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Advice to Business: Peter Caldwell and Christopher Sykes discuss how businesses should respond to the extension of the Senior Managers Regime

Background

The recent decision by the FCA not to discipline RBS over the GRG lending scandal caused outrage in some quarters, but perhaps should be seen as a reflection of a change of approach to regulation. The “Senior Managers Regime” (SMR) is the latest effort by the FCA to avoid the need for crisis management through a regulatory regime that is better understood, more consistent and more effective .{i} The SMR will be rolled out to all regulated firms and persons by 9th December 2019.[ii] Firms should start acting now to ensure they are compliant with the SMR by that date.

 

The old regime and the revolution

The SMR replaces the “Approved Persons Regime” (APR) as implemented by the Financial Services and Markets Act 2000 (FSMA).

The APR regulated any person exercising a “controlled function” under s.59 FSMA. The most basic requirement was that such “approved persons” had to be “fit and proper” to exercise their controlled functions (s.61(1) FSMA). They were also required to comply with the FSA Code of Practice or else face disciplinary proceedings (s.66 FSMA).

In 2013, the Parliamentary Commission on Banking Standards criticised the ineffectiveness of the APR.[iii] In the following years, the FCA held a series of consultations on how to better regulate the financial regulatory system. By 2015, progress formulating the new SMR scheme enabled the Treasury to herald it as the incoming replacement for the now “discredited” APR.[iv]

 

A focus on “individual accountability”

The ethos underlying the SMR will be “individual accountability”. The FCA describes the SMR as aiming to “reduce harm to consumers and strengthen market integrity by creating a system that enables firms and regulators to hold people to account.”[v]

The people who will be held to account are “the most senior people in a firm with the greatest potential to cause harm or impact upon market integrity.”[vi] These senior managers (SMs) will be subjected to “a more rigorous, comprehensive and consistent approach across the financial industry.”[vii]

 

Achieving compliance under the SMR

The extent to which SMs are regulated by the SMR will be decided by the scale and complexity of their firm. The SMR identifies the scale of a firm by allocating it into a certain “tier”. For example, a small brokerage firm will not be in the same tier as a global bank and so will be regulated with a lighter touch.

The SMR establishes three tiers: Limited Scope, Core, and Enhanced. Limited Scope and Core firms will be exempt from stricter regulatory requirements. Enhanced firms will bear the greatest burden since their “size, complexity and potential impact on consumers or markets warrant more attention.”[viii]

Although the SMR regulates firms as well as individuals, the new regime has been described as “highly personal” in its focus. Senior managers are now under a non-delegable “duty of responsibility” and will be personally held to account if they fail to take reasonable steps to comply with the SMR. [ix]

The FCA envisages the leadership of firms as being the first responders to regulatory breaches. The regulator will, however, intervene when necessary. In the words of the FCA “Guide for FCA solo-regulated firms” (“the Guide”): “Sometimes it will be appropriate to take action against a Senior Manager, sometimes against a firm, and sometimes against both. These decisions will be made on a case by case basis, applying the criteria set out in [the Decision Procedure and Penalties Manual].”[x]

 

Practical steps to achieve compliance

The pressing question for firms and senior managers is what practical steps are needed to achieve compliance with the SMR. Of course, the very first step is for firms to give a close reading to the Guide itself. Besides that, there are four basic steps that a firm should take.

 

First step: assess your tier

The leadership of a firm should assess whether their organisation qualifies as a Limited Scope, Core or Enhanced firm.

The FCA expects each firm to take the initiative for this process of self-assessment. Those assessing their firm’s tier should begin by consulting the Guide, which explains how each tier is defined. The FCA has, however, stated that it will contact firms itself in order to provide its own assessment of their tier.

An accurate assessment is vital. The tier into which a firm falls decides how the FCA expects that firm to comply with the SMR.

 

Second step: identify your senior managers and their functions

Any employee who exercises a Senior Management Function (“SMF”) qualifies as a SM. SMFs are listed and defined at SYSC 4.7.7 of the FCA Handbook.

The size and complexity of a firm will define how many SMFs must be allocated among its SMs. Enhanced firms may have as many as 17 SMFs. SMFs that apply to Enhanced firms will include functions that rarely trouble smaller firms; for example, deciding who chairs the remuneration committee. By contrast, the Guide anticipates that Core firms will have six SMFs and Limited Scope firms will have only three.

