Are you ready for the Senior Managers & Certification Regime?
Earlier this month, the Financial Conduct Authority (FCA) published a short summary of the Senior Managers and Certification Regime, noting that The Conduct Rules for deposit takers and the largest investment firms (banks) came into effect on 7 March 2016, replacing the Approved Persons Regime, and rules regarding regulatory references for Senior Managers and staff in the Certification Regime came into force on 7 March 2017.
The new regime follows the 2013 Parliamentary Commission on Banking Standards
(PCBS), which recommended a series of measures to improve standards in financial
services. The FCA, alongside the Prudential Regulation Authority (PRA), developed the
SM&CR, aimed at ensuring that firms more rigorously consider their conduct, and
encourage a culture of individual responsibility and raise standards across the sector.
With the passing of the Bank of England and Financial Services Act 2016, the regime is
extended to all authorised firms, including consumer credit firms.
The FCA is currently developing its approach to the extension of the Regime to the sector,
and aims to publish its first consultation paper in the second quarter of 2017. However,
firms should be preparing now to ensure they are ready; both the FCA and HM Treasury
anticipate the implementation to begin in 2018.
The Regime and Rules will require a number of complex changes, including possible
fundamental changes to management and governance structures, and the implementation
of a large amount of documentation, systems and processes to fit with regulatory
Whilst the regulator’s authority will extend to a greater proportion of the firm’s employees,
the burden for certifying fitness of middle management moves from the regulators to
firms. As such, firms must ensure that both their practices and their policies and
procedures rigorously identify affected individuals, ensure individual responsibilities, and
cover breaches – and these must reflect the reality of business.
The new Regime will be made up of three strands:
Senior Managers Regime: Covering the most senior individuals, those who hold key roles,
or have overall responsibilities for whole areas. There should be a clear allocation of
various designated senior management responsibilities.
Firms need to prepare and submit a Statement of Responsibilities for each individual who
will become a Senior Manager. While some will be able to ‘grandfather’ into the new
regime, firms must consider whether current grandfathering provisions accurately cover
the move to the new regime. In all cases, newly approved individuals must be identified
prior to the commencement of the Senior Managers Regime, in other words, those who
are not currently Approved Persons, but who will be performing a Senior Management
function need to be accurately identified.
Certification Regime: Covering the wider population of ‘material risk takers’. Firms are
required to certify annually that these individuals are fit and proper to perform functions
which have the potential to cause harm to the firm, or to the firm’s customers. These
individuals will also be listed on the Financial Services Register.
Conduct Rules: Replacing Statements of Principles for Approved Persons (APER), and
applies directly to all staff (other than ancillary, i.e. IT support, facilities, assistants, PAs
etc). Split into two tiers, the first applies to all staff, whilst the second is specific to Senior
Managers. Firms must notify all relevant individuals that they are subject to the Conduct
Rules, and must give all affected staff appropriate training. It is the responsibility of a
relevant person within a firm to ensure that all staff subject to the rules are made aware
and given this training, and that the FCA are made aware of any breaches of Conduct
Firms can get a head start by considering how the changes will affect them. Now is the
time to begin early stage planning, including setting out key targets, timeframes, and
considering the impact on the firm both as a whole and on sub-departments, structural
changes, undertaking gap analysis and initial drafts of the required documentation along
with the new policies and procedures.
In particular, the large amount of documentation required should be noted. Employee
contracts may need to change – both existing and templates for new staff. With the
heightened risks to individual staff, changes to insurance and indemnity may need to be
considered. In order to meet the new requirements, a large number of new procedures
and processes are required, including those aimed at ensuring staff training, that staff
remain fit and proper while in post, and breach reporting systems and processes. Some
firms will also be required to provide and maintain a ‘Responsibilities Map’, which will
collate the firm’s management and governance arrangements.
The impact of not ensuring compliance could be considerable – where there has been a
breach by the firm of its regulatory obligations in relation to an area within a Senior
Manager’s remit, the regulator could take action against the Senior Manager for failing to
take ‘reasonable steps’ to avoid a breach occurring or continuing.