Raising the SMCR
09 Aug 2017
As the FCA consults on the potential expansion of its Senior Management and Certification Regime, Stephanie Palmer gauges the initial reactions
Image: Shutterstock
The UK Financial Conduct Authority has released proposals to extend its Senior Managers and Certification Regime (SMCR), bringing more firms into its scope, and replacing the previous Approved Persons Regime.
First coming into effect for deposit-takers and some of the largest investment firms in March 2016, the SMCR followed recommendations from the Parliamentary Commission on Banking Standards for improving standards in financial services, and place the concept of personal responsibility at the heart of how firms must conduct themselves.
The latest proposed changes extend the scope of the rules to apply to almost all regulated financial services firms, and are intended to make individuals more accountable for their conduct, ultimately reducing the risk of harm to consumers, and improving market integrity.
Staff members at all levels will be encouraged to take personal responsibility for their actions, with requirements extending to making sure staff can demonstrate their understanding as to where responsibility lies.
Jonathan Davidson, executive director of supervision for retail and authorisations at the FCA, said when the proposal was released: “Culture and governance in financial services and its impact on consumer outcomes is a priority for the FCA. The extension of the Senior Managers and Certification Regime is key to driving forward culture change in firms.”
“This is about individuals, not just institutions. The new conduct rules will ensure that individuals in financial services are held to high standards, and that consumers know what is required of the individuals they deal with. The regime will also ensure that senior managers are accountable both for their own actions and for the actions of staff in the business areas that they lead.”
Commenting on the proposals, Charlotte Henry, a financial services partner at law firm Norton Rose Fulbright, noted that the extension means the rules will apply to over 50,000 additional firms for the first time, including asset managers, brokers and consumer credit firms, plus any foreign firms operating branches in the UK.
For some of these, implementing the regime will pose a significant challenge, Henry said.
“The implementation of the regime is intensive and complex, particularly for smaller firms, involving a cross-collaboration between HR, compliance and legal departments. But, the biggest burden on firms will be continuing to operate in compliance with the regime as part of business-as-usual.”
The proposal for the new regime is split into three parts. First, the FCA proposes to introduce five conduct rules applying to all financial services staff.
Individuals must: act with integrity; act with due care, skill and diligence; be open and cooperative with regulators; pay due regard to customer interest and treat customers fairly; and observe proper standards of market conduct.
Second, the responsibilities of senior managers will be clearly set out. In the case of something going wrong in one manager’s area of responsibility, the individual could be personally held accountable. Further, any senior managers will have to be approved by, and registered with, the FCA.
Finally, under the certification arm of the regime, firms will be obliged to provide annual certification for individuals who do not fall directly under the regime, but whose jobs significantly affect customers or firms. These staff members will be duly assessed on their fitness, skill and propriety in their roles.
For smaller firms that are new to the regulation, a large part of the challenge will be in the culture shift. According to Henry, the senior managers affected will need support in understanding and undertaking their new duties, and addition training will be required, not least among HR personnel.
Henry added: “A review of employment insurance policies are all key.”
She said: “The FCA will want to see that the new conduct rules are actually embedded in the firm’s day-to-day business. The cultural shift for newly affected firms will be significant.”
That said, a statement from the FCA noted that the regulator will strive to make the regime proportionate to the size of a firm. A baseline of core requirements will apply to all regulated firms, while extra requirements under an “enhanced regime” will apply to larger and more complex firms.
The statement also suggested that these enhanced rules will likely apply to less than 1 percent of firms.
Sarah Henchoz, an employment partner at Allen & Overy, suggested that this differentiation between the largest 1 percent and the other 99 will ease some of the pressure on those in the larger bracket.
She said: “The FCA’s approach of not seeking to apply a one-size-fits-all policy to the extension firms will be a welcomed relief to the industry, which was actively seeking a level of proportionality in recognition of the different types and size of firms that will now be caught under the regime.”
However, for those firms that were previously not affected at all, even the ‘lite’ rules will still pose a challenge.
Henchoz commented: “Underpinning all of the requirements … will be the same structure of senior managers [and] certified persons, and the application of conduct rules to the majority of the workforce.”
Henry added: “The basic elements of the regime will need to be complied with by all firms.”
“This means putting forward in writing to the regulator exactly what identified senior managers of a firm are responsible for and those senior managers accepting that they have a personal duty to the regulator in relation to those responsibilities.”
