The FCA has published two consultation papers extending the senior managers and certification regime which is already in place in the banking sector. The consultation papers are:
- Consultation Paper 17/25: Individual accountability – extending the senior managers and certification regime to all FCA firms (CP17/25); and
- Consultation Paper 17/26: Individual accountability: extending the senior managers and certification regime to insurers.
The PRA has also published Consultation Paper 14/17: Strengthening individual accountability in insurance: extension of the senior managers and certification regime to insurers.
The remainder of this blog focuses on CP17/25.
Culture of accountability
The FCA states in CP17/25 that the main purpose of the senior managers and certification regime (SM&CR) is not to change how firms organise themselves or to force firms to hire people to fill specific functions. The regulator notes that “how firms structure themselves is up to them, and is driven by factors such as size, best practice, as well as requirements in law and regulations”. The SM&CR is instead intended to clarify and reinforce the governance structures that firms already have in place. The regulator believes that firms’ senior managers have a crucial role in demonstrating that they are accountable and responsible for their part in delivering effective governance. This includes taking personal responsibility and being accountable for their decisions and exercising rigorous oversight of the business areas they lead. The FCA wants all firms to develop a ‘culture of accountability’ at all levels and for senior individuals to be fully accountable for defined business activities and material risks.
The core regime
The FCA is proposing to replace the current Approved Persons Regime with the SM&CR in almost all financial services firms, not just banks. By bringing so many different types of firms within the scope of the SM&CR the FCA does not feel it appropriate to take exactly the same approach as it did for banks. However, the FCA proposes to apply a baseline of requirements to every regulated firm, these will be known as the ‘core regime’. This means that the three main elements of the SM&CR will apply to every firm: the senior managers regime, certification regime and conduct rules.
The FCA is also consulting on certain extra requirements for a small number (fewer than 1%) of solo regulated firms whose size, complexity and potential impact on consumers warrant more attention – these additions are called the ‘enhanced regime’.
The FCA proposes using the following criteria to identify enhanced firms: firms that are ‘significant investment (IFPRU) firms, firms that are ‘CASS large firms’, firms with assets under management of £50 billion or more, firms with total intermediary regulated business revenue of £35 million or more per annum, firms with annual regulated revenue generated by consumer credit lending of £100 million or more per annum, and mortgage lenders (that are not banks) with 10,000 or more regulated mortgages outstanding.
Limited scope firms
The FCA is also consulting on a reduced set of requirements for a group of firms which the regulator defines as ‘limited scope’. This covers all firms that currently have a limited application of the Approved Persons Regime, including: limited permission consumer credit firms, sole traders, authorised professional firms whose only regulated activities are in non-mainstream regulated activities, oil market participants, service companies, energy market participants, subsidiaries of local authorities or registered social landlords, insurance intermediaries whose principal business is not insurance intermediation and who only have permission to carry on insurance mediation activity in relation to non-investment insurance contracts and internally managed alternative investment funds.
In chapter 3 of CP17/25 the FCA sets out a firm checker that allows firms to check what type they are and whether the ‘limited scope’, ‘core’ or ‘enhanced regime’ applies. A diagram showing the key elements of the regime for all firms is also set out in this chapter.
Senior managers regime for all firms
The most senior people who perform key roles in their firm will continue to need regulatory approval before starting their roles. Every senior manager will need to have a statement of responsibilities setting out what they are responsible and accountable for. The FCA Handbook will set out those roles that are ‘senior management functions’. The FCA proposes that senior management functions (SMFs) for all firms (except limited scope firms) will be: SMF 9 (Chair), SMF 1 (Chief Executive), SMF 3 (Executive Director), SMF 27 (Partner), SMF 16 (Compliance Oversight) and SMF 17 (Money Laundering Reporting Officer. Specific responsibilities, known as prescribed responsibilities, will be given to senior managers. The FCA notes in CP17/25 that many firms will not need to apply all of these SMFs.
