Today, the FCA published the long-awaited near final rules on the extension of the SMCR to those firms regulated by the FCA only:

 

The FCA is proposing to implement the rules as they were consulted upon with minor amendment. Set out below are some of the key highlights, FCA clarification and guidance.

  • Test for being an enhanced firm: The FCA has made changes to the thresholds for when a firm meets the requirement to be an enhanced firm.
  • Groups: As expected, the FCA is not prescribing a particular approach for groups that have a combination of enhanced and core firms within the structure. The FCA has clarified that where firms have an enhanced firm in the group and wish to apply those standards to core firms for operational ease, the core firm cannot select to adopt specific parts of the enhanced regime, it is all or nothing. The FCA has prescribed a new form, Form O, for firms that wish to voluntarily opt-up to the enhanced standard. There is a different transitional period for firms wishing to voluntarily opt-up to enhanced standards – namely three months, as opposed to the current twelve months. This same transitional period of three months applies to limited scope scope firms moving to core through the voluntary opt-up process.
  • FS Register: In addition to the formal FS Register, the FCA is proposing to introduce a new public directory to include all certified staff, non-SMF directors, sole traders and appointed representatives.
  • Standard NEDs: It appears that they will be included on the new public register described above, but otherwise do not have to be notified to the FCA as opposed to Standard NEDs in the Bank SMCR which do have to be notified.
  • Separate Handbooks: Despite receiving this request from the industry, the FCA is not proposing to proceed with separate handbooks for the different types of firms. However, the final versions of the forms are included in PS18/14 and the FCA has confirmed that when firms are using the forms on the online Connect system, the forms will be tailored so that, for example, a limited scope firm will only see the SMF functions available for them to select and not all functions.
  • Corporate Partners/Limited Partners: The FCA has confirmed that only partners that meet the definition of being a senior manager need to be put forward. This should mean that corporate partners and those limited partners that are not involved in managerial decisions in a partnership will need to cancel their approvals ahead of the implementation of the regime.
  • Implementation Timing: The FCA has confirmed that Treasury has announced that the implementation date for solo-regulated firms is 9 December 2019. This was confirmed in Parliament by the Economic Secretary to the Treasury, John Glen, in a written ministerial statement but the formal statutory instrument is awaited.
  • Practical application: In relation to the scope of the rules, for firms which conduct both regulated and unregulated activities, the FCA has confirmed that it only relates to regulated activities but also includes those activities that support the regulated business, e.g. middle office and back office. In particular, the FCA has provided new guidance that enhanced firms only need to address those parts of their business that relate to/support regulated activities in the SORs and Map and not all parts of their business.
  • Territorial Limitation: The FCA is continuing with its proposed approach to the territorial limitation for certified staff and conduct staff. However, for UK branches of EEA firms the FCA has said that they will not provide any further guidance on territoriality until the plans for Brexit become clearer. Finally, the FCA has confirmed that there is no territorial limitation in relation to allocating overall responsibility (for enhanced firms) meaning that even non-UK business of enhanced firms will need to be the overall responsibility of one/more senior managers.
  • Application to Appointed Representatives: The FCA has confirmed that the current approved persons regime will continue for appointed representatives. However, note that the approved persons will be moving from the formal FS Register to the public directory.
  • ‘No gaps’ principal: The FCA has confirmed that core firms do not have a duty to allocate ‘overall responsibility’ for every business area, function, activity of the firm to one or more senior managers (known as the ‘no gaps’ principle). However, they have not clarified how this sits with their previous statements (namely that core firms should have one or more senior managers with responsibility for outsourced arrangements) which appear to suggest that they expect the ‘no gaps’ principal to apply to core firms.
  • Head of Legal/GC: In relation to whether the Head of legal is in-scope/out-of-scope, the FCA has confirmed that they will issue a consultation paper before the regime comes into force.
  • Prescribed Responsibilities: The FCA has made a number of comments:
    •  There have been some changes to what was in the consultation namely that the proposed prescribed responsibility for legal and regulatory obligations has been removed (as it is already included within the scope of other senior manager functions).
    • The FCA has also confirmed that merely because an individual is a board member does not mean that s/he will have to have prescribed responsibilities.
    • The FCA has confirmed that even if a firm does not have any certified staff, the prescribed responsibility that relates to the certification regime still needs to be allocated.
    • The FCA will be proceeding with its intention to introduce the new prescribed responsibility in relation to conduct rules (namely the training of conduct staff and the breach reporting). This will apply to those already within the Bank SMCR from 1 November 2018 and the amended forms (including Statements of Responsibilities) will be available from the first half of September 2018.
    • The FCA confirmed that there is no additional prescribed responsibility for culture which remains the responsibility of everyone within a firm and  which senior managers should drive forward.
  • CASS Oversight Function: The FCA has confirmed its original position in relation to the current CF10a role – namely that a new SMF function for the current CASS Oversight officer will not be introduced. However, the current CASS Oversight officer will need to either map into being a senior manager (the general SMF function) or a certified employee.
  • Allocating responsibilities: The FCA has provided guidance on how the responsibilities might be allocated/described, particularly in areas that involve a process flow with different departments having responsibility for different parts of the process chain. In particular, they have commented that responsibilities (particularly prescribed responsibilities) should not be shared across different lines of defence. They cite financial crime as an example noting that if overall accountability rests with an executive director, the fact that Compliance is involved in the process does not mean that the prescribed responsibility should be split or shared with the SMF16 (Compliance Officer). Instead, the FCA notes that the role of compliance in oversight over this process should be included in the Supplementary Information part of the Statement of Responsibilities. Moreover, if the MLRO does not have overall responsibility for all areas of financial crime, then the financial crime prescribed responsibility should not be allocated to the MLRO but up to the senior manager that has the holistic view across all areas that are included within financial crime.
  • Changes to criminal checks: The FCA has changed their requirements in relation to criminal record checks, these will only be mandatory for proposed senior managers. This means that the original proposal for these checks to also be required for certified staff falls away as a regulatory requirement but firms may still choose to adopt such checks.
  • In-flight cases: For applications for additional approved persons pre-implementation that are ongoing on implementation, or intended to take effect upon implementation, the FCA will automatically treat them as applications for SMFs.
  • Fit and Proper questions in Form As: In what is a surprise, the FCA has decided to introduce a time limit for some of the fit and proper questions in the Form As. The time limits relate to questions about civil proceedings and have a 10 year time limit. This should allow firms doing their fitness and propriety process for certification staff to adopt a similar time limit. Also, the FCA has clarified that the requirement to disclose arbitration proceedings was only meant for insurers and not solo-regulated firms.

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