The FCA has published its first consultation paper on extending the Senior Managers & Certification Regime (“SM&CR”) to all firms regulated under FSMA (CP 17/25). The new rules will have significant implications for individual accountability and governance arrangements across the financial services sector.
The Government has been consulting since October 2015 on extending the SM&CR, which first came into effect for banks and large investment firms in March 2016. The FCA is now consulting on the specific rules to be applied to the wider sector.
Similar to the SM&CR for banks, the new regime will involve:
i. regulatory approval of designated “Senior Managers” (rather than of all Approved Persons, as currently);
ii. firm approval of other staff performing prescribed functions (such as customer-facing front office staff); and
iii. a new set of regulatory standards (“Conduct Rules”) that all staff (other than those in purely ancillary roles) will need to comply with.
However, there are some important differences between the FCA’s proposals and the existing rules for banks – a lighter touch approach is proposed across a number of areas, and it appears that only a limited population of large firms will be subject to some of the more onerous rules. In line with proportionality considerations, the FCA’s proposals envisage the application of different rules to different firms, depending on their size and complexity. The FCA is proposing a three-tiered approach, with a ‘core regime’ which will likely apply to the majority of FCA regulated firms, additional requirements for so-called ‘Enhanced Firms and a lighter touch regime for ‘Limited Scope’ firms. The new regime will also apply on a modified basis to UK branches of overseas firms – with different rules for Non-EEA headquartered firms and EEA headquartered firms, reflecting the allocation of responsibilities for prudential matters under EU law to Home State regulators.
The specific areas covered in CP 17/25 include:
- Which individuals will need to be approved as Senior Managers. As is the case for banks, this could include individuals based in the UK, or overseas, including where the individuals are employed by firms’ parent companies;
- The minimum “Prescribed Responsibilities” that need to be allocated amongst Senior Managers. A more limited list has been prescribed than in the case of banks (although the extent will depend on the type of firm).
- Which employees need to be subject to individual certification by firms and subject to regular assessments as to their fitness and propriety (“Certified Employees”). There are similarities in the approach taken for banks, but most firms covered by the new consultation are likely to have a much smaller population of Certified Employees than banks.
- As noted above, new “Conduct Rules” will be introduced – the proposed rules reflect those that already apply to banks.
- Requirements on firms where employees are hired or leave (including requirements to provide, and obtain, Regulatory References). As is already the case for banks, disciplinary action against staff for breaches of Conduct Rules will need to be disclosed in References.
- Reporting obligations, including where Conduct Rules are breached (these rules reflect the position for banks).
This Client Alert provides further information on the extension of the SM&CR and the 10 key actions which firms should be taking.