Extending The Senior Managers And Certification Regime
www.pwc.co.uk/fsrr26 July 2017Stand out for the right reasonsFinancial Services Risk and RegulationHot topicExtending the SeniorManagers and CertificationRegimeHighlightsThe FCA and PRA propose toextend the SM&CR to all FCAfirms, and to amend theexisting insurance andbanking regimes.Governance and culture are akey priority for theregulator. The regimes willreplace the existing ApprovedPersons Regime, and seek todrive individualaccountability in senior staff.The FCA and PRA want to conform their approach to governance and accountability infinancial services by extending the Senior Managers Regime (SMR) and Certification Regime(CR) (together SM&CR) to all FCA regulated firms. The regulators are also seeking to align theexisting Senior Insurance Managers Regime (SIMR) for insurers with these new proposals.The FCA and PRA set out their proposals to extend the SM&CR in three consultation papers:CP17/25 “Individual Accountability: Extending the Senior Managers & Certification Regime toall FCA firms”; CP17/26 “Individual Accountability: Extending the Senior Managers &Certification Regime to insurers”; and CP14/17 “Strengthening individual accountability ininsurance: extension of Senior Managers & Certification Regime to Insurers”. These werereleased together on 26 July 2017.As well as setting out the new SM&CR regime for FCA-only regulated firms, the regulatorspropose extending the CR to insurers, and some amendments to the existing banking andinsurance SMRs.The proposals are set to impact approximately 50,000 FCA solo regulated firms, whichcomprise a diverse group of financial services businesses. The FCA therefore proposes aproportionate approach, with differing requirements for various types of firm. Through athree-tiered approach to applying SM&CR, it targets firms based on their complexity and riskto the financial system.The 350 largest asset managers, intermediary firms, credit firms and non-bank lenders will besubject to the ‘enhanced regime’, which is most similar to the existing SM&CR.Other firms will either benefit from the lighter ‘core regime’, with baseline requirements, and afew firms (such as sole traders, internally managed AIFs, professional and non-core FS firms)will be considered limited scope firms and experience the ‘limited regime’. Appointedrepresentatives are currently out of scope.The FCA and PRA welcome responses to their consultations until 3 November 2017. TheFCA expects to publish a technical consultation, which will consider transitional andgrandfathering provisions, and then final rules in 2018.
Senior managers: coreregimeAs with the existing SM&CR regime for banks and insurers,the SMR elements will apply to the most senior staff in anorganisation. While the exact application will depend onfirm type, size and complexity, the regulator’s aspiration isto make senior staff individually accountable for the firm.To achieve this, firms must allocate specific ‘prescribedresponsibilities’ (PRs) to senior managers (SMs). All SMswill need to document their areas of responsibility throughindividual ‘statements of responsibility’, akin to regulatoryrole descriptions. These must be kept up-to-date asindividuals, roles or firms’ strategies change. Typically, PRsmust be allocated to one individual, and not split or sharedacross multiple SMs.SMs will operate under a duty of responsibility. If aproblem occurs in an area of their responsibility, the FCAwill consider whether ‘reasonable steps’ were taken in thedischarge of their responsibilities. This has presentedoperational and philosophical challenges for firms, as theaccountability and responsibility falls squarely on anindividual. As part of the implementation process, firmsmust consider the impact on their people, who have beenkeen to consider how best to demonstrate reasonable steps.SMs will need to be pre-approved by the regulator beforeappointment, in a similar way to individuals currentlysubject to the FCA’s Approved Persons Regime. This mayinclude interviews and vetting and firms will need toconduct criminal records checks.The FCA’s technical consultation paper will consider thetransitional arrangements in more detail, althoughgrandfathering of existing individuals is expected,particularly given the volume of individuals involved.Firms will also be required to comply with a regulatoryreferences regime which mirrors the approach in theSM&CR for banks.Senior staff captured by the SMR include: SMF9 – ChairpersonSMF1 – Chief ExecutiveSMF3 – Executive DirectorSMF27 – Partner Required functionsSMF16 – Compliance OversightSMF17 – Money Laundering Reporting