On 13 December 2017, the FCA published consultation papers (CP17/40-42) that set out proposed transitional arrangements for the wider roll-out of the Senior Management and Certification Regime (SMCR). As will be well known, a version of SMCR has applied to Banks since March 2016. In July 2017, the FCA set out (in CP17/25) for the first time its substantive proposals as to how the wider roll-out of SMCR would operate. This was covered in our previous issue of Enforcement Watch "FCA consults on roll-out of SMCR to all authorised firms".
These most recent consultations deal with the proposed transitional arrangements for these firms into the SMCR. There are separate FCA and PRA consultations dealing with the application of SMCR to insurers, which we do not cover in this article.
Implementation for Limited Scope and Core Firms.
It was already known from the FCA's July 2017 consultation that individuals with APR controlled functions at Core and Limited Scope firms corresponding to SMCR SMFs are proposed to be "grandfathered" across to the new regime without the need to re-apply for approval or to notify the FCA. (The only exception to this is non-executive directors (CF2 under the APR). NEDs will either cease to be approved on implementation (albeit they will likely be subject to the Conduct Rules including Senior Manager Conduct Rule 4 (notifications to the regulator)) or, to the extent they are the Chairman, will take on the SMF9 (Chairman function) which must be notified to the FCA before implementation. Firms should take careful note that "grandfathering" will only operate where there is a direct correlation of roles. As such, for example, a director (CF1) will grandfather to SMF3. However, if the CF1 happens also to be the Chief Executive then they must hold SMF1 (Chief Executive) and this will require an application for approval using the SMCR Form A process (although the enhanced SMCR regulatory references need not be requested).
Readers will know that SMCR, as it applies to Banks, requires all SMF holders to sign up to a Statement of Responsibility (SoR). The FCA proposes that SoRs will need to be prepared for new SMF holders at Limited Scope and Core Firms, but need not actually be submitted to the FCA for approval. This will substantially lighten the administrative burden on the FCA.
The FCA also recognises that the transition to the Certification regime may take some time for firms, requiring as it does a new or updated set of systems, controls, policies and contracts. As such, it is proposed that individuals who will fall to be certified (and in this context firms must remember that there is not a precise correlation between certification and the APR), will be subject to the new Conduct Rules from the moment of implementation but will only have to be certified by firms as "fit and proper" 12 months after implementation and annually thereafter. To complete the picture, for those non-ancillary staff subject to the Conduct Rules only, the FCA proposes a 12 month window following implementation before the Conduct Rules apply to allow firms time to train staff, to implement appropriate policies and to amend contracts (as appropriate).
Implementation for Enhanced Firms
The proposal is that Enhanced Firms will similarly benefit from grandfathering where there is a direct correlation of roles (see above). However, the FCA wishes to be notified of this fact and to receive SoRs and Responsibilities Maps (a requirement that only Enhanced Firms are likely to be subject to) before the grandfathering takes place. Those taking on new roles will be required to submit an SMCR Form A in the usual fashion or Form E if they are approved under the APR and they are changing roles.
The delayed implementation of the Certification regime and the application of the Conduct Rules to non-ancillary staff summarised above, will also apply to Enhanced Firms.
Guidance on the Duty of Responsibility
The FCA proposes that the existing guidance (in DEPP) regarding the application of DoR applies without amendment to all SMF holders.
Timing and Next Steps
The consultation window for the consultations on transitional provisions closes at the end of February 2018. The final implementation dates are not yet clear but the latest information from the FCA suggests that transitioning will take place between late 2018 and mid to late 2019.
We have commented before that the extension of the new regime will likely result in an increase in enforcement against senior management. It is (of course) also possible that the transition to the new regime will, especially for smaller less well-resourced firms, create its own risks that may generate enforcement activity against firms as well as their management.