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The extension of the Senior Managers and Certification Regime to the payments and e-money sector looks set to come into effect for nearly 1,500 firms as early as this year. The change will not only mean resource implications for regulated firms, it will also set a higher bar for new firms seeking FCA authorisation or registration and could have a wide reaching impact on the job market in the sector.
SMCR – a reminder
The Senior Managers and Certification Regime – known as SMCR – harks back to the financial crisis in 2008 and has the aim of improving standards of conduct for people in the financial services industry and holding them to account for their actions. The regime was first implement in 2016 and originally applied to the banking sector, but at the end of 2019 it was extended to most solo-regulated financial services firms. In its recent Perimeter Report, the FCA proposed extending the regime further to include e-money and payment services firms, of which there are nearly 1,500 currently authorised or registered in the UK.
Why is the FCA looking to extend SMCR to payments and e-money firms?
Currently, the personnel fitness and propriety regulatory requirements for e-money and payment services firms only extend to a very limited number of individuals and are much lighter touch than SMCR. Under the Payment Services Regulations 2017 (PSRs) and Electronic Money Regulations 2011 (EMRs) firms need to ensure their most senior personnel are ‘of good repute and possess appropriate knowledge and experience’. While this is not something that should be taken lightly, the PSRs and EMRs stop short of specific behavioural standards or individual accountability. Without the same structure as SMCR – such as conduct rules for individuals, Senior Manager Functions (SMFs) and prescribed responsibilities – it is much harder for the FCA to protect consumers and hold individuals within the e-money and payments sector to account. The inconsistency between rules can also be confusing for firms, particularly those with individuals holding responsibilities cutting across two regulatory environments, for example a broking firm that also provides payment services.
In the opinion of many in the industry, this proposal by the FCA is long overdue. The e-money and payment services market has been booming in recent years, in part due to the UK government encouraging a favourable fintech environment both pre and post-Brexit. Many firms aspiring to become banks see authorisation under the EMRs or PSRs as a stepping stone to becoming a fully authorised deposit taker. In addition, the sector is heavily focused on potentially vulnerable retail customers, whose protection is a key focus of the regulator. This was made evident when the FCA sent a Dear CEO letter to e-money firms earlier in the year, instructing them to make it very clear to customers that their transactions are not afforded the same FSCS protection as a bank. In their Perimeter Report the FCA states the reason for the proposal to extend the SMCR regime is to:
“enhance individual accountability and governance within firms, and strengthen our ability to supervise such firms by giving us a wider range of tools to drive higher standards and mitigate risks of consumer harm.”
The proposed extension should be a positive move for the industry – firms that want to do the right thing will welcome the regime as it can help them demonstrate their credibility and provide clarity in respect of individual responsibilities and obligations. Now firms (and, crucially, the individuals at those firms) who push the boundaries, often at the expense of the consumer, are going to be held directly to account. Regulatory references are mandatory for all staff in scope of SMCR (including non-executive directors) and mean that past misdemeanours will follow an individual for six years and can’t be suppressed by non-disclosure agreements.
Consequences for firms and the payments and e-money sector
As with any new piece of regulation, there will of course be a cost and resource implication for the firms joining the regime. Should the proposals come into effect, new firms seeking authorisation in the UK will find there is a higher bar for application. Organisations should do some forward thinking about their hiring plans and who they are going to place in SMF roles.
This may in turn have quite a large impact on the job market. For those applying for a senior role at an e-money or payment services firm, it will no longer be enough to state general experience in the sector. Instead, they will need to demonstrate their credibility and integrity against the SMCR criteria. This is likely to be of greater consequence to smaller firms and start-ups than the bigger established firms. A large bank or firm can make a personnel change fairly easily, for example by bridging temporary skills gaps from their existing pool of SMFs when seeking regulatory approval for a new appointee. Whereas a smaller or newer firm won’t have this established safety blanket – they can’t afford to have a new joiner in a senior role who doesn’t satisfy the Regulator’s expectations. It will also cost these firms more to get the right qualified staff, as they will be in high demand and potentially low supply.
Firms should be assured, however, that there are various approaches and strategies for getting the right people at the right time without having to frontload the costs or being held-back by the regulations. For new firms seeking regulatory permissions, having a suitable candidate in mind (ideally with an offer of employment) at the point of application can demonstrate the firm’s good intentions to the regulator without necessarily having this person on their payroll.
The Treasury will need to review and agree with the FCA’s proposal, and then proceed with the process for legislation. It is highly likely the proposal will go ahead and that the SMCR will apply to e-money and payment services firms, possibly as early as this year. It is therefore a good idea for firms to start thinking ahead and preparing. And if your firm is looking to start an FCA authorisation or registration application process, you may want to revisit your time frame and roadmap to account for the process of demonstrating compliance with the regime.
We can help
At Bovill we have a specialist Payments Services and E-Money team and have been supporting firms at all stages of their development – from regulatory applications to ongoing regulatory and compliance support, advice and financial crime prevention – for over twenty years.