FCA consults on further proposals under SM&CR

14 December 2017

In July, the FCA published its CP17/25 in which it set out its proposals to extend the Senior Managers & Certification Regime (the SM&CR) to the wider financial services industry (we previously summarised the key elements of CP17/25 here). The FCA has now published three consequential consultation papers, in which it sets out proposals on how solo-regulated firms and insurers will transition to the SM&CR and how it will apply the ‘Duty of Responsibility’ to Senior Managers in those firms.

Within the three consultation papers there are a few noteworthy points, which may be of interest:

Conversion of existing approved persons

For Core and Limited SM&CR firms, the FCA proposes to automatically convert (most of) the existing ‘governing and required’ controlled functions to the corresponding Senior Management Functions. Firms will need to take one of the following actions for their future SMF9 Chair function:

  • Submit a notification informing the FCA where this will be an existing CF2 Non-Executive Chairman, or
  • Submit a form A application to the FCA for an existing CF1 Director to be approved as SMF9. Existing CF1 Directors will be automatically converted to a SMF3. So these individual will hold two Senior Management Functions.

Interestingly, these firms are not required to submit Individual Statements of Responsibility in respect of those ‘converted’ Senior Manager Functions (although firms are still required to prepare these and provide them upon request to the FCA). Individuals within these firms who are performing CF10A, CF28, CF29 and CF30 will automatically cease to be approved persons and drop off the FCA Register. Note that these individuals will almost certainly be deemed to be Certified Individuals under the new regime.

Enhanced SM&CR firms will need to submit a conversion notification form to the FCA, which in essence maps their existing Significant Influence approved persons to the senior manager functions. This is partly because there is a much wider range of applicable SMFs and so automatic conversion would not be possible for most roles. In addition, Enhanced SM&CR firms will also need to submit Individual Statements of Responsibilities and their Management Responsibilities Map.

Duty of Responsibility

The FCA has confirmed that it intends to apply a Duty of Responsibility to Senior Managers within solo-regulated firms and insurers. This means that where a contravention occurs, the FCA may take action against the Senior Manager(s) responsible for that area of the business, if those Senior Managers failed to take reasonable steps to prevent the contravention from occurring or continuing.

This is not unexpected, but is a timely reminder to all those who may become Senior Managers under the new regime, that they will be subject to increased individual regulatory scrutiny and personal accountability.

Timing

Probably the most important point coming out of the latest consultations is an acknowledgement from the FCA that the implementation of the regime for solo-regulated firms cannot be practically achieved in 2018. Given that the FCA will not publish the final rules until the summer of 2018, giving firms six months or less to implement the regime was clearly not reasonable or workable.

Timings will ultimately be determined by HM Treasury in due course, but the FCA has set out that it is assuming that solo-regulated firms will need to implement the new regime from mid to late 2019, with a further 12 month transitional for firms to complete their initial certification of fitness and propriety in respect of Certified Individuals. The FCA also confirmed that the Conduct Rules will apply to Senior Managers and Certified Individuals from the commencement date, but for other staff (i.e. ‘Conduct Rules Staff’) the Conduct Rules will only apply from 12 months after commencement to give firms sufficient time to provide the required training to all relevant staff.

Conclusion

In summary, much of what was contained within the consultation papers was as expected. The automatic conversion of ‘senior’ approved persons into Senior Managers slightly reduces the burden on Core and Limited scope SM&CR firms – although the conversion process for Enhanced SM&CR firms is not entirely challenging. Equally, it would have been odd, had the FCA not applied the Duty of Responsibility to all Senior Managers – as it is at the crux of what the regime is intended to achieve, greater individual accountability.

Timing however is interesting, and it will be a relief to most firms, that they will have longer to prepare for the regime than had previously been suggested. Nevertheless, firms should be under no illusions, that successful implementation of the new regime will not be without its challenges, and some work-streams within the implementation project may be particularly thorny and time-consuming. We would strongly recommend that firms start to at least scope out their implementation project in Q1 or Q2 next year, to ensure they have plenty of time to get their ‘ducks in a row’.

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