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FCA Consultation CP17/26***

The Senior Managers Certification Regime (SMCR) is a key part of the initiatives emanating from the FCA aimed at setting the tone, culture, integrity, ethics, conduct and governance of the Company. However, the purpose of the SMCR is not to change how firms organise themselves or to require firms to hire people to fill specific functions rather is aimed at assisting firm how best to structure themselves with the ultimate underlying goal of improving public confidence.

Aims of the SMCR

The regime will require all firms to develop a culture of accountability at all levels and, for the first time, will mean senior individuals are held fully accountable for defined business activities and material risks. The FCA consultation will be open for three months until 03 November 2017. The FCA recognised that the approach of the firm has to be proportionate to the potential for harm. However, will apply to all and will require observance of the Certification Regime, Fit and Proper tests, and Conduct Rules.

Although it does appreciate that not all firms will be subject to the same tasks, Management functions or obligations.

Applicability of the Rules

It is proposed that the regime will apply to the following Senior Managers:

•    Executive Directors
•    Compliance
•    Money Laundering Reporting Officer
•    Conduct Risk Oversight Officer (Lloyd’s only)
•    Other Overall Responsibility
•    Chair of Nominations Committee
•    Chair of the With-Profits Committee

Many firms won’t need to apply for all of these functions and firms should use the ‘Statement of Responsibilities’ to set out the areas of the business that the prospective Senior Manager will be responsible for.

It is also proposed that certain roles will not require prior approval by the FCA before appointment:

•    Significant Management function
•    Proprietary traders
•    CASS oversight function
•    Client Dealing function
•    Algorithmic Traders
•    Material Risk Takers
•    Anyone supervisor/manager of a person performing Certification Function

As per the SIMR, the regime does allow the FCA to take action against a Senior Manager if they fail to take ‘reasonable steps’ to prevent regulatory breaches. Every Senior Manager will have a duty of responsibility. The burden of proof will lie with the FCA to establish that the Senior Manager has breached that duty and, where appropriate, the FCA can take action against a Senior Manager or firm.

The regime will also require all Firms to allocate Prescribed Responsibilities and this will apply to employees who aren’t Senior Managers but by the nature of their role means it is possible for them to cause significant harm to the firm or its customers.

Firms should consider what activities, business area and management functions they have and who has overall responsibilities at the most senior level. Overall Responsibility is to be allocated to the most senior person responsible for a business area.

Territorial Differences

There is no territorial limitation on the Senior Managers Regime and the requirement is for SMCR to apply to both EEA and non-EEA branches. EEA branches will be required to introduce two new Senior Management Functions; whereas non-EEA branches, the proposal is for 5 Senior Management Functions, and the requirement is for Statements of Responsibilities, Responsibilities Maps and a shortened list of Personal responsibilities to be introduced.
Certification Regime
The Certification Regime is a new FSMA requirement and defines Certification Functions as a function that ‘requires the person performing it to be involved in one or more aspects of the firm’s affairs’. Any one who has previously been approved by the FCA will not need to become authorised any new person will. The regime will only apply to undertaking a key function or managing a key function area and will only cover employees and does not extend to NED’s.

Significant Management Certification Function

The firm will be required to identify and register certain individuals in charge intention of a firm’s main activities below the Senior Manager layer, the number and requirement will be determined by reference to the following:  
•    size and significance of the firm’s business in the UK
•    risk profile
•    contribution to the firm’s capital requirements
•    contribution to the profit and loss  
•    number of employees, Certification Functions or Senior Managers
•    number of customers

SMRC Diagrams

What is a Prescribed Responsibility (PR)?

The Senior Manager should be allocated a Prescribed Responsibility and it should be single individual. If a firm divides or share a Prescribed Responsibility, the firm will need to show why this is justified and confirm that this does not leave a gap.
The 3 proposed PR’s are:
•    Conduct
•    CASS - the CASS Oversight Function is often operationally focused, the person performing is not always be a Senior Manager however, the Oversight Function will fall under the Certification Regime
•    Financial Crime.

Statement of Responsibilities (SOR’s)

Firms will be required to submit SORs with an approval application for a new Senior Manager and then maintain and update them as required applications will require re-submission if there is a significant change in responsibility. The governance map will be replaced by the ‘Responsibilities Map’ which must also be submitted alongside any application for approval.
The intention is to introduce a 12 weeks process with the right to introduce and attach conditions to any approval.

Fit and Proper Requirement

A key feature of the SMCR is to reinforce that firms need to take responsibility for their staff being fit and proper to do their jobs. For individuals in the EEA the FCA is still interested in the person’s honesty, integrity and financial soundness for Non-EEA branches the requirement is for a Responsibilities Map to be submitted. The proposal is for a 2 stage test:

The proposal is for a 2 stage test:

Stage 1 - There will be the requirement for Senior Manger to undergo a Criminal records check to include any spent convictions. Firms will therefore have to register with to the Disclosure and Barring Service (DBS), and the equivalent agencies in Scotland and Northern Ireland.

Stage 2 - Regulatory reference
The proposed rules will require firms to:
•    Request a reference from all previous employers in the past 6 years
•    Use a standard template to share said reference
•    Disclose certain mandatory information
•    Disclose any other information relevant
•    Retain records of disciplinary/fit
•    Not enter into arrangements.

Conduct Rules

The aim is to:

•    Shape the culture standards and policies of a firm as a whole
•    Promote more positive behaviours that actively support the FCA’s priorities of reducing consumer harm and promoting market integrity.

The proposal is for Conduct Rules to the following types of roles:

•    Senior Managers
•    Certification staff
•    Non- Executive Directors
•    All other employees, except ancillary staff.And there will be a requirement to advise the FCA of the Training policy and when disciplinary action has been taken.

And there will be a requirement to advise the FCA of the Training policy and when disciplinary action has been taken.

The aim is to reduce non-compliance, misconduct, excessive risk taking and un-allocated individual responsibility.

SMRC Diagrams2

SMRC Diagrams3 

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Posted 1 May 2020

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