Most firms already have SMs performing the key SMFs. For example, most firms will have a Money Laundering Reporting Officer (as per SMF17). Firms should nevertheless investigate whether their existing SMs will be automatically converted (or “grandfathered”) into the new SMR scheme, or if their conversion will require approval by the FCA. The Guide provides further information about which of the “controlled functions” will transition to the new scheme without the need for re-approval by the FCA.

 

Third step: draft Statements of Responsibility for all SMs

After establishing which SMs are performing which SMF, a firm must ensure that a Statement of Responsibility (SoR) is drafted for each SM.

The SoR should set out all of the SMFs for which the individual SM is accountable. There should be no space for ambiguity. For example, if a certain SMF is shared between two SMs then that should be clarified in their SoRs.

The SoR itself should be a succinct and self-contained document. It is not necessary for a SoR to detail how each SMF will be performed. As the Guide states, the ethos behind the SMR is accountability not micro-management.

The completed SoR should be submitted to the FCA. It is, however, a living document. If the allocation of a SMF changes, then the firm should update and re-submit its SoR. A firm should always be able to provide the FCA on request with the SoR for an individual SM.

 

Fourth step: allocate Prescribed Responsibilities among your SMs

Along with allocating SMFs, firms should allocate Prescribed Responsibilities (PRs) among its SMs. The SoR should state whether the SM in question is accountable for any PRs as well as SMFs.

PRs are defined at SYSC 24 of the FCA Handbook. Their purpose is “to make sure a Senior Manager is accountable for key conduct and prudential risks.” For example, one PR is the responsibility for ensuring the firm performs its obligations under the SMR.

Each PR should be allocated to the SM “who is the most senior person responsible for that activity or area.” That SM should have the knowledge and competence necessary to meet their PR. If a PR is allocated to a SM, or re-allocated to another SM, then the SoRs for those affected should be updated and re-submitted to the FCA.

 

Firms should begin engaging with the SMR now

Achieving compliance will not be a straightforward process and will require real effort and investment from regulated firms. This article has only summarised the fundamentals of achieving regulatory compliance. The advice given to individual firms will engage with the regulatory scheme in a way that is tailored to their specific operations and employees.

It should be stressed that compliance will be an ongoing project. Firms may shift between tiers and the role of senior employees may expand or change over time in a way that requires a re-assessment of whether the firm is compliant. Firms are expected to work actively with the FCA to achieve this end.

This “ongoing project” is one with which all regulated firms will soon have to grapple. Failure to do so will lead to disciplinary sanctions for firms as a whole and also their individuals SMs. The hope of the FCA seems to be that the SMR will place a renewed emphasis on individual accountability. This approach signals the determination of the regulator to end the public perception that individuals as well as firms are “getting away with it” when disaster, or negligence, strikes.

 


 

{i} HM Treasury, “Senior Managers and Certification Regime: extension to all FSMA authorised persons”, (October 2015) para.1.4

[ii] FCA, “The Senior Managers and Certification Regime: Guide for FCA solo-regulated firms”, (July 2018), p.51

[iii] HM Treasury, “Senior Managers and Certification Regime: extension to all FSMA authorised persons”, (October 2015), para.1.6

[iv] HM Treasury, “Senior Managers and Certification Regime: extension to all FSMA authorised persons”, (October 2015), para.1.1

[v] FCA, “The Senior Managers and Certification Regime: Guide for FCA solo-regulated firms”, (July 2018), p.6

[vi] FCA, “The Senior Managers and Certification Regime: Guide for FCA solo-regulated firms”, (July 2018), p.13

[vii] HM Treasury, “Senior Managers and Certification Regime: extension to all FSMA authorised persons”, (October 2015), para.1.11

[viii] FCA, “The Senior Managers and Certification Regime: Guide for FCA solo-regulated firms”, (July 2018), p.18

[ix] FCA, “The Senior Managers and Certification Regime: Guide for FCA solo-regulated firms”, (July 2018), p.14

[x] FCA, “The Senior Managers and Certification Regime: Guide for FCA solo-regulated firms”, (July 2018), p.14