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Enforcement Watch

Enforcement WatchIssue 23 | September 2017

Date
26 September 2017

As readers of this publication will be aware, the FCA has long planned to roll-out the Senior Managers and Certification Regime (SMCR) to all authorised firms (it currently just applies to Banks, certain investment firms and certain insurers).


FCA consults on roll-out of SMCR to all authorised firms

As readers of this publication will be aware, the FCA has long planned to roll-out the Senior Managers and Certification Regime (SMCR) to all authorised firms (it currently just applies to Banks, certain investment firms and certain insurers).  The FCA has now published its consultation for this wider roll-out (it did so on 26 July 2017) and we summarise below the core features of its proposals.

The basic features of the regime proposed by the FCA for all authorised firms are the same as those already in place under the existing SMCR.  The FCA describes this as the "core regime".  The proposals for the "core regime" are summarised below: 

  • To put in place a new Code of Conduct applying to directors, officers and employees at all levels of authorised businesses.  Senior Managers will be subject to certain additional requirements under the new Code, for example the requirement to take "reasonable steps" to ensure that the part of the business for which they are responsible is controlled effectively.
  • For senior management, the FCA will define Senior Management Functions (SMFs) to replace the existing Controlled Functions under the Approved Persons Regime.  Each SMF holder will be allocated one or more of the FCA "prescribed responsibilities" by the firm. Their responsibilities will be set out clearly in a Statement of Responsibility.  SMF holders will be pre-approved by the FCA to hold a particular SMF and discharge particular "prescribed responsibilities".   
  • Other employees, whose duties mean that they pose a risk of "significant harm" to the firm or its clients, will need to be certified as "fit and proper" by the firm and will not be pre-approved by the FCA.
  • Employees who are neither Senior Managers nor certified by the firm will (unless ancillary to the business) be brought within the regulatory regime for the first time and required to adhere to the Code of Conduct. 

Importantly there is recognition in the FCA's consultation that many small firms will fall within the scope of SMCR and that it would not be sensible to impose the same requirements (with associated administrative burden) on them as larger firms.  Therefore, the FCA proposes that, where a firm meets certain size requirements, it will be subjected to an "enhanced regime" in addition to the requirements of the "core regime" summarised above.  The FCA proposes that the "enhanced regime" will be triggered, for example, if the firm has over £50bn assets under management or is a CASS large firm.  The FCA estimates that around 350 firms will be subject to the "enhanced regime".  The FCA proposes that those firms subject to the "enhanced regime" will have the following additional requirements:

  • Additional SMF's for Senior Managers, such as the Chief Operations Function.  Additionally, such firms will have to ensure that there is a Senior Manager with overall responsibility for every area, business activity and management function of the firm.  This may include creating an Other Overall Responsibility Function (the equivalent of SMF18 under the existing SMCR) where appropriate. 
  • Additional "prescribed responsibilities" to allocate between the SMFs.  For example, a responsibility of safeguarding and overseeing the independence and performance of the risk function and the compliance function.  
  • The requirement to submit Responsibilities Maps to the FCA, setting out how the various Senior Managers and their responsibilities interact.
  • The requirement to put in place systems and controls in relation to hand-overs between Senior Managers.

Those readers familiar with the existing SMCR will note that the "enhanced regime" is a step closer towards it than the "core regime" is.

The consultation closes on 3 November 2017, with implementation expected at some point in 2018. 

If adopted, these changes will require all firms to take significant steps prior to implementation to ensure that management structures, systems and controls and policies meet the requirements of the new regime.  Recent research based on FCA data suggests that some 72,000 senior managers will be caught by the extended regime and anticipates that the administrative pressure and regulatory threat of the new regime will put a burden on smaller firms.  That is plainly right, but the wider roll-out of SMCR is now inevitable. Firms not yet subject to SMCR should start to think now about how they will comply with a regime in substantially the same form as set out in this consultation. 

From an enforcement point of view, the extension of the regime will almost inevitably result in further investigations against senior management. Those involved in enforcement cases may well have noticed an increase in investigations being opened. Beyond that, as readers will see from elsewhere in this issue (Symington outlines the FCA's approach to investigations), the FCA has stated that, where there are grounds to investigate a matter, there will generally be a need to investigate the role of senior management in the conduct issues that arise. The FCA has laid out its stall.