The UK's Financial Conduct Authority is extending the Senior Managers and Certification Regime to almost all regulated firms in the summer of next year and has issued two consultative documents to start the process off.

As readers know, the new regime is to supersede the Approved Persons Regime, which has been in operation since the passage of the Financial Services and Markets Act 2000. The papers draw a distinction between 'core firms' (firms "that will have a baseline of SM&CR requirements applied," which is possibly a reference to something the FCA calls "the core regime") and 'enhanced firms' (a tiny number of solo-regulated firms that will have to obey extra rules because their size, complexity and potential effect on consumers warrant more attention). A third category, of 'limited scope firms,' consists of firms that will have to satisfy fewer requirements than core firms, most of which dwell at the extreme margins of financial services. The two consultative papers are called CP17/25 and CP17/26.

New principles for old

The FCA wants to impose five vague 'conduct rules' on individuals and four on senior managers, whom it seems not to think of as individuals.

It exhorts 'individuals' to:

• act with integrity;
• act with due care, skill and diligence;
• be open and co-operative with the FCA, the PRA and other regulators;
• pay due regard to the interests of customers and treat them fairly; and
• observe proper standards of market conduct.

It exhorts every senior manager to:

• take reasonable steps to ensure that the business of the firm for which he is responsible is controlled effectively;
• take reasonable steps to ensure that the business of the firm for which he is responsible complies with the relevant requirements and standards of the regulatory system;
• take reasonable steps to ensure that any delegation of his responsibilities is to an appropriate person and that he oversees the discharge of the delegated responsibility effectively;
• divulge any information that the FCA or PRA would reasonably expect to receive.

These points are very much in the style of the current APER principles, which exhort approved persons to act with integrity, due skill, are and diligence in carrying out their accountable functions; observe proper standards of market conduct when doing so; deal with regulators in an open and co-operative way and divulge any information that they would reasonably expect to receive; and take reasonable steps to ensure that the business of the firms for which they are responsible is organised so that it can be controlled effectively. An approved person, according to principle 7, who performs an accountable higher management function must also take reasonable steps to ensure that the business of the firm for which he is responsible in his accountable function complies with the relevant requirements and standards of the regulatory system.

Under the Certification Regime, firms will certify people for their fitness, skill and propriety at least once a year, if they are not covered by the Senior Managers Regime but their jobs significantly effect customers or firms. The FCA is tying its reform to its twin themes of 'culture' and 'governance.' Many bankers think of the SM&CR, which has ballooned in its reach since its first conception, as typical British 'gold plating' over and above the steps that the European Union is ordering its countries to take to stop a repetition of the financial crash of 2008.

At the moment, insurers have to follow their own slightly different version of the FCA’s Approved Persons Regime and the Prudential Regulation Authority’s Senior Insurance Managers' Regime. In CP17/26, the FCA proposes to thrust these aside and impose everything in the SM&CR on them.

Everyone who is not to be subject to the regime

In CP17/25 the FCA publishes a fascinating and exhaustive list of who should not be subject to the SM&CR. These are: receptionists; switchboard operators; post room staff; reprographics/print room staff; property/facilities management; events management; security guards; invoice processing; audio-visual technicians; vending machine staff; medical staff; archive records management; drivers; Corporate Social Responsibility staff; data controllers and processors under the Data Protection Act; cleaners; catering staff; personal assistants and secretaries; information technology support (i.e. helpdesk); human resources administrators/processors.

Everybody except these people will be subject to the demands of the regime. As the weight of regulation keeps growing and never subsides, these demands can only grow more onerous and spine-chilling as the years go by. Nobody knows whether ordinary staff at core firms will begin to demand "danger money" over and above their usual pay rises.

Training and notification requirements

How swiftly should firms tell the FCA about any disciplinary action they have taken against their staff for breaking the 'conduct rules'? The FCA is proposing that the maximum period should be seven business days in the case of senior managers and once a year in the case of everyone else. There is no intention to change or remove firms’ obligations to report concerns about people's conduct under existing rules and principles, such as FCA “principle for business” 11. This states, vaguely, that a firm must deal with its regulators in an open and co-operative way and must tell the FCA about anything of which it would reasonably expect notice.

MLROs still to be senior managers

The most senior people at firms will continue to need regulatory approval before they commence. Every senior manager will have to have a "statement of responsibilities" that states what he is responsible and accountable for with the utmost clarity. The rulebook will list the jobs that are "senior management functions." For 'core' and 'enhanced' firms (see above) the FCA is proposing to list the jobs of chair, chief executive, executive director, partner, compliance oversight and money-laundering reporting officer. This is the same as under APER.

Certification

The Certification Regime will, if all goes to plan, apply to employees who are not senior manager but who might harm their firms or their customers significantly. The FCA wants so-called 'certification functions to include: a "significant management function," proprietary traders; CASS oversight function; functions that are subject to qualification requirements; client dealing function; algorithmic traders; material risk takers; and anyone who supervises or manages anyone who performs any of these functions.

The £50 billion AuM threshold

'Enhanced' firms are to include firms that are 'significant investment (IFPRU) firms; firms that are "CASS Large firms" (CASS is the "client assets" section of the rulebook); firms with assets under management of £50 billion or more; firms with total intermediary regulated business revenue of £35 million or more per annum; firms with annual regulated revenue generated by consumer credit lending of £100 million or more per annum; and mortgage lenders (that are not banks) with 10,000 or more regulated mortgages outstanding.

The FCA wants to oblige these 'enhanced' firms to do the same as 'core' firms, but also to add the following.

• Additional senior management functions such as a chief operations function.
• Additional prescribed responsibilities for senior managers.
• The appointment of a senior manager with overall responsibility for every area, business activity and management function.
• A single document at each firm, called a "responsibilities map," that sets out that firm's management and governance arrangements.
• Handover procedures, which concern the need to make sure that a person who is about to become a senior manager has all the information and material that he could reasonably expect in order to do his job. This last is presumably an idea to stop people from being handed "poisoned chalices."

New rules for banks

The SM&CR already applies to banks, but some proposals are relevant to them. The FCA is proposing to introduce a new "prescribed responsibility" so that all firms, including banks, will have to allocate to a senior manager to make sure that they train their staff to know the FCA's conduct rules and comply with the proposed notification requirements (see above).

Then there is the so-called "12-week rule." At the moment, APER and the SMR for banks allow someone to cover for an approved person or a senior manager without regulatory approval, as long as the absence is temporary or reasonably unforeseen and the appointment is for less than 12 consecutive weeks. The FCA wants to carry this rule over to the SM&CR for solo‑regulated firms but also to extend it to apply to responsibilities under the "overall responsibility" requirement (see above). For example, if the person approved to perform the chief operations function is ill and he is also the person with "overall responsibility" for the complaints handling process, the 12-week rule should allow the firm to appoint a person to perform the chief operations function without FCA approval and reallocate the responsibility for the complaints-handling process to the same person, or a different person, also without the need for approval.

As part of its efforts to amend its rulebook and extend the SMR to all firms, the FCA is going to introduce SMF27, the "partner senior management" function, to banks as well. It expects the practical effect of this to be limited because it suspects that no banking firms are set up as partnerships at the moment. This may happen in future, however.

For both consultative papers the comment period closes on 3rd November, with the policy statement to follow next summer. Transitional (including 'grandfathering') arrangements are to be a topic for consultation at a later date.