SM&CR for overseas persons
18 December 2018
The UK Senior Managers and Certification Regime (SMCR) will be extended to all financial services firms on December 9, 2019 and will replace the current Approved Person Regime. At a high level the regime only applies to firms authorised in the UK. However, for senior individuals affiliated with UK authorised firms, SMCR has a wider scope and may apply whether based in the UK or overseas. It is therefore important that firms are aware of the exact functions performed by individuals based overseas to ensure compliance with the new requirements.
SMCR itself covers three areas: the Senior Managers Regime (SMR), the Certification Regime (CR) and the Conduct Rules.
The FCA recognizes that it needs to bring in a regime which is proportionate and flexible. Therefore, the impact and obligations will differ depending on the type of firm:
- Core SMCR Firm: The vast majority of firms will be categorised as Core SMCR Firms.
- Enhanced SMCR Firm: the largest 350 or so firms, whose size, complexity and potential impact on customers warrants more attention, will be subject to an additional set of requirements
- Limited Scope SMCR Firm: Firms that currently apply the Approved Persons Regime on a limited basis, for example sole traders.
Since the vast majority of firms will be categorised as “Core SMCR Firms” it is those requirements that we will focus on here.
Senior Managers Regime
The SMR covers anyone who undertakes a Senior Management Function. Each senior manager will have a Duty of Responsibility and a Statement of Responsibility. Regardless of where an individual is based or the location from which the function is performed, an individual will be caught by the SMR if they perform any Senior Management Function. These functions include CEO, Executive Director, Partner, Chair, Compliance Oversight and Money Laundering Reporting Officer for a FCA-authorized firm.
Individuals who undertake an SMF must:
- be pre-approved by the FCA
- prepare and submit a “Statement of Responsibility” to the FCA
- adhere to the duty of responsibility
- be assessed as “fit and proper”
- where possible, have regulatory references and criminal record checks.
The CR covers people who are not senior managers but whose job means it is possible for them to cause significant harm to the firm or its customers. Certified Functions include:
- significant management function
- proprietary traders
- CASS operational oversight function – current CF10a
- functions subject to qualification requirements – for example, mortgage advisers, retail investment advisers and pension transfer specialists
- client dealing function – this function is expanded from the current CF30 function to cover any person dealing in or arranging investments with clients
- anyone who supervises or manages a Certified Function but isn’t a senior manager
- material risk takers – including prudential, operational, conduct and reputational risk. This function includes anyone that is categorised as remuneration code staff.
- algorithmic trading – includes people responsible for approving the deployment of a trading algorithm or a material amendment thereof. It also includes anyone monitoring or deciding the use or deployment of a trading algorithm.
These individuals will not be approved by the FCA, but the firm must ensure they are certified internally as fit and proper on at least an annual basis.
Compared to the SMR, the CR has a territorial limitation and applies only to overseas employees who (i) are dealing with UK clients, and/or (ii) are categorised as material risk takers under one of the FCA’s Remuneration Codes. These remunerations codes include, for example AIFMD/IFPRU/BIPRU, and the regime applies irrespective of whether the person deals with a UK client.
What does it mean to be caught by the Certification Regime? Individuals subject to the CR will:
- no longer be approved by the FCA
- need to be assessed and certified as “fit and proper” by the firm
- be subject to regulatory reference checks.
The Conduct Rules are comprised of nine rules that set the standard on how the FCA expects individuals working in the financial services industry to behave. The Conduct Rules apply to employees of a firm irrespective of whether they are directly approved by the FCA. The intention with the Conduct Rules is to improve standards of individual behaviour in financial services. They are a set of enforceable rules that set the basic standards of good personal conduct, against which the FCA intends to hold people accountable. The rules apply directly to individuals and will therefore help promote positive behaviour, shaping the culture and standards and policies of firms.
The Conduct Rules apply to all UK employees except ancillary staff (people who don’t perform a role specific to financial services such as receptionists or drivers). But the rules have a territorial limitation in the same way as the Certification Regime. So in fact for employees based overseas, Conduct Rules only apply to those already caught by the SMR and the CR for the reasons listed above. The only exception is for Non-Executive Directors who are not Senior Managers or Certified Individuals, for whom the Conduct Rules apply regardless of where they are based.
What does SMCR mean for me?
Firms would be well advised to get ahead of the game and consider how their current internal governance processes stack up against the requirements. For anyone running a financial services firm and who has approved person responsibilities, the implications of non-compliance are severe. Understanding the regulator’s expectations and what this means in practice for your firm is key.
As you plan for the coming months, ask yourself these questions:
- Who are your senior managers and what are their core responsibilities?
- Are these responsibilities properly documented and can you articulate these clearly to the regulator?
- Do your governance arrangements align with the new regime?