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Extending the SMCR to FCA-only authorised firms: Our insights

 

27 July 2017

Yesterday the FCA published its much-anticipated consultation paper on the extension of the Senior Managers and Certification Regime (SMCR) to FCA-only authorised firms. We have set out below our initial thoughts on and insights into the FCA’s proposals, which we hope that you will find useful.

In addition,

  • Online implementation tool: Very shortly we will be launching our online SMCR implementation tool, Individual Accountability 2 Manager. This will, for a fixed price of £20,000 (excluding VAT) per firm, allow you to scope and implement the SMCR in a way which meets the FCA’s requirements and which is consistent with approaches that have already been adopted, tried and tested across the industry. Our tool gives you a suite of template documents that cover the new documents and the changes to existing documentation that will be needed in order to implement the SMCR, as well as project management tools and training materials.

  • Our guide to the SMCR: We will be publishing a guide detailing the requirements of the SMCR, which will include insights and guidance based on our extensive experience from advising banks and building societies on their implementation of the SMCR, as well as post-implementation issues that have arisen.  

  • A&O seminar: We will be hosting a seminar at our London offices in September 2017. This seminar will not only cover the FCA’s proposals for the extension of the SMCR, but will also provide insights and guidance on how firms should go about implementing the SMCR.

To find out more about our online tool, receive a copy of our SMCR guide and/or to register for the our SMCR seminar in September please click here or contact your usual Allen & Overy contact.

We established our Senior Managers and Certification Regime Working Group in 2014 when the FCA first announced its plans for the SMCR for banks and building societies. Our Working Group includes members of our employment and regulatory (contentious and non-contentious) practices. Members of our Working Group have advised a significant number of banks and building societies in relation to the implementation of the SMCR, and have already been instructed by a number of FCA-only authorised firms to advise them in relation to the extension of the SMCR.

Should you have any questions, or if you would like to arrange a meeting with us to discuss the SMCR, please do not hesitate to contact SMCR_Enquiries@AllenOvery.com or your usual Allen & Overy contact.

Our initial thoughts and insights on the FCA’s proposals

A familiar structure

As we had anticipated, the FCA is proposing to adopt the same structure for the SMCR as it used for banks and building societies:

  • Senior Managers Regime: The FCA will require FCA-only authorised firms to appoint Senior Managers who will be assigned certain responsibilities that have been prescribed by the FCA. These functions and responsibilities will need to be documented in formal documents which are filed with the FCA, known as Statements of Responsibilities. 

  • Certification Regime: Only Senior Managers will require approval by the FCA. Other individuals within FCA-only authorised firms who meet the FCA’s criteria for one or more of eight prescribed Certification Functions (which have already been adopted by banks and building societies) will not require approval by the FCA. Rather, firms will be required to assess the fitness and propriety of these individuals on at least an annual basis. Banks and building societies we advised in relation to the SMCR found that implementing the Certification Regime took more time than they had anticipated, due to the amount of new processes and procedures that need to be designed, implemented and embedded. 

  • A new Code of Conduct: The FCA will replace its Statement of Principles for Approved Persons (or ‘APER’) with the Code of Conduct that currently applies to individuals working in banks and building societies. The Code of Conduct will apply to almost all employees working within FCA-only authorised firms and will apply to regulated and unregulated activities. Interestingly this application is narrower than the application of the Code of Conduct to employees within banks and building societies (where the Code of Conduct applies to everything an employee does on behalf of their bank or building society).

The FCA’s proposal to adopt a structure for the SMCR which is similar to the one which it applied to the banks and building societies means that FCA-only authorised firms are likely to face many of the same issues and challenges as the banks and building societies did when they implemented the SMCR in 2015/16. We advised a number of banks and building societies in relation to their implementation projects. As a result, we are familiar with the issues and challenges that FCA-only authorised firms will face, as well as how these issues and challenges can be dealt with in practice.

Proportionality

The FCA has been careful not to simply impose its SMCR designed for the banks and building societies on FCA-only authorised firms. In particular, we are pleased to see that the FCA has reflected points raised by the industry about proportionality on board when designing its proposals for the extension of the SMCR. For example, the FCA is proposing to have three ‘categories’ of firm for the purposes of the SMCR, which will determine the specific SMCR requirements that your firm will need to comply with:

  • Limited scope firms: Firms that are only required to have a limited application of the current approved persons regime. These firms will be permitted to adopt a lighter touch approach to the SMCR than ‘core’ and ‘enhanced’ firms. In particular, these firms will be required to appoint fewer Senior Managers and allocate fewer responsibilities than ‘core’ or ‘enhanced’ firms.

  • Core firms: Firms that apply the current approved persons regime in full but do not qualify as an ‘enhanced firm’. These firms will be required to adopt the baseline SMCR requirements set out by the FCA which are similar to (but slightly lighter touch than) the SMCR requirements that apply to banks and building societies.

