When one SM&CR delay can lead to another

20 December 2017

The Financial Conduct Authority (FCA) and Prudential Regulation Authority’s (PRA) long-awaited technical consultations, to put more flesh on the bones of July’s broad policy proposals to extend the Senior Managers and Certification Regimes (SM&CR) to all FCA firms, arrived on 13 December 2017. Firms have been waiting to understand how the transition will work, with a particular focus on grandfathering and deadlines.

With the FCA’s three consultation papers, and the PRA’s own version, firms could be forgiven for thinking Christmas had come early. Particularly if they’d asked Santa for lots of detail and draft forms. But those in search of hard deadlines and confirmed dates may have found such details to be scarce.

The broad policy intentions have not changed. All solo-regulated firms will come into the scope of the SM&CR, and the PRA and FCA are ‘upgrading’ and aligning elements of the Senior Insurance Managers Regime (SIMR) to the SM&CR. The FCA has maintained its proportionate approach to implementation. Only the largest 300-350 firms will fall under the bank-like ‘enhanced’ regime, with most firms considered ‘core’ and the very smallest at ‘limited’. The qualification criteria are also unchanged.

While these papers are technical in nature, it does appear that the FCA is continuing its policy of assessing on a ‘legal entity’ basis, and still feels that Appointed Representatives are out of its jurisdiction. The assessment of a firm's status at legal entity had been a challenge for some asset and wealth management firms (AWM) firms, who found that the nuance of their business model resulted in some entities being classes as ‘enhanced’ while others were not.

There was one key takeaway from the papers. The regulators have pushed out the implementation date; perhaps in acknowledgement of the work that firms have to do already next year to prepare for other major initiatives. The FCA previously said the regime would be implemented by 2018; the regulators now suggest that we may not see final rules until mid-2018, with the SIMR ‘upgrade’ taking effect at the end of 2018. Implementation for the AWM sector and other firms is scheduled as far ahead as late-2019, with an extra year to cycle through the certification population.

While pragmatic and to be welcomed by firms, the delay does raise questions over other initiatives. The FCA’s Asset Management Market Study (AMMS) has two obvious direct links: firstly, to drive accountability for the assessment of value, the FCA proposed a new specific ‘prescribed responsibility’ to be allocated to the chairperson of the Authorised Fund Manager (AFM). If the application of the SM&CR has been delayed, the implementation of this measure must surely also be delayed?

The second interaction is with the proposed increase in independent non-executive directors (iNEDs). The FCA wants a minimum of two iNEDs to be appointed by an AFM, resulting in 480 new iNEDs across the AM sector. 

But under the SM&CR proposals, all iNEDs without a specific role (such as Chair of Audit or Remuneration Committee), would find their authorisation falling away under SM&CR. It’s really important that the FCA doesn’t push on with this requirement, forcing firms (and the FCA itself) to go through the approval process for 480 new iNEDs only to see their authorisation fall away six or twelve months later when the SM&CR commences. The FCA must make sure its initiatives are coordinated to reduce excessive burden on firms.

Firms may welcome the respite created by the delay; I just hope the regulator has joined up the dots, and that wider initiatives which have a value and purpose of their own, don’t get lost in the process.

Grant Lee | Partner
Profile | Email | +44 (0)20 7 213 1536


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