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In late 2015 the FCA announced that it was to abolish the Approved Persons regime and extend the Senior Managers and Certification Regime (SM&CR) currently in place for banks, building societies, credit unions and PRA-designated investment firms to all regulated financial services firms, including those engaging in credit-related regulated activities. The aim and approach of the SM&CR is to create greater individual accountability and professional standards within the UK banking industry through enhanced transparency around those roles and responsibilities held by Senior Managers.
This Quick Study outlines the key provisions of the SM&CR, summarises the current challenges faced by financial services firms in adhering to the policy, discusses how the SM&CR could apply to the consumer credit industry, and finally outlines the current interim measures that consumer credit firms should be taking in preparation for these new regulatory requirements.
SM&CR – the Three Pillars
The SM&CR can be sub-divided into three distinct ‘pillars’:
Senior Managers Regime
- The Senior Managers Regime (SMR), which require senior roles to be fully defined and the individuals performing them to be approved by the regulator;
- The Certification Regime (CR), which require individuals capable of causing “significant harm” to either the firm or the firm’s customers to be certified on at least an annual basis by the firm; and
- Conduct Rules, that are applicable to all employees with a few exceptions to promote best practice at all levels of the firm.
Under the current Approved Persons regime firms will no doubt have become well acquainted with Controlled Functions, including Significant Influence Functions. Under the SMR, these are to be abolished and replaced with Senior Management Functions (SMFs).
An individual will be performing an SMF if:
i. they are responsible for managing one or more aspects of the firms’ regulated activities; and
ii. those aspects involve, or might involve, a risk of serious consequences for the authorised person, or for the business or other interests in the UK.
‘Managing’ can include taking decisions or participating in the taking of decisions on how a firm’s affairs should be run, meaning that non-executive directors and directors in other group entities who participate in the decision making process of the firm are therefore also included within this definition.
An SMF can be carried out by both executive functions (such as Chief Executive, Chief Finance, Chief Risk, Head of Internal Audit and head of key business area), and non-executive functions (Chairman, Chair of the Risk Committee etc.) Amongst these SMF functions, the SMR contains a number of ‘prescribed responsibilities’ which must be shared out and allocated as deemed fit between those carrying out SMFs within the firm.
The FCA has duly extended the list of those carrying out SMF functions to include all board members and individuals who have overall responsibility for one or more ‘key functions’. A list of key functions has been provided by the FCA to assist firms in determining these individuals within the firm.
Senior Management Functions – what do firms need to do?
There are three tasks in relation to the SMR that firms should start preparing now:
i. ‘Identify your Senior Managers': who within your organisation is engaging in a Senior Management Function? Such persons will be required to make an application for approval as a Senior Manager in much the same way as currently seen for Approved Persons. As part of the application, Senior Managers will be required to submit a ‘statement of responsibilities’ setting out the specific responsibilities of that individual within the firm. Firms should therefore start to prepare by identifying what responsibilities are currently, or it is intended will, be allocated to each Senior Manager.
ii. ‘Responsibilities Map': under the SMR, firms are required to prepare, maintain and update a Responsibilities Map. This is a single document that describes the firm’s senior management arrangements, including details of what specific responsibilities have been allocated to each senior manager and how these duties were assigned. The FCA Handbook contains prescriptive guidance in relation to this document.
Firms should start to prepare for this by analysing and documenting what responsibilities are allocated to its senior managers and identifying if there are any responsibility gaps where the FCA would expect a specific responsibility to have been allocated.
iii. ‘Identify applicable prescribed responsibilities’: the FCA is yet to confirm how the current prescribed Senior Management Responsibilities found in the FCA Handbook will apply to firms engaging in credit-related regulated activities. These prescribed responsibilities were initially designed to be applied to institutions such as banks and building societies, rather than firms engaging in activity such as credit broking as a secondary activity. On that basis, firms should expect some amendments to the application of the prescribed rules to the credit and leasing industry.
However, firms should still begin to look at the prescribed rules, identify those rules that are likely to be easily transplanted onto credit activities, and then assess to which Senior Manager the prescribed responsibility should be allocated.
The certification regime (CR) applies to staff who are engaging in a Significant Harm Function. A person will be engaging in a Significant Harm Function if they are employed in a position whereby they could pose a risk of significant harm to the firm or any of its customers.
An individual performing a CR will not be subject to direct approval by the FCA. Instead, a firm must take reasonable care to ensure that an employee does not perform a CR without having first been certified as fit and proper to do so.
The scope of activity that falls within the CR includes:
- Those individuals performing functions that would formerly have been a SIF, but would not fall within the scope of the new senior management function;
- Individuals in customer-facing roles who are subject to qualification requirements; and
- Anyone who supervises or manages a certified person.
As part of the assessment of fitness and propriety, firms seeking to appoint someone to either a senior management or a certification function must request a “regulatory reference” from all previous employers covering the past six years of employment. Likewise, potential employers of former employees will request regulatory references from firms, who will need to supply one.
Certification regime – what do firms need to do?
i. ‘Identify who falls within the Certification Regime'
: who within your organisation is engaging in a Significant Harm Function?
ii. ‘Consider how the fit and proper test applies within your firm'
: begin to plan how you assess whether an individual is fit and proper for each of the roles identified as a Significant Harm Function. Also consider what systems need to be put in place to ensure that employee certifications remain up to date and how the question of whether a person is fit and proper is assessed on an ongoing basis. Finally, consider what process is required if an employee ceases to be considered fit and proper, including requirements within employment contracts, both existing and future.
iii. ‘Plan how you will respond to requests for regulatory references'
: identify the criteria you will be required to cover in a regulatory reference when one is requested. Also begin to consider whether your systems currently hold information to address that criteria for at least six years.
The FCA will apply new conduct rules to:
- All individuals approved by the FCA as Senior Managers;
- All individuals covered by the FCA’s Certification Regime; and
- All other employees, except ancillary staff who perform a role which is not specific to the financial services business of the firm (such as receptionists, post room staff and events management).
If covered under the above, every employee must adhere to five key conduct rules:
- You must act with integrity;
- You must act with due skill, care and diligence.
- You must be open and co-operative with the FCA, PRA and other regulators.
- You must pay due regard to the interests of customers and treat them fairly.
- You must observe proper standards of market conduct.
In addition to the main five conduct rules, there are four additional conduct rules which currently apply only to Senior Managers of financial services firms:
- You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively.
- You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with relevant requirements and standards of the regulatory system.
- You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively
- You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice.
What challenges are faced by firms that are already subject to the SM&CR?
The FCA carried out a review on how well financial services firms were adhering to the ‘three pillars’. While most financial services firms had performed well, several firms had struggled to understand and implement the following:
- An allocation of the FCA-prescribed responsibilities to the most senior and/or most appropriate individual;
- Not all business activities and functions had been allocated to SMF holders, resulting in gaps within the firm’s responsibility structure;
- Some firms have not provided enough details as to the shared responsibilities between SMF holders. This has been a particular problem in firms with international structures; and
- The statements of responsibility should clearly reflect the duties outlined in the corresponding ‘Responsibilities map’ but many firms have demonstrated inconsistencies between these two documents.
The FCA has warned that firms which do not adhere in full to the new provisions will face warnings and penalties for non-compliance.
Timothy Anson, London, Paralegal also contributed to this article.