Officer(MLRO)Many of the PRs will be familiar to or self-explanatory tofirms, such as the PR to ensure ‘performance by the firm ofits obligations under the Certification Regime’.But as highlighted by the FCA in its recent AssetManagement Market Study (MS), one PR (which must beallocated to the Chair of the Authorised Fund Manager) is toaccept ‘responsibility for an AFM’s value for moneyassessments, independent director representation andacting in investors’ best interests’. This, as phrased, is awide responsibility to effectively ensure compliance with a2 Hot Topic Financial Services Risk and Regulationsignificant portion of the MS’s remedies, and will be ofparticular note to firms with relevant funds.Senior managers: enhancedregimeFirms will be subject to the enhanced regime if they meetany of the six criteria set out as: a Significant IFPRU firma CASS Large firmfirms with Assets Under Management of 50billion or more (at any time in the previous threeyears)firms with current total intermediary regulatedbusiness revenue of 35 million or more perannumfirms with an annual regulated revenue generatedby consumer credit lending of 100 million ormoremortgage lenders (that are not banks) with 10,000or more regulated mortgages outstanding.Limited scope firms and EEA and non-EEA branches willnot be moved into the enhanced regime even if they meetany of the above criteria.For firms in the enhanced regime, the SMR will apply mostbroadly to senior staff. In addition to the core list of rolesand PRs, enhanced firms may also need additional roles andwill have additional PRs to allocate. The additional rolesinclude: SMF2 – Chief Finance FunctionSMF4 – Chief Risk FunctionSMF5 – Head of Internal AuditSMF14 – Senior Independent DirectorSMF12 – Chair of the Remuneration CommitteeSMF10 – Chair of the Risk CommitteeSMF11 – Chair of the Audit CommitteeSMF13 – Chair of the Nominations CommitteeSMF24 – Chief Operations FunctionSMF7 – Group Entity Senior Manager: Someonewho has significant influence on the managementor conduct of the affairs of the UK-regulated entityand is employed by, or is an officer of, anothermember of its group.SMF18 – Other Overall ResponsibilityEnhanced firms will also need to consider on a firm-by-firmbasis whether there are additional individuals not caught asan SM, but who do have an overall responsibility for a keyarea, business activity or management function of the firm.Operationally, in addition to individual statements ofresponsibility, firms must create and maintain a‘responsibilities map’ setting out the interaction of the PRs,and interaction with wider governance structures. SMs inenhanced firms will also need to consider handoverprocedures and materials.There is no territoriality limitation on the SMR, so an SMperforming a role overseas would still remain in
scope. Often a SM will hold more than one PR, relevant totheir role.Senior Managers: limitedscope firmsFor limited scope firms (sole traders, ancillary FS firms), thenumber of SMs maybe a low as one.While they will transition into the new SM&CR, it will be asimilar approach to the current Approved Persons Regime.A small sole-trader may only have the new SMF16compliance oversight role; others may require the SMF29limited scope function which is similar to theApportionment and Oversight Function under the ApprovedPersons Regime.Certification regimeThe CR applies to those individuals able to cause significantharm to the firm, or its customers. This includes thefollowing roles and the entire line of management abovethese individuals, up to but excluding the SM, as individualscannot be both SMs and in the CR. significant management functionproprietary tradersCASS oversight functionfunctions that are subject to qualificationrequirements (such as mortgage advisers, financialadvisers)client dealing functionalgorithmic tradersmaterial risk takers.Under the current Approved Persons Regime, some of theseroles are pre-approved by the FCA. But the FCA will nolonger approve these individuals as it believes that theobjective of the CR is to shift responsibility for assessingfitness and propriety to firms. So under the SM&CR,responsibility for approving and then assessing the ongoingfitness and propriety falls solely on the firm. An SM will bepersonally accountable for this, and will need to certifyannually that all staff are fit and proper.Firms will need to provide regulatory references for all SMsand staff in the CR.3.4.5.In addition SMs have four further rules: The FCA is seeking to apply the conduct rules to a firm’sregulated and unregulated financial services activities wherethey are carried on in connection with