While such an extreme change of culture will doubtless have an effect on the newly-obligated firms, it will also put additional strain on the FCA itself, which will have not only an inpouring of new information to contend with, but also a likely barrage of questions on the finer details of the regime.
And that’s on top of everything already on the regulatory agenda.
Grant Lee, financial services risk and regulation partner at PwC, suggested that the FCA will have to consider how it manages its interactions with such a varied group of firms.
He said: “Grandfathering and transitional provisions are really important. The FCA itself will be experiencing an uptick in authorisations and permissions activity, due to the second Markets in Financial Instruments Directive (MiFID II), but also Brexit, so it is important that the regulator feels able to manage the volume of activity that today’s proposals could create.”
“Firms shouldn’t underestimate the implications of this initiative on their people. Discussing the nature, scope and accountability of roles in an organisation is highly emotive, so communicating with staff, both immediately and throughout implementation exercises, is vital.”
The proposals come at a tricky time for UK-regulated financial services firms. With Brexit negotiations ongoing, and the continuing uncertainty around the future of London as a financial centre, firms are also contending with MiFID II, set to come into full force in January 2018, and then the General Data Protection Regulation (GDPR), which will be implemented the following May.
Lee said: “Firms are already flat-out tackling other regulatory issues such as MiFID II, the Insurance Distribution Directive, the Packaged Retail and Insurance-based Investment Products Regulation and GDPR, let alone managing the uncertainty of Brexit, so the FCA must be pragmatic in its approach, expectations and deadlines.”
Lee added: “The FCA must also be cognisant of the fact that many asset and wealth managers have EU or global footprints, and striking a balance between driving accountability in those who are responsible, without unduly affecting head-office staff is important.”
However, ultimately, market commentary broadly deems the new proposals as fair.
The stricter rules will only apply to a small minority, and the FCA has indicated that a final policy statement can be expected in the summer of next year, suggesting that the rules will not come into effect until late next year, something Henchoz said will come as further relief “for firms who still have a lot of work to do in terms of planning and scoping before they can begin implementation”.
Lee added: “We are glad to see that the FCA has taken a proportionate approach with its limited, core and enhanced regimes, as ensuring the best outcomes requires the FCA to recognise the diversity of firms.”
Consultation on the FCA’s proposals will close on 3 November.
First coming into effect for deposit-takers and some of the largest investment firms in March 2016, the SMCR followed recommendations from the Parliamentary Commission on Banking Standards for improving standards in financial services, and place the concept of personal responsibility at the heart of how firms must conduct themselves.
The latest proposed changes extend the scope of the rules to apply to almost all regulated financial services firms, and are intended to make individuals more accountable for their conduct, ultimately reducing the risk of harm to consumers, and improving market integrity.
Staff members at all levels will be encouraged to take personal responsibility for their actions, with requirements extending to making sure staff can demonstrate their understanding as to where responsibility lies.
Jonathan Davidson, executive director of supervision for retail and authorisations at the FCA, said when the proposal was released: “Culture and governance in financial services and its impact on consumer outcomes is a priority for the FCA. The extension of the Senior Managers and Certification Regime is key to driving forward culture change in firms.”
“This is about individuals, not just institutions. The new conduct rules will ensure that individuals in financial services are held to high standards, and that consumers know what is required of the individuals they deal with. The regime will also ensure that senior managers are accountable both for their own actions and for the actions of staff in the business areas that they lead.”
Commenting on the proposals, Charlotte Henry, a financial services partner at law firm Norton Rose Fulbright, noted that the extension means the rules will apply to over 50,000 additional firms for the first time, including asset managers, brokers and consumer credit firms, plus any foreign firms operating branches in the UK.
For some of these, implementing the regime will pose a significant challenge, Henry said.
“The implementation of the regime is intensive and complex, particularly for smaller firms, involving a cross-collaboration between HR, compliance and legal departments. But, the biggest burden on firms will be continuing to operate in compliance with the regime as part of business-as-usual.”
The proposal for the new regime is split into three parts. First, the FCA proposes to introduce five conduct rules applying to all financial services staff.
Individuals must: act with integrity; act with due care, skill and diligence; be open and cooperative with regulators; pay due regard to customer interest and treat customers fairly; and observe proper standards of market conduct.
