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SMCR Implementation for Solo-Regulated Firms

Posted on 29 September 2019

As readers of this publication will be aware, the Senior Managers and Certification Regime (SMCR) will apply to almost all firms regulated by the FCA only (Solo Regulated Firms) from 9 December 2019.  Appointed representatives and payment services firms are not captured.  For full details of the new regime and an implementation guide, follow this link.  This article discusses how the enforcement landscape might change under SMCR.

The SMCR introduces new Conduct Rules (set out in the COCON chapter of the FCA Handbook). In broad terms, the Conduct Rules apply to all staff within a Solo Regulated Firm, save for those carrying out ancillary functions (such as HR or security).  There are separate (additional) Conduct Rules for Senior Managers. 

Whilst many of the Conduct Rules are familiar from the current Approved Persons Regime, there are some new rules that codify existing FCA expectations. For example, Senior Managers are required to delegate responsibilities to an appropriate person and to exercise oversight (Senior Management Conduct Rule 3).  Any breach of the Conduct Rules may result in individual enforcement action. Breaches also go to the question of overall "fitness and propriety" to perform regulated functions.   Whilst there is some guidance on the application of the Code, calls for further guidance, particularly from Solo Regulated Firms, have been resisted by the FCA.

From the perspective of the Solo Regulated Firm itself, it must ensure that its staff are aware of and trained in the Conduct Rules from 9 December 2019 (in the case of Senior Managers and Certified Employees) and from 9 December 2020 in respect of other staff.  A failure to embed the Code of Conduct may (in extreme cases) jeopardise a Solo Regulated Firm's compliance with its threshold conditions and thereby its authorised status. 

The SMCR also introduces a new duty for Senior Managers (the Duty of Responsibility).  In essence, the Duty of Responsibility requires Senior Managers to take reasonable steps to prevent a failure in the area of the firm which they have assumed responsibility.  There is associated guidance (in the DEPP chapter of the FCA Handbook) as to what "reasonable steps" means, which is certainly helpful.  Whilst it has always been open to the FCA to bring enforcement proceedings against senior individuals, the Duty of Responsibility (when combined with the SMCR requirement for carefully documented responsibilities) is intended to make such cases far more straightforward. 

Will there then be an increase of enforcement activity after 9 December 2019?  It is quite possible that FCA Enforcement will feel emboldened by the Duty of Responsibility to commence or persist in cases that they might not previously have brought or continued against Senior Managers. 

For others within the scope of the regime, an increase in enforcement activity per se seems less likely simply because the new Code of Conduct is more of a codification exercise.  However, there are certainly other areas where the regime may nonetheless lead to disputes or lead to individuals being excluded in practice from the sector.  One such example is the enhanced regulatory reference requirements under SMCR (detailed in full in the guide mentioned above). These are designed to ensure that "bad apples" will find it increasingly difficult to take up regulated roles in the first place, and it is not difficult to see the issues that they may cause in the period to come.

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