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The Senior Managers and Certification regime: The Final Countdown

08 August 2019. Published by Lucy Kerr, Senior Associate

With only a few months to go until the Senior Managers and Certification Regime (SMCR) is extended to apply to all sole-regulated firms, the FCA has released further near-final rules and produced a report on its findings as to how firms in the banking sector have embedded the regime since March 2016.

As explored in RPC's series of blogs (What is the SMCR?, What does the SMCR mean for me?, and  Key features of the SMCR), the SMCR is made up of three elements:

  • the Senior Managers Regime (SMR) which focuses on regulatory approval for senior individuals in each firm;
  • the Certification Regime, under which the onus is on firms to assess whether employees who could harm the firm or its customers are "fit and proper" to perform their roles; and
  • the Conduct Rules, which are high-level standards of behaviour for all individuals working in financial services.

Policy Statement

On 26 July 2017 the FCA published a Policy Statement, which sets out near-final rules on the extension of the SMCR to FCA sole-regulated firms and sets out the final rules on a new directory of the individuals working in financial services.

The headline points from the Policy Statement are:

  1. It confirms that a firm's Head of Legal function will not come under the SMR due to the fact that the disclosure obligations expected of individuals within the SMR would be incompatible with the Head of Legal function requirement to maintain legal privilege. 
  2. It amends the criteria for the "Enhanced" regime, which identifies firms to which the FCA will apply extra requirements.
  3. It clarifies the requirements and scope of the Certification Regime in respect of the "client dealing" function and circumstances where a Senior Manager also carries out a systems and controls role.
  4. It extends the Senior Manager Conduct Rule that obliges senior managers to "disclose appropriately any information of which the FCA or PRA would reasonably expect notice" to non-approved executive directors at Limited Scope firms.  This corrects an anomaly where some non-executive directors at such firms were caught by this rule, but executive directors previously were not.  Now, all directors at Limited Scope firms will be required to comply with this rule.

Stocktake Report on SMCR in the Banking Sector

The FCA has also recently published a Stocktake Report looking at how the banking sector has embedded the SMCR since March 2016 in a bid to assess whether there are any issues that require more focus from firms and/or the FCA. 

The report finds that most firms have made a "concerted effort" to implement SMCR.  For sole-regulated firms looking to prepare for the December implementation deadline, the key takeaways from the report are:

  • The Conduct Rules are the "critical foundation" for a firm's culture.  The FCA found that staff generally understood the Conduct Rules but it found that many firms were unable to explain what a conduct breach looked like in the context of their business.  The FCA plans to increase its supervisory focus on the Conduct Rules and considers that clear mapping of the Conduct Rules to a firm's values, as well as role-specific training will be indicators of how well the Conduct Rules are understood and implemented by firms.
  • The FCA found many Senior Managers remained concerned as to the meaning of their responsibility to take "reasonable steps" to prevent a regulatory breach.  The FCA referred back to the guidance in the Decision Procedure and Penalties manual and noted it will not issue further guidance in this regard, but instead encouraged Senior Managers to think more "broadly" and to create an environment where the risk of misconduct is minimised. 
  • Firms have implemented systems to oversee the employees falling within the Certification Regime and the FCA found they have generally broadened their approach to assessment of staff beyond solely technical skills.  The FCA found that managers are in a better position to assess the behaviours of their certified staff, but there were some issues, such as most firms could not demonstrate how they ensure consistency of their assessment approach across the population of certified staff.

With only a few months until SMCR is extended to all FCA sole-regulated firms on 9 December 2019, incoming firms would do well to take these findings onboard as they prepare to join the ranks of firms under the SMCR.

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