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Part 2: What does the SMCR mean for me?

29 October 2018.

The new “Conduct Rules” are a minimum, basic standard of good personal conduct and behaviour applicable to all financial services personnel, and against which the FCA will hold individuals to account.

The SMCR introduces three levels of obligations:

  • Conduct Rules
  • the Senior Managers’ regime
  • the Certified Persons’ regime

Conduct Rules

The main tier of Conduct Rules, which apply to all staff, requires that personnel act with integrity, as well as due care, skill and diligence, must be open and cooperative with regulators, must pay due regard to the interests of customers and treat them fairly and must observe proper standards of market conduct. There is little that is ground-breaking in their content but the key innovation of codifying the Conduct Rules is that they are directly enforceable by the FCA. The FCA has stated that the Conduct Rules are “a meaningful change in the standards of conduct we expect from those working in the industry…by applying the Conduct Rules to a broad range of stall we aim to improve individual accountability and awareness of conduct issues across firms”.

The Conduct Rules apply both to a firm’s regulated and unregulated financial services activity (including activity carried on in connection with a regulated activity). In other words, financial services personnel will have to adopt the new conduct culture in all their work. Operating within the Conduct Rules will need to be inherent in everything staff do, rather than applying the Conduct Rules as a sort of “go/no-go” hurdle to be cleared prior to implementation of a decision.

The Conduct Rules apply to almost all personnel of a financial services firm. This includes all Senior Managers, Certified Persons, Non-Executive Directors (who are for other purposes outside of the SMCR to a greater degree than they are of the Approved Person regime) and all other staff except for those who do not perform a role specific to financial services. The FCA calls these exempt staff “ancillary staff” and the new rules contain an exhaustive list of what constitutes ancillary staff roles. These include: receptionists, post room staff, reprographics staff, facilities management, events management, security guards, invoice processing, audio-visual technicians, vending machine staff, medical staff, archive records management, drivers, corporate social responsibility staff, data controllers and processors, cleaners, catering staff, personal assistants and secretaries, information technology support, and human resources administrators.

All non-ancillary staff will need to be trained on how the Conduct Rules apply to their role. This will require bespoke education and engagement.

Additional Conduct Rules for Senior Managers

Certain additional Conduct Rules will also apply to Senior Managers. Senior Managers must take reasonable steps to ensure that: the business of the firm for which they are responsible is controlled effectively; the business of the firm for which they are responsible complies with the relevant requirements and standards of the regulatory system; any delegation of their responsibilities is to an appropriate person; and that they oversee the discharge of the delegated responsibility effectively. Senior Managers must also disclose appropriately any information of which the FCA or PRA would reasonably expect notice. Again, it’s not the content that is new, but the adoption of these principles in black and white, and that Senior Managers will be held accountable to them.

For Senior Managers seeking to demonstrate that they have adequately met their Conduct Rule obligations, there has been much discussion (and no doubt there will be much more to come) about the concept of “reasonable steps”. Some commentators think that this will lead to more collective decision making, further administrative burden on firms, more meetings and ultimately “analysis paralysis”. At this time, it remains to be seen how this question will be answered by the industry, but we think it is important to remember that most of the firms being brought under the aegis of the SMCR in December 2019 are relatively small, lightly staffed enterprises. It will be uneconomic for most of these firms to introduce layer upon layer of committees, task forces and approval bodies. However, it should not be seen as a negative for such firms to seek to record their decisions and decision making processes in a systematic manner. On the buy-side of the asset management industry, it was not too long ago that trades were recorded on scraps of paper and the logic for decisions was not formally recorded in an OMS or PMS. However, practice evolved, and it seems reasonable to expect a similar evolution for systematic recording of management decisions in light of the SMCR.

Senior Managers

By virtue of their importance to the direction and operation of a firm, senior managerial personnel will be required to comply with the most extensive level of obligations under the SMCR. In addition to the extended conduct rules and fitness and propriety standards required, Senior Managers will need to be approved by the FCA, and to meet the SMCR’s fitness and propriety standards.

Part of the approval process will include the role and duties of Senior Managers being set out in a “Statement of Responsibility”1 which will act as a yardstick to measure each Senior Manager’s activities. Each Senior Manager will owe a “Duty of Responsibility” to the FCA, so that if the relevant firm breaches an FCA requirement, the Senior Manager responsible for that area can be held to be directly and personally accountable if they did not take “reasonable steps” to prevent or stop the breach.