a regulated activity.This is narrower than the requirements under the SMR forbanks, where the conduct rules apply to everything someonedoes on behalf of a banking firm.Firms must train staff to understand how the conduct rulesare relevant to their individual roles. An SM will bepersonally responsible for ensuring compliance with this.Additionally, firms must report disciplinary action takendue to a breach of the conduct rules to the FCA. This mustbe completed within seven days for SMs, and on an annualbasis for all other staff.InsurersThe FCA and PRA want to align the SIMR with the existingSM&CR. The regulators propose a number of changesincluding: For both non-EEA and EEA branches, the CR will onlyapply to those individuals in the UK. If people are dealingwith UK clients from abroad, the CR will not apply. Conduct rules will apply very broadly to almost all staff in afirm, including SMs, those in the CR and all other staff. Theconduct rules will replace the existing Statements ofPrinciple and Code of Practice for Approved Persons in theFCA handbook. Five conduct rules will apply to all staff. They are: 1.2.You must act with integrityYou must act with due care, skill and diligence3 Hot Topic Financial Services Risk and RegulationSC1. You must take reasonable steps to ensure thatthe business of the firm for which you areresponsible is controlled effectivelySC2. You must take reasonable steps to ensure thatthe business of the firm for which you areresponsible complies with the relevantrequirements and standards of the regulatorysystemSC3. You must take reasonable steps to ensure thatany delegation of your responsibilities is to anappropriate person and that you oversee thedischarge of the delegated responsibility effectivelySC4. You must disclose appropriately anyinformation of which the FCA or PRA wouldreasonably expect noticeExcluded staff are limited to a specific list of ancillary rolessuch as receptionists, drivers, security and medical staff.For UK firms, the CR is limited to those performing acertification function who are either based in the UK or, ifbased outside the UK, are dealing with UK clients.Conduct rulesYou must be open and cooperative with the FCA,the PRA and other regulatorsYou must pay due regard to the interests ofcustomers and treat them fairlyYou must observe proper standards of marketconduct the creation of a new CR that mirrors the extendedCR regime for FCA firms and existing bankswidening the scope of the conduct rules to cover abroader range of individualsintroducing a proportionate SM&CR regime forfirms outside the scope of Solvency IIintroducing a number of new FCA Senior ManagerFunctions (SMF)introducing a duty of responsibility in relation toregulatory breachesintroducing a number of new PRs (including fournew PRs for third country branches and Swissgeneral insurers)adding a new rule relating to the provision ofhandover information for an individual to performor take over an SMFfacilitating the approval process for transfers ofindividuals between banking and insurance firms.
The introduction of the CR will mean that all individualspreviously designated as Key Function Holders or who areconsidered material risk takers will need to be certified as fitand proper on an annual basis. Non-Executive Directorswill be excluded from this requirement in addition toindividuals who have been approved for a SMF.There will also be a number of minor changes in order toalign the accountability regimes such as renaming SeniorManagement Insurance Functions as SMFs; renaming theexisting ‘scope of responsibilities statements’ as ‘statementsof responsibilities’ and replacing ‘governance maps’ with‘responsibilities maps’.Both the FCA and PRA request responses to theirconsultations on the changes to SIMR by 3 November 2017.Banking amendmentsThe FCA is creating an additional PR which will apply to allfirms, including banks. This is to ensure that all staff havebeen trained in the conduct rules.The FCA also proposes extending the new SMF27 Partnerrole to banks, although isn’t aware of any bankinginstitution structured as an LLP.4 Hot Topic Financial Services Risk and Regulation
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Certification Regime to insurers”; and CP14/17 “Strengthening individual accountability in insurance: extension of Senior Managers & Certification Regime to Insurers”. These were released together on 26 July 2017. As well as setting out the new SM&CR regime for FCA-only regulated firms, the regulators propose extending the CR to insurers, and some amendments to the existing banking and .
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