With the new Senior Managers & Certification Regime due to come into force on 9 December 2019, firms should be looking ahead and preparing to meet their new obligations.

The Financial Conduct Authority is changing the way that people working in the financial services industry are regulated through the introduction of the SM&CR. This change affects nearly all firms that offer financial services and are regulated by the FCA. In particular, this includes any firm that is subject to the Approved Persons Regime which the FCA uses to regulate individuals in financial services. The changes will also affect the vast majority of people who work at these firms. The only employees who are exempt from the SM&CR are “ancillary staff” who, for example, may include human resource administrators, IT Support, personal assistants and receptionists.

After the financial crisis began in 2008, the British Parliament recommended that the FCA should develop a new system of accountability that concentrated on senior managers and also on individual responsibility. Subsequently, the FCA created the SM&CR to replace the Approved Persons Regime.

In March 2016, the FCA began to apply the Senior Managers' Regime to banks, building societies, credit unions and firms 'designated' by the Prudential Regulation Authority.

The FCA has set out three 'regime tiers' of firm. These are: core, enhanced and limited firms. Most firms that are regulated only by the FCA will fall into the ‘core’ category of the SM&CR.
 
There are three main elements to the SM&CR. They are:

• the Senior Managers Regime:
• the Certification Regime; and
• the Conduct Rules.

Senior Managers Regime

A Senior Management Function or SMF is a new type of controlled function that covers senior personnel at firms who are responsible for managing one or more aspects of their firms' affairs. Certain Controlled Functions are automatically converted across to SMFs and there is no requirement to submit any application to the FCA for this conversion. For staff who perform Controlled Functions that do not appear in the table below, these individuals fall outside the scope of the Senior Managers' Regime, but may still be considered as Certification Staff.

The below table shows the proposed function mapping for core firms.   

Each senior manager also ought to have a single document which clearly sets out his job and the things for which he is responsible; this is known as a Statement of Responsibilities.
 
Every Senior Manager will have a duty of responsibility to prevent regulatory breaches from occurring or continuing to occur in his area of responsibility. This means that if a firm breaks an FCA rule, the FCA could hold the Senior Manager responsible for that area accountable if he did not take ‘reasonable steps’ to prevent or stop the transgression.

Prescribed Responsibilities are new, specific responsibilities that the FCA says that a firm must give to a Senior Manager. When allocating a Prescribed Responsibility, a firm will have to locate and choose the most senior person for the particular area.

Certification Regime

The Certification Regime applies to people whose jobs might let them have a big effect on customers, their firms and/or market integrity. The FCA will not have to approve these people and they will no longer appear on the FCA Register (but may appear on a separate directory).

The list of Certification Staff includes:

Fitness and propriety

Firms will be required to certify that Senior Managers and Certification staff are certified as fit and proper every year. This can be incorporated in those firms' periodic performance appraisal processes. The first annual certification should take place by December 2020 (a year after the implementation date).

Firms should also obtain criminal reference checks and Regulatory References for new staff who will be Senior Managers and Certification staff. Regulatory References already exist under the Approved Persons regime, but under the new regime they will cover the last 6 years (instead of 5 years) of each person's working history and any firm that is are asked to provide a Regulatory Reference must respond within 6 weeks.

Conduct rules

The Conduct Rules are new set of rules that set basic standards of good personal conduct, against which all people at each firm will be held to account. This replaces the Statements of Principle and a Code of Practice for Approved Persons currently in place.

There are two tiers of conduct rules. The first is a general set of rules that applies to most employees in a firm. The second tier consists of rules that only apply to Senior Managers.

The Conduct Rules apply to Senior Managers, Certification Staff, Conduct Staff and other staff excluding except ancillary staff (i.e. people who do not perform a job specific to financial services such as administrators, receptionists etc).

Firms must provide Conduct Rules training to staff before 9 December. They must also notify the FCA of any disciplinary action where that action was a result of breaches of the Conduct Rules.

• For Senior Managers, each firms must divulge this information to the FCA within seven business days of the firm becoming aware of the matter.
• For other individuals, it must notify the FCA every year.

* To find out more about Newgate's training and consultancy, contact Tracy Pham at info@newgatecompliance.com