Second, the responsibilities of senior managers will be clearly set out. In the case of something going wrong in one manager’s area of responsibility, the individual could be personally held accountable. Further, any senior managers will have to be approved by, and registered with, the FCA.
Finally, under the certification arm of the regime, firms will be obliged to provide annual certification for individuals who do not fall directly under the regime, but whose jobs significantly affect customers or firms. These staff members will be duly assessed on their fitness, skill and propriety in their roles.
For smaller firms that are new to the regulation, a large part of the challenge will be in the culture shift. According to Henry, the senior managers affected will need support in understanding and undertaking their new duties, and addition training will be required, not least among HR personnel.
Henry added: “A review of employment insurance policies are all key.”
She said: “The FCA will want to see that the new conduct rules are actually embedded in the firm’s day-to-day business. The cultural shift for newly affected firms will be significant.”
That said, a statement from the FCA noted that the regulator will strive to make the regime proportionate to the size of a firm. A baseline of core requirements will apply to all regulated firms, while extra requirements under an “enhanced regime” will apply to larger and more complex firms.
The statement also suggested that these enhanced rules will likely apply to less than 1 percent of firms.
Sarah Henchoz, an employment partner at Allen & Overy, suggested that this differentiation between the largest 1 percent and the other 99 will ease some of the pressure on those in the larger bracket.
She said: “The FCA’s approach of not seeking to apply a one-size-fits-all policy to the extension firms will be a welcomed relief to the industry, which was actively seeking a level of proportionality in recognition of the different types and size of firms that will now be caught under the regime.”
However, for those firms that were previously not affected at all, even the ‘lite’ rules will still pose a challenge.
Henchoz commented: “Underpinning all of the requirements … will be the same structure of senior managers [and] certified persons, and the application of conduct rules to the majority of the workforce.”
Henry added: “The basic elements of the regime will need to be complied with by all firms.”
“This means putting forward in writing to the regulator exactly what identified senior managers of a firm are responsible for and those senior managers accepting that they have a personal duty to the regulator in relation to those responsibilities.”
While such an extreme change of culture will doubtless have an effect on the newly-obligated firms, it will also put additional strain on the FCA itself, which will have not only an inpouring of new information to contend with, but also a likely barrage of questions on the finer details of the regime.
And that’s on top of everything already on the regulatory agenda.
Grant Lee, financial services risk and regulation partner at PwC, suggested that the FCA will have to consider how it manages its interactions with such a varied group of firms.
He said: “Grandfathering and transitional provisions are really important. The FCA itself will be experiencing an uptick in authorisations and permissions activity, due to the second Markets in Financial Instruments Directive (MiFID II), but also Brexit, so it is important that the regulator feels able to manage the volume of activity that today’s proposals could create.”
“Firms shouldn’t underestimate the implications of this initiative on their people. Discussing the nature, scope and accountability of roles in an organisation is highly emotive, so communicating with staff, both immediately and throughout implementation exercises, is vital.”
The proposals come at a tricky time for UK-regulated financial services firms. With Brexit negotiations ongoing, and the continuing uncertainty around the future of London as a financial centre, firms are also contending with MiFID II, set to come into full force in January 2018, and then the General Data Protection Regulation (GDPR), which will be implemented the following May.
Lee said: “Firms are already flat-out tackling other regulatory issues such as MiFID II, the Insurance Distribution Directive, the Packaged Retail and Insurance-based Investment Products Regulation and GDPR, let alone managing the uncertainty of Brexit, so the FCA must be pragmatic in its approach, expectations and deadlines.”
Lee added: “The FCA must also be cognisant of the fact that many asset and wealth managers have EU or global footprints, and striking a balance between driving accountability in those who are responsible, without unduly affecting head-office staff is important.”
However, ultimately, market commentary broadly deems the new proposals as fair.
The stricter rules will only apply to a small minority, and the FCA has indicated that a final policy statement can be expected in the summer of next year, suggesting that the rules will not come into effect until late next year, something Henchoz said will come as further relief “for firms who still have a lot of work to do in terms of planning and scoping before they can begin implementation”.
Lee added: “We are glad to see that the FCA has taken a proportionate approach with its limited, core and enhanced regimes, as ensuring the best outcomes requires the FCA to recognise the diversity of firms.”
Consultation on the FCA’s proposals will close on 3 November.
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