How Non-Executive Directors Will Be Affected By The SM&CR

This week we’re going to take a look at how Non-Executive Directors will be affected by the implementation of the Senior Managers and Certification Regime in solo-regulated firms.

Previously, under the Approved Persons Regime, all of a firm’s directors needed approval from the Regulator. This changes with the SM&CR, and from commencement, non-executive directors that do not also undertake a Senior Management Function do not require approval under the Senior Managers Regime.

This broadly mirrors the status of NEDs at banking firms – the SM&CR was implemented for banks in March 2016 – the Prudential Regulation Authority requires banks to assess the fitness and propriety of their NEDs, and in effect, requires the NEDs to adhere to the PRAs conduct rules.

Under the new Regime, some NEDs will hold a Senior Management Function, and should thus be treated as a Senior Manager. All NEDs will, regardless of whether they hold a Senior Management Function, be subject to the Conduct Rules. NEDs and NEDs who are also Senior Managers at Core and Enhanced firms will also be subject to the fitness and propriety requirements. This means that they will need to be assessed on their fitness and propriety (considering their honesty, integrity and reputation, their competence and capability, and their financial soundness), and will be subject to criminal records checks and regulatory references requirements. NEDs who are not Senior Managers at Limited Scope firms will not be subject to the fit and proper requirements, including regulatory references, and criminal records checks.

All NEDs will need to be trained on how the Conduct Rules apply to them. At present, the Conduct Rules that apply to Non-Executive Directors are:

1. You must act with integrity

2. You must act with due care, skill and diligence

3. You must be open and cooperative with the FCA, the PRA and other regulators

4. You must pay due regard to the interests of customers and treat them fairly

5. You must observe proper standards of market conduct

6. SC4. You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice.

The Financial Conduct Authority’s Code of Conduct for Staff sourcebook (COCON) sets out guidance on the responsibilities of Non-Executive Directors of SM&CR firms, and with which all NEDs should be familiar. The role of a Non-Executive Director performing the role of chair of the board of directors, chair of the nomination committee, chair of any other committee, and the general NED role, is to:

• Provide effective oversight and challenge

• Help develop proposals on strategy

Their responsibilities include:

• Attending and contributing to board and committee meetings and discussions

• Taking part in collective board and committee decisions, including voting and providing input and challenge

• Ensuring they are sufficiently and appropriately informed of the relevant matters prior to taking part in board or committee discussions and decisions

COCON sets out other key roles depending on the specific role that the NED performs – whether as part of the SM&CR regime or not – and reinforces that the standard of care, skill and diligence that the FCA would expect to see from a Non-Executive Director is that which would be exercised by any reasonably diligent person with the skills, knowledge and experience expected of someone performing their role.

Before implementation on 19 December 2019, all Core and Enhanced firms should ensure:

• Their NEDs have been trained on how the Conduct Rules affect them

• Policies and procedures are in place for ongoing fitness and propriety assessments, at least annually

• Policies and procedures are in place for the request of regulatory references for incoming NEDs

• Policies and procedures are in place for the undertaking of criminal records checks for incoming NEDs

• Where the CF2 function is performed by a non-executive director, Form K should be submitted to the FCA, telling them the firm wishes to convert an approved NED to the SMF9 – Chair function. Core firms do not need to submit the SOR; Enhanced firms must submit the SOR.

Limited Scope firms should ensure:

• Their NEDs have been trained on how the Conduct Rules affect them. Currently, SC4 of the Second Tier – Senior Manager Conduct Rules does not apply to NEDs at Limited Scope firms, however the FCA have published a consultation paper that proposes applying SC4 to non-approved NEDs at Limited Scope firms; until the policy statement is published in Q3 of 2019, Limited Scope firms should proceed on the basis that their non-approved NEDs will be subject to SC4.

For further information please download our Guide to SM&CR for Solo-Regulated Firms or feel free to Contact Us for clarity and guidance.

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