Senior managers regime for enhanced firms
In addition to the above enhanced firms will be subject to additional SMFs such as the chief operations functions. There will also be more prescribed responsibilities that enhanced firms will need to give their senior managers. Enhanced firms will also need to make sure that there is a senior manager with overall responsibility for every area, business activity and management function of the firm. Enhanced firms will also need to have a single document that sets out the firm’s management and governance arrangements (responsibilities map). Enhanced firms will also be subject to handover requirements whereby they will need to ensure that a person who becomes a senior manager has all the information and material that they could reasonably expect in order to do their job.
Senior managers regime for limited scope firms
The FCA is proposing that limited scope firms will have fewer senior management functions when compared to core regime firms. If a firm currently only needs to have some controlled functions approved by the FCA this will continue under the new regime. A table setting out SMFs for limited scope firms can be found at para 4.15 of CP17/25.
Duty of responsibility
Every senior manager will have a duty of responsibility meaning that if a firm breaks one of the regulator’s requirements, the senior manager responsible for that area could be held accountable if they did not take reasonable steps to prevent or stop the breach. The burden of proof lies with the FCA to show that the senior manager did not take the steps a person in their position could reasonably be expected to take to avoid the firm’s breach occurring.
Employees who are not senior managers but conduct a role that means it is possible for them to cause significant harm to the firm or its customers will come within the certification regime. Such individuals will not need to be approved by the FCA, but the firm itself will need to check and confirm (certify) that they are fit and proper to perform their role at least once a year.
The FCA Handbook will set out the roles that are certification functions. The FCA proposes that these are: significant management function, proprietary traders, CASS oversight function, functions that are subject to qualification requirements, client dealing function, algorithmic traders, material risk takers and anyone who supervises or manages anyone who supervises or manages anyone performing one of the aforementioned functions.
To drive up standards of individual behaviour the FCA is proposing high level conduct rules that will apply to almost all employees who do financial services activities in a firm. Firms will be required to train their staff so that they know how the conduct rules apply to them. Firms must notify the FCA when they have taken formal disciplinary action against a person for breaching a conduct rule.
Incoming UK branches
Chapter 9 of CP17/25 sets out the FCA’s proposals for how the SM&CR will apply to UK branches of EEA and non-EEA firms. For EEA branches the FCA proposes a senior managers regime with two SMFs – SMF 21 (EEA Branch Senior Manager) and SMF 17 (Money Laundering Reporting Officer). The FCA also proposes to apply the certification regime to such branches. However, the regime will be limited to people based in the UK. It will not extend to people based outside the UK, even if they deal with a UK client. Conduct rules will also apply but, again, these will not apply to employees based outside the UK.
For UK branches on non-EEA firms the FCA is proposing a senior managers regime consisting of the following SMFs: SMF 19 (Head of Third Country Branch), SMF 3 (Executive Director), SMF 27 (Partner), SMF 16 (Compliance Oversight) and SMF 17 (Money Laundering Reporting Officer). The scope of the certification regime and conduct rules for non-EEA branches is the same as EEA branches.
Some of the proposals in CP17/25 affect firms already subject to the SM&CR (i.e. banks, building societies, credit unions and PRA designated investment firms). These proposals are set out in chapter 10 of CP17/25. Chapter 11 of CP17/25 is also relevant to these firms.
Noticeably the FCA proposes the introduction of a new prescribed responsibility so that all firms, including banks, will need to allocate to a senior manager, to make sure the firm trains its staff in the conduct rules and complies with the FCA notification requirements
The proposals in CP17/25 do not affect individuals and Approved Persons of Appointed Representatives of firms. The FCA will confirm how it intends to approach the SM&CR for Appointed Representatives in a follow-up consultation paper. Principal firms, including the senior managers of principal firms, remain fully responsible for ensuring that their Appointed Representatives and networks comply with the new rules.
The deadline for comments on CP17/25 is 3 November 2017. The FCA will publish final rules next year.
The FCA will separately consult on the operational aspects of the new regime, including how firms will transition into the regime, and any changes that the regulator needs to make to its forms and other parts of the Handbook.
View Senior managers and certification regime, 26 July 2017