What Senior Managers Need to Be Doing Now for the SM&CR
As solo-regulated firms are preparing to leave behind the Approved Persons Regime and implement the Senior Managers and Certification Regime, November is the ideal time for Senior Managers to revise the changes that will affect them from 9th December. Senior Management Functions will replace Controlled Functions, and there are likely to be fewer SMFs in the organisation than there were CFs. There are a range of additional and enhanced responsibilities and expectations, including the ‘Duty of Responsibility’ and specific ‘Prescribed Responsibilities’.
How the new Regime affects individual Senior Managers, in practice, will depend on their role, given the specific function they hold, the business of their firm, their individual role, and any ‘prescribed responsibilities’ that are conferred on them. Each Senior Manager should spend time ensuring they are familiar with the requirements of the Senior Manager element of the Regime and whether this will result in changes to current ways of working, or whether any current gaps need to be accounted for – for example, whether robust and up to date policies, procedures and systems of control in their area exist and are regularly reviewed.
The Conduct Rules provide a solid foundation on which to base this preparation. All Senior Management Staff must be trained on and abide by the rules from the start of the new Regime, but training should not simply be a tick-box exercise – the Conduct Rules set out the standards against which the FCA will hold individuals to account. A thorough, practical knowledge of the rules can provide assurance that the basics are covered.
Senior Managers – who are not non-executives – must comply with all of the Conduct Rules.
There are two tiers – one tier of five rules for all staff (other than ancillary staff), and a second tier of four individual conduct rules that cover additional responsibilities and accountabilities specifically for Senior Managers. Tier one of the conduct rules also apply to non-executive directors – as well as Senior Manager Conduct Rule 4 – the reason being that non-executives are likely to have access to the types of information that the FCA may need to be aware of.
Senior Managers should ensure that they know what is expected by the rules in both tiers – and not just focus on the second tier – and are clear about what good practice in their areas will look like in light of the Rules. Just as importantly, Senior Managers should think about what potential breaches in their areas of responsibility will look like.
Senior Managers should bear in mind that the first-tier rules apply equally to the second tier, and that in June 2018, the FCA took action against an individual for a breach of Individual Conduct Rule 2 (acting with due skill, care and diligence).
In the run-up to implementation, Senior Managers can use the Conduct Rules to audit their ways of working, in particular:
Review each area that they are accountable for, and ensure that each business area has been clearly assigned to a particular individual and that reporting lines are clear
Ensure that policies and procedures for reviewing staff competence, skills, knowledge and performance exist
Ensure they have taken ‘reasonable steps’ to ensure their business area has clear operating procedures to ensure compliance with the requirements of the regulatory system
Where clear deficiencies exist, Senior Managers should ensure that improvement measures are taken
Ensure they are familiar with the difference between Individual Conduct Rule 3 (you must be open and cooperative with the FCA, the PRA and other regulators and SC4 (you must disclose appropriately any information of which the FCA or PRA would reasonably expect notice
This is particularly important because any disciplinary action taken as a result of breaches of the Conduct Rules must be notified to the FCA, and will be included on regulatory references for at least six years, or indefinitely - depending on the severity of the breach or action. The FCA can also take independent action against individuals for breaches of the Conduct Rules. Research by Clyde and Co found evidence of a switch in focus from firms to individuals in 2018, with the average fine amount almost trebling in 2018 when compared to 2017. This reflects the expectation of the Regulator that those in Senior Manager roles be fully accountable for ensuring the prevention of wrongdoing. There is also evidence that the number of open cases was up to a record high in 2018, suggesting that the regulator is proactively investigating any issues within its remit.
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