The FCA has established a range of “Senior Manager Functions” (similar to “Significant Controlled Functions” under the existing Approved Person regime), and firms will apply for individuals to carry out specific Senior Manager Functions. However, the FCA considers that the SMCR does not require firms to change their governance structure or to hire new people to fill specific roles. As such, if a firm is not required to have a particular function, the SMCR will not change that. But (as with the Approved Persons regime), there will be certain roles that every business must have. The FCA refers to these as “Required Functions”. For most Core firms, the only Required Functions will be compliance oversight and anti-money laundering oversight. However, in addition to this, as well as being responsible for matters inherent in their roles, Senior Managers of a firm will be required to apportion between them responsibility for a handful of key conduct and prudential risks. The FCA refers to these items as “Prescribed Responsibilities”.

A “Senior Manager” will be any individual who performs a Senior Manager Function, whether based in the UK or abroad (ie there is no territorial limit). And one person may hold more than one Senior Manager Function at any one time.

Firms may outsource the carrying out of particular functions to a third party, but the accountability for that function cannot be outsourced, and will remain the responsibility of a specific named Senior Manager at the firm (and oversight of delegation is an explicit Senior Manager Conduct Rule).

Staff who are not Senior Managers of a firm but whose activities could result in “serious harm” to the firm, consumers or market integrity will be subject to the Certified Persons regime. Certified Persons need to be fit and proper to carry out their duties, and will report (ultimately) to a Senior Manager, but the “certification” process will be owned by and maintained by the firm itself and its Senior Managers rather than by the FCA. A firm may have many or no certified persons.

Unlike the situation with Senior Managers, the Certified Persons regime is subject to territorial limitations. A person is out of scope if they would otherwise be carrying out a Certified Person function but are based overseas, do not deal with UK clients and are not a “material risk taker” (ie Remuneration Code staff).

It is possible that one individual can be both a Senior Manager and a Certified Person of a given firm. The FCA considers such a scenario to be unlikely in “larger” firms, but it could arise where a director of a firm also has authority to execute trades. If an individual is “double hatting” in this way and the two roles they are performing are very different, the FCA expects that the person will be certified by the firm as well as approved by the FCA as a Senior Manager.

Converting to the SMCR from the approved person regime and relevant transition periods

The FCA has also provided some much needed colour on the process of converting existing firms from the Approved Person regime to SMCR.

Conversion

The FCA expressly told the SMCR Briefing on 11 July that they have sought to minimise the administrative burden of moving to the new regime for firms. Accordingly, the FCA envisages that, wherever possible, the conversion process will be automatic. Core and Limited Scope firms are not, by default, going to be expected to make submissions to the FCA and the FCA has published outlines for the automatic mapping of certain functions from the Approved Person/Controlled Function regime to the SMCR/Senior Manager/Certified Person regime.

In line with the maxim that “you only get out what you put in”, the FCA quite reasonably requests that firms review their existing FCA filings and approvals, and makes any appropriate amendments well in advance of the commencement of the SMCR. This should help to ensure that the conversion process is smooth for firms and the FCA. Or at least, that’s the theory. As mentioned above, firms are responsible for their own classification and filings. As such, automatic mapping or not, firms will still have to ensure that they are correctly represented under the SMCR, and make any amendments necessary. Responsibility for a firm’s compliance with its regulatory notification obligations under the SMCR will sit with a specific Senior Manager and that Senior Manager will be accountable for any failures.

Transition periods

The SMCR commences for most firms (ie Solo Regulated Firms) on 9 December 2019, but the FCA has also announced two noteworthy transition periods.

As such, by 9 December 2019, Solo Regulated Firms MUST have:

  • identified all Senior Managers and Certified Persons, and
  • trained all Senior Managers and Certified Persons on the Conduct Rules.

Firms will then have 12 months to complete the initial certification process2.

Firms will also have those 12 months to train non-Senior Managers and non-Certified Persons on the conduct rules. 

1. At their SMCR Briefing on 11 July, the FCA suggest firms consider Statements of Responsibility to be “statements of accountability” and impressed the point that the contents of Statements of Responsibility should set out what an individual is accountable for rather than what they functionally do.

2. Accordingly, it looks to us that there is a typo on page 52 of the guide for Solo Regulated Firms. “9 December 2019” should be “9 December 2020”.