As we have covered in a number of previous editions of Enforcement Watch, all remaining firms authorised by the FCA alone will fall under the Senior Managers and Certification (SMCR) regime from December 2019. In this article, we call these Solo-Regulated Firms. An equivalent regime has been in place since March 2016 in respect of Banks and PRA designated investment firms.
SMCR is to be applied to Solo-Regulated Firms in a tiered manner, in broad terms depending on their size. However, the core features of SMCR will be same for most Solo-Regulated Firms who therefore need to engage with the regime in good time and to make appropriate changes.
The core features of SMCR are:
- Senior Managers approved by the FCA for defined roles, signing-up to FCA prescribed responsibilities. This will be documented in the manner discussed later in this article.
- A duty of responsibility incumbent on all Senior Managers personally, in respect of firm failures in an area for which they were responsible overall.
- A new code of conduct for individuals at all levels of the firm, with additional rules for Senior Managers.
- The abolition of the Approved Persons Regime (APR), and the firm adopting processes to enable its own annual certification of a broader category of employees than was captured by APR as "fit and proper".
- Various ancillary changes, including to notification requirements and to regulatory references.
Accountability is at the core of SMCR. Accordingly, the documentation of a firm's allocation of roles and responsibilities is seen as crucial by the FCA. It will now be well known that there are two key documents under SMCR that fill this purpose: Statements of Responsibilities (SoRs) for all Senior Managers, and Responsibilities Maps for those Solo Regulated Firms that are "Enhanced Firms" (Maps). These document the allocation of responsibilities across the firm and to specific named Senior Managers. Accordingly, the FCA is (sensibly) seeking to provide finalised guidance well in advance of December 2019 to assist Solo-Regulated Firms in the preparation of these crucial documents. To that end, on 11 October 2018, it published a consultation on guidance that will ultimately sit alongside the Guide for Solo Regulated Firms (published in July) and guidance in the FCA Handbook itself.
Unsurprisingly, in its consultation, the FCA stresses that the proposed guidance will not constitute a template for firms preparing their SoRs and Maps. Firms are urged to apply the proposed guidance in a risk-based and proportionate fashion. The essence of these documents is their bespoke nature, describing how roles and responsibilities are in fact allocated in a compliant manner in the particular firm in question. This said, the guidance under consultation is useful because it offers up hypothetical examples of good and bad practice that firms will no doubt find very useful.
For example, useful guidance is provided to further explain the circumstances in which prescribed responsibilities can be shared (rather than split, which is not acceptable to the FCA) and how this should be properly documented. The sharing of prescribed responsibilities during the handover from one CEO to another is given as an example of good practice.
There is also useful guidance on the appropriate use of the SMF18 (other overall responsibility function), the open-endedness of which is often confusing for firms. The FCA warns against using the SMF 18 function to allocate broad responsibilities to one person. At the other end of the spectrum, obligations that are already an integral part of a Senior Managers' role should not be described as a separate overall responsibility.
In respect of Maps, useful guidance and examples are provided to sit alongside the requirements in the FCA Handbook (SYSC). The FCA notes that a guiding principle should be whether an objective outsider could look at the document and be able to comprehend how the firm was governed and who was accountable. It also notes that a combination of text and graphics is likely to be a useful way of meeting this requirement. The FCA also stresses the need to identify and explain the roles of governance bodies and suggests that any graphical representations should identify direct and indirect reporting lines.
In conclusion, the proposed guidance is interesting and welcome. Solo-Regulated Firms will find it a very useful catalyst to further the process of engaging with SMCR in respect of their particular circumstances given that SoRs and (if appropriate) Maps go to the heart of the regime.
The consultation closed on 10 December 2018.