  • Enhanced firms: A small proportion of FCA-only authorised firms that will be subject to additional SMCR requirements set by the FCA (namely requirements relating to handovers between Senior Managers, maintaining Management Responsibilities Maps and ensuring that a Senior Manager is responsible for every aspect of their UK business). The SMCR that will apply to enhanced firms is more aligned with the requirements that apply to banks and building societies. Whether a firm is an ‘enhanced firm’ for SMCR purposes will depend on a set of criteria published by the FCA, including whether their assets under management are/have been £50 billion or more at any time in the previous three years, or if they are classified as a CASS Large Firm.

What is going to change?

A question you will be asked within your firm is ‘How do the FCA’s proposals differ from the current approved persons regime?’ and ‘What is going to change?’. In the table below, we highlight some key changes between the current approved persons regime and the FCA’s new SMCR proposals:

 
Current Significant Influence Function holders (SIFs)
  • Most firms are likely to have significantly fewer Senior Managers than they currently do SIFs. For example, for core firms, the FCA has specified seven Senior Manager Functions which, for the most part, firms are required to fill only to the extent that they already have someone fulfilling those roles.

  • The number of and roles held by Senior Managers will depend on the size of a firm. Larger firms will be required to fill more Senior Manager Functions and allocate more responsibilities amongst those Senior Managers than smaller firms.

  • More formality will be required around Senior Managers’ roles and responsibilities. These will need to be documented in Statements of Responsibilities, which must be kept updated and filed with the FCA.

  • For partnerships, the FCA has indicated that its starting point will be that all partners should be designated as Senior Managers. However, the FCA has stated that if a partner has no involvement in managing their firm (e.g. they are a silent partner, or where a firm has a number of partners who have no involvement in managing the firm or no authority to act on behalf of the firm), they may not need to be designated as a Senior Manager. Partnerships may therefore need to think carefully about what ‘types’ of partners it has, based on the FCA’s rules and guidance.

  • Firms will need to seek more detailed regulatory references in respect of their Senior Managers.

Current approved persons (other than SIFs)
  • If a current approved person is unlikely to become a Senior Manager (including current CF29s and CF30s), they are very likely to be designated as a Certified Person.

  • Certified Persons will not be subject to approval by the FCA, as is currently the case with approved persons. Rather firms will be required to act as ‘mini-regulators’ with responsibility for assessing the fitness and propriety of their Certified Persons when they take up their roles and at least on an annual basis thereafter.

  • Firms will need to seek more detailed regulatory references in respect of their Certified Persons.

All other employees (except those performing ancillary functions, e.g. cleaners, receptionists)
  • All employees (except those performing ancillary functions) will be required to comply with the FCA’s new Code of Conduct. The Code of Conduct will apply to a much broader population of employees (including Legal, Compliance and HR) and not just those who have previously been subject to APER.

  • Senior Managers, Certified Persons and Non-Executive Directors will be required to comply with the Code of Conduct, and there are additional Conduct Rules that will apply to Senior Managers.

  • The Code of Conduct is similar in many respects to APER. However, there are some key differences. For the first time the obligation to treat customers fairly will apply to individuals. In addition, Senior Managers and Non-Executive Directors will be subject to a personal obligation to notify the FCA of information of which the FCA would reasonably expect notice.

  • Firms will need to provide specific training to all employees about the Code of Conduct and how its provisions apply to employees’ specific roles and responsibilities.

  • Firms will also be required to report any disciplinary action taken against an employee for breaching the Code of Conduct (including remuneration adjustments) to the FCA. This obligation will exist in addition to firms’ existing obligations under FCA Principle 11.


Timetable

HM Treasury has not yet announced the implementation date for the extension of the SMCR to FCA-only authorised firms. We understand that HM Treasury was originally proposing a March 2018 implementation date, but given that the FCA will not publish its final rules relating to the extension of the SMCR until 2018, we think it is most likely that implementation will not be until later in 2018 at the earliest. The FCA is also likely to take a phased approach to implementing the SMCR.

The prospect of a late 2018 implementation date should not lead firms to delay starting their implementation projects. We believe that it is unlikely that any fundamental changes will be made to the proposals set out in the FCA’s consultation paper published yesterday. We would encourage firms to commence their implementation projects sooner rather than later, as opposed to waiting for the FCA to publish its final rules next year. Our experience is that the banks and building societies we advised that started their implementation projects at an early stage tended to have a much easier journey towards implementation, and avoided a last minute rush.

Further information

For further information about our experience in relation to the SMCR and how we may be able to help you, please email SMCR_Enquiries@AllenOvery.com or your usual Allen & Overy contact.

 

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