Senior Managers and Certification Regime: Be prepared

03 August 2017

The proposals to extend the Senior Managers and Certification Regime (SM&CR) to all firms regulated by the Financial Conduct Authority (FCA), published last month by the FCA and Prudential Regulation Authority (PRA), will affect around 50,000 firms. For that reason, I was comforted that the FCA and PRA have taken a proportionate approach to the introduction of the new regime. Even so, this is bound to be a more complicated initiative than many firms expect, so the preparations should start now.

The FCA and PRA are proposing to extend the current regime to all regulated firms, including asset and wealth managers, credit firms and intermediaries including insurance brokers. They also propose to extend the certification regime to insurers. The intention, say the regulators, is to ‘strengthen market integrity by making individuals more accountable for their conduct and competence’, by encouraging a culture of personal responsibility at all levels. The proposed regimes will replace the existing Approved Persons Regime from a date to be decided in 2018.

Because of the scale of the change, the FCA has proposed a three-tier approach, with different requirements for various types of firms. We’ve prepared a detailed run-down of what this means for each, but below is a quick summary of the senior manager scope:

  • An ‘enhanced regime’ for the 350 largest asset managers, intermediary firms, credit firms and non-bank lenders, similar to the existing SM&CR;
  • A ‘core regime’, where firms will be required to allocate a more limited range of ‘prescribed responsibilities’ to senior managers;
  • A ‘limited regime’ for sole traders, internally managed alternative investment funds, professional and non-core financial services firms, where there may only be one senior manager.

Under the proposals for the Certification Regime, the FCA will no longer approve individuals under the Approved Persons Regime, but will instead shift responsibility for assessing fitness to firms. A Senior Manager will be personally accountable for the firm’s assessment of the ongoing fitness of individuals who are able to cause significant harm to the firm or its customers, and will need to certify annually that all staff are fit and proper. The FCA is also proposing to replace the existing Statements of Principle and Code of Practice for Approved Persons in its handbook with five conduct rules, which will apply to all staff (with an additional four rules for Senior Managers).

There is also a significant change ahead for insurers, as the existing Senior Insurance Managers Regime (SIMR) will be aligned with the SM&CR. This includes anyone who is currently designated as a Key Function Holder, or who is considered a material risk taker, being certified as fit and proper annually.

So what should firms be doing to prepare? This is a consultation (the comment period ends on 3 November), so my first recommendation is for all firms to engage with the regulators and respond. The grandfathering and transitional provisions – still to be discussed – will be extremely important and, given the number and diversity of firms affected, the FCA will need to be careful and thoughtful in its approach.

In the meantime, it’s important for firms to think about the new regimes in conjunction with existing governance structures and policies. If you don’t engage early with these proposals you could find the whole implementation process far more challenging than you expect. And remember that this will be a very emotive subject for your people, considering that we’re talking about individual responsibility and accountability, so be careful to communicate well, often and clearly about what’s going on. Begin the groundwork now, and feel the benefits later.

Grant Lee | Partner
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