What you need to know: the new fit & proper requirements in SM&CR
The FCA’s proposed extension to the Senior Managers and Certification Regime aims to bring all FCA regulated firms under a single regime, in effect uniting the Approved Persons Regime and SMCR. The current rules apply to banks and insurers and the FCA’s proposal will extend the regime to all FCA solo-regulated firms.
As part of the regime, the FCA are set to require firms to assess whether Senior Managers, Executive Directors and Individuals are fit and proper to do their job. This responsibility stems from legislation – the FSMA states that firms should ensure that anyone ‘performing a Senior Management Function or Certification Function is fit and proper for their role’ - and the consultation sets out how they envisage this would take place. Assessment doesn’t end once the individual is in role however, firms will need to assess them on an ongoing basis, at least once a year.
The FCA are not proposing any new rules relating to the qualifications, training, competence and personal characteristics of candidates for senior roles, further to the ones that already exist under FSMA.
In short, the FCA propose a set of requirements relating to the compilation of evidence that firms should collect – and be able to evidence - when assessing candidates for Senior Management roles and Certification Functions.
Criminal Records Checks
Under the current process, firms and candidates for Senior Management roles need to declare a criminal record – including spent convictions the employer has a legal right to be made aware of. This will continue under the new regime, but the FCA will also require firms to undertake criminal record checks as part of each Senior Manager application for approval. The FCA are adding to this the proposal that this requirement is also applied to Non-Executive Directors who are not Senior Managers.
This means that firms will either need to register with the DBS or use an umbrella organisation as an intermediary (in the case of smaller firms, for example). If a candidate has spent time working or living outside the UK, firms will need to consider undertaking an equivalent check with the appropriate overseas bodies.
Whilst criminal records checks will not be mandated for those undertaking Certified Functions, the FCA make clear that firms will be able to do this under the regime, where they choose and are legally allowed to do so.
In line with the recommendations of the Fair and Effective Markets Review (FEMR), the FCA propose that firms be required to request a reference from Senior Management and Certification Function candidates’ past employers for the previous six years. This would also apply to Non-Executive Directors who are not Senior Managers. The onus will be on firms to request a reference from all previous employers in the past six years for applicants for the relevant roles, using a standard template.
Firms receiving such requests would be required to provide references, disclosing certain information going back six years, including details of any disciplinary action taken due to breaches in Conduct Rules, and any findings that the person was not fit and proper, in addition to any other information that could be considered to be relevant in assessing whether a candidate is fit and proper. Any serious misconduct should be noted, even if this has taken place outside of the usual six-year period; serious misconduct is not bound by the six-year time limit.
At present, the FCA have suggested that firms will need to use their judgement when considering what is relevant, on a case-by-case basis. The new requirements don’t impose anything on a firm’s current disciplinary procedures – these shouldn’t need to change, and firms will not need to revisit previous disciplinary action that happened before the requirements come into effect.
As such, firms will need to establish good record keeping systems, as the proposed rules require retention of records of disciplinary and fit and proper findings, as well as updated regulatory references where ‘new, significant information comes to light’. The FCA also highlight that firms should not enter into arrangements that conflict with these disclosure obligations, e.g. non-disclosure agreements.
A Senior Manager will be accountable for the firm’s regulatory reference obligations as part of Prescribed Responsibilities 1 and 2. Firms’ compliance with these new rules would need to be consistent with their common law duties and other relevant legislation, such as those relating to the rehabilitation of offenders and spent convictions.
The consultation on extending SM&CR to all FSMA authorised firms closes on 3 November 2017 with the policy statement due in Summer 2018.
If you’re considering whether your firm needs FCA Authorisation, or you are starting down the road to becoming authorised, download our free FCA Authorisation guide