Posted: 12th September 2017

An updated version of our SM&CR implementation guide is now available.

Anticipation around SM&CR has been high following the introduction of similar measures within the banking world. The release of the FCA’s latest consultation paper has seen this anticipation turn into practical planning for the changes ahead.

It places emphasis on firms’ responsibilities, with the onus being on organisations to ensure their business is set up in such a way that enables a culture of good governance and individual accountability. In its proposal, the regulator demonstrates a flexible approach that is proportionate and considers the different risks of a firm’s business model by introducing ‘Enhanced’ supervision for those firms deemed to represent greater regulatory risk. It employs similar tools and principles used to implement the rules to the original banking version of the regime, but is ‘lighter touch’ for those firms deemed to represent a comparatively lower risk.

SM&CR affected firms will now be separated into the following:

• Limited scope - these are firms with limited permissions or whose principle business is not financial, i.e. a secondary general insurance firm. It is worth noting that these firms will not be moved into the enhanced regime (see below) even if they meet all of its criteria.
• Core – most firms will fall into this category and can be seen as the ‘standard’ version of the regime.
• Enhanced – this will apply to less than 1% of firms, whom, by way of size, complexity and potential impact on customers, fall into this category. Enhanced firms will be subject to increased scrutiny and a more complex set of requirements such as the development of a firm-wide ‘Governance Map’.

The core message of the regime is responsibility and accountability, especially for senior management. The purpose is to ensure that if things go wrong, the FCA can locate the person responsible and hold that individual accountable for their actions, or lack thereof. This is primarily because a culture of individual accountability is seen to be the most effective way to drive good governance, and ultimately making it less likely that firms will fail.

To implement the regime successfully, firms must be able to demonstrate the principles highlighted in SM&CR. By driving good culture and governance from the top and ensuring the right message filters down, firms will be better placed to put the customer at the heart of its business and ensure good customer outcomes.

The regime consists of three main elements:

• The Senior Managers Regime creates a set of specified ‘Senior Management Functions’, which will effectively replace the current Control Functions under the Approved Persons Regime (APER)
• The Certification Regime requires firms to identify employees who represent a risk to consumers, the firm or the markets it operates in, and assess on an ongoing basis whether they are fit and proper to perform their roles effectively
• The Conduct Rules require individuals to act with integrity, due care, skill and diligence, to be open and cooperative with regulators and to treat customers fairly. Where breaches of these rules occur, firms will be required to report the consequent disciplinary action taken to the FCA

Considerations for firms:

• All firms are required to allocate ‘prescribed responsibilities’ to senior managers
• In addition to the Responsibilities Map, enhanced firms are required to have an additional set of Senior Management Functions and prescribed responsibilities
• Every senior manager needs to provide an accurate statement of their own responsibilities to the regulator
• Individuals based overseas will be captured by the regime if they perform significant harm functions or are material risk takers, in relation to the UK business
• The FCA will be consulting on Appointed Representatives separately; likely to be later this year
• Firms should prepare for the potential effects of SM&CR on compensation, staff retention and ability to compete in the market, caused by the fact senior positions within the industry may be perceived as less desirable given the increased risk now associated with them

Consultation on the regime ends on the 3rd November 2018, and whilst we await the FCA’s final rules on the regime, firms need to be considering their readiness for SM&CR and any gaps that may exist. In particular, firms can learn from the original implementation of the regime for banks and should start considering the cost of implementing policies, retraining staff and monitoring compliance with the regime.  

Our popular SM&CR guide has recently been updated for 2019. Implementing the Senior Managers and Certification Regime: Practical Guidance for Solo-Regulated Firms 2019 outlines the steps required for Core and Enhanced tier firms to implement the regime effectively and ahead of the final deadline.