Widening the net – SMR extended to FCA solo-regulated firms

Co-authored by Emma Rachmaninov

Under new near final rules published this month, the senior managers regime (SMR) will apply to FCA solo-regulated firms and branches from 9 December 2019, replacing the old approved persons regime (APR). In general the new rules follow those consulted upon last year. While FCA firms have known this regime is coming and this might seem to be a long way off, experience gained implementing the SMR for PRA-regulated firms has shown that firms should start the process now to be ready to meet this deadline. So how should a firm go about this?

The first step is undoubtedly cultural – a change of emphasis for the management role that firms and management need to understand. Those designated as senior managers will be both responsible and accountable for their given responsibilities: senior managers have a statutory “Duty of Responsibility” whereby if a firm breaches an FCA requirement, the senior manager responsible for that area could be held accountable unless they took reasonable steps to prevent or stop the breach.  The drawing up of a statement of responsibility (the SoR) for each senior manager will be one of the most important steps to ensure that each senior manager’s role and responsibilities are set out clearly and understood. In addition, firms will need to implement the certification regime and adhere to the conduct rules.

The second step for a firm will be to assess which of the three types of firms it is, since the rules to follow flow from this categorisation. The FCA plans to provide an indicative assessment to all firms of their status but the onus is on firms to assess which tier they fall into. For some this will be easy, others less so. The lowest tier being the most obvious – firms that are subject at the moment to the limited application of the APR become limited scope SMR firms subject to a lighter regime. At the other end of the spectrum, significant IFPRU firms and CASS Large firms will, by definition, be enhanced firms, required to have more senior managers and to follow more prescribed responsibilities. All other firms will need to assess against certain criteria (e.g. assets under management or business revenues) calculated on a rolling average or at a point in time. Where certain thresholds are reached, firms will become enhanced firms; otherwise firms are classified as core firms. Given the step up in requirements between a core and an enhanced firm, those firms operating near thresholds will want to consider which category they fall into carefully. The changes that have been made in the policy statement compared to the consultation relate largely to the distinction between a core and an enhanced firm and give those firms becoming enhanced firms for the first time 12 months to meet the enhanced requirements (rather than the six months proposed originally).

Core firms have six senior manager functions (SMFs) - four concerning governing roles (e.g. CEO, chair, executive director) and two required functions of the compliance oversight and the MLRO. Such firms have five prescribed responsibilities that must be given to a senior manager, including the performance of the firm of its obligations under the SMR, the certification regime, the conduct regime and responsibility for policies and procedures against use of the firm for financial crime. Those firms which have client money or assets must prescribe responsibility for compliance with the FCA’s CASS rules to a senior manager. Authorised fund managers will have further requirements including a prescribed responsibility for value for money assessments, independent director representation and acting in investors’ best interests.

Enhanced firms will need to consider the application of 17 SMFs and 12 prescribed responsibilities. As well as those applied by core firms the SMFs apply to the chairs of key committees (e.g. risk, audit, remuneration and nominations, if applicable) and the chiefs of risk, finance, internal audit and operations. There is an additional catch all function of having “other overall responsibility” to apply where a senior executive is the most senior person responsible for an area of the firm’s business (and they don’t perform any other SMF). Enhanced firms are required to ensure that every activity, business area and management function has a senior manager with overall responsibility for that area, to prevent any chance of an activity “falling between the cracks” with no one taking responsibility for it.  Firms will need to prepare and maintain a “responsibilities map”  setting out the firm’s management and governance arrangements and who has overall responsibility for each area, including individuals’ and committees’ reporting lines. The maps will be there for the regulator to see who has overall responsibility for an area and who is accountable if something goes wrong. One further requirement that will apply to enhanced firms is the handover procedures – a person taking on a senior management role needs to be informed to do the job effectively and a firm will be required to have a policy in place to comply with this requirement.

There are two welcome transitional provisions – certification staff need to be identified by the commencement date but firms have 12 months to complete the initial certification process; and those staff who are neither senior managers nor certification staff will have an additional year from commencement to be trained in respect of the new conduct rules.

There is no territorial limitation to the SMR: it applies to anyone performing an SMR, whether they are based in the UK or overseas. Firms planning on operating in the UK with a branch structure post-Brexit will need to take particular care to ensure that relevant overseas personnel with branch oversight are correctly designated. At the moment the rules distinguish between EEA and third-country branches, with EEA branches requiring less SMFs and having no prescribed responsibilities (third-country branches have eight prescribed responsibilities that must be given to a senior manager). But presumably EEA branches will become third-country branches following Brexit assuming EEA passporting rights (and associated supervisory oversight of certain functions) fall away and will have more SMFs applying together with the eight prescribed responsibilities.

The new rules certainly widen the net of accountability of senior financial services management, however it remains to be seen how regulators will use them when something goes seriously wrong.