Regulatory update: CP17 / 40 and 41 - Transitioning to a new regulatory landscape under SM&CR

Posted: 27th February 2018

Background

On the back of the FCA’s initial consultation (CP 17 / 25) outlining its plans for introducing the Senior Managers & Certification Regime (SM&CR) to all financial services firms, the FCA has subsequently released two separate consultation papers.

CP17 / 40 and CP 17 / 41 update the industry on how the regulator is proposing to transition firms across to SM&CR, and how it intends to transition insurance firms (who had previously been subject to either the Approved Persons Regime (APR) or both APR and the Senior Insurance Managers Regime), respectively.

By way of a reminder, the core components of SM&CR (the Senior Managers Regime, the Certification Regime and the Conduct Rules) are all being rolled out to the firms in scope of the proposals set out in the original consultation, but the applicability of the regime will vary for firms depending on whether they are regarded as ‘Core’, ‘Enhanced’ or ‘Limited Scope’ under SM&CR.

Key features of CP17 / 40 and 41

The FCA is introducing a simpler process for transition than that experienced by the banks, and senior managers will not need to re-apply for their roles in most cases, providing that the corresponding role exists under SM&CR.

This means that currently approved persons under the APR will need little interaction with the FCA, and the process will effectively be automated for the vast majority of impacted companies (aside from the non-executive Chair of a firm who will have to submit a regulatory form to become that function under SM&CR, because this role was not specified under APR).

However, there is a caveat to this. Firms subject to the Enhanced Regime – whereby the largest and most complex firms (fewer than 1% of regulated firms, or approximately 350 firms) are subject to significantly more stringent requirements – will have to follow a process similar to that which applied to banks’ and insurers’ senior management teams. This means the completion of a regulatory conversion form for each approved person, a statement of responsibility for each approved person and a firm-wide responsibilities map. Enhanced firms can expect a more complex transition to SM&CR than firms in the other two camps.

For the Certification Regime – whereby it is now up to the firm to authorise and certify as fit and proper its own customer facing or significant harm staff (which will likely include previously approved persons) – there will be a gradual implementation. The FCA has not yet defined exactly what it means by ‘gradual’, but this approach is similar to how the banking regime was rolled out, where firms were given 18 months to fully set up their operations for the Certification Regime.

Likewise for the Conduct Rules, following the formal start of SM&CR, firms will have a ‘bedding-in’ period whereby staff won’t be required to have the rules applied and trained out to them for the first 12 months.   

It is also worth mentioning how the FCA is dealing with Appointed Representatives (ARs) – and specifically their approved persons – in the landscape of SM&CR.

Primarily as a result of the difficulty and lack of logic in transitioning all ARs (where in many cases it would not be proportionate given the limited impact they have on their Principal firms) to an accountability regime, these firms will actually all remain as they are in APR, so there are no changes to report in this area. Importantly, what this does draw out is that the accountability for all AR activities and business areas will reside with Senior Management Functions (SMFs) in the Principal firm. Businesses will have to ensure that they are structured and aligned in such a way that makes the firm an effective oversight function of its AR(s).

Considering insurance firms

Bearing in mind the implications for insurance companies, the regulator is effectively breaking SM&CR into two differing versions: (1) Solvency II insurers and large non-directive firms; and (2) small, non-directive firms, any insurers with under £25m technical provisions and without permission to write / acquire new business.

In essence, the firms who slot into category (2) above will become Core firms, thereby following the same process as them (automated submission), and the Solvency II and large, non-directive firms category will be required to submit the Conversion Notification, Statements of Responsibility and Responsibilities Map, akin to the Enhanced firms.

What this means for firms

The main takeaway from these consultations for Core and Limited Scope firms is that they should consider whether the relevant senior managers are in place as approved persons in advance of the transitions, which would make the process as smooth as it can be. If firms do not do this, they put themselves at risk of submitting regulatory documentation as part of their transition, which the regulator will consider enforcing on an exceptional basis.

There is no official date for the regime to start as yet, but it will be up to the Treasury to make this announcement and firms will have until one week before that date to submit their conversion notifications to the FCA.

Firms can also consider at this stage:

• Performing gap analyses of their operating model in advance of SM&CR implementation
• Delivering senior management training (including mock FCA interviews) on the implications of SM&CR
• Designing, building and beginning to undertake SM&CR implementation p