falls on the Chairman. The scope and definition of this PR is likely to differ across firms.
  • Enhanced firms would have more roles to allocate and documents to submit than Core firms. This includes Management Responsibilities Maps and SMF handover procedures.
  • The FCA’s conduct rules would apply to all but ancillary staff. Conduct rules have been split into two tiers, with an additional layer applicable to SMFs, reflecting their duty to oversee and run the firm effectively.
  • The FCA is consulting on introducing a Directory hosted by the FCA, potentially filling the gap left by the removal of client facing functions from the FCA Register. Firms would remain responsible for the information relating to individuals who are not approved by either the FCA or PRA.

Impact and next steps

  • The absence of significant change in the near final rules means that firms have been familiar with the key elements of the regime for quite some time. As such it is less likely the FCA will apply any leniency towards any firm that fails to implement the rules by the implementation date.
  • Familiarity with the requirements, and the knowledge and experience of SIMR for insurers, should not lead to complacency. Firms should not underestimate the considerable amount of effort, resource and time required across all areas of the organisation to implement the regime. Although the intention is for SMCR to be an evolution rather than revolution of governance, firms should take this opportunity to review and optimise their entire governance framework which may involve holistic changes.
  • First steps should include analysis of the impact of the requirements on current arrangements, including scope, population, policies and procedures, systems and controls, reporting and MI. Scenario walkthroughs would help bring the regime to life, highlighting delineation between roles and responsibilities and gaps in oversight.
  • Firms need to commence or reinvigorate their SMCR programmes, ensuring they have leadership buy-in and include representatives across the business, Legal, Compliance, HR and IT. Key scope and application decisions should be made early on, taking into account strategic alignment with other regulatory or change programmes and competing business initiatives.
  • Critical to successful implementation would be investment in the right technology providing the capability to maintain the regime in BAU.
  • Given how the regime personally impacts on senior individuals, firms should ensure they have robust stakeholder management and communications plans to promote engagement with those affected. Successful embedding of the rules is likely to require tailored role specific, learner-led training delivered face to face and online.
  • The FCA has responded to calls to clarify the application of the conduct rules by providing additional guidance and industry specific examples. Firms need to develop their conduct rule frameworks and test whether they are likely to meet the regulator’s intended outcomes for the regime.
  • All programmes should perform quality assurance checks to test and challenge their delivery against pre-agreed success factors and monitor firms’ abilities to meet the deadline for compliance.

For more information on SMCR, or if you would to meet our SMCR experts in person, please get in touch.

The FCA Policy Statement can be accessed here and the PRA Policy Statement can be accessed here.

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