Business Plan 2020-21: FCA remains vigilant to potential misconduct
Recent Financial Conduct Authority (“FCA”) proposals seek to extend the Senior Managers and Certification Regime across nearly the whole of the financial services sector.
The Senior Managers Regime, introduced in March 2016, was a direct response to the call for senior level accountability made under the Parliamentary Commission on Banking Standards 2013-14. Currently it applies to banks, building societies, credit unions and Prudential Regulation Authority (“PRA”) designated investment firms. The FCA and PRA require firms to map out the roles of their senior managers and to allocate responsibilities to them so as to make them individually accountable. There is a statutory duty on senior managers to take reasonable steps to prevent regulatory breaches in their areas of responsibility – the so-called “duty of responsibility”.
In addition, mid-level employees in these firms are now subject to the Certification Regime, which went live in March 2017, under which it is the responsibility of firms to certify that individuals are fit and proper on an on-going basis.
The regime is collectively known as the Senior Managers and Certification Regime (“SMCR”). Read more here.
The FCA published a consultation paper on 26 July 2017 which contains proposals to extend the SMCR to almost all financial services firms. This will replace the current Approved Persons regime. The proposals apply principles consistent with the existing SMCR for banks but in a three tier regime under which the rules are applied in a manner which is proportionate to the size and business model of the firms in each tier.
The proposals in the consultation relate to all firms regulated by the FCA not currently subject to the SMCR.
The FCA is proposing a “baseline” requirement where the key elements of the SMCR will apply to every firm – the core regime. The core regime includes three main elements:
Senior individuals performing “senior management functions” will need FCA approval for their roles and a “statement of responsibility” setting out what they are personally accountable and responsible for. At least once a year firms need to certify that senior managers are suitable to do their job.
This covers individuals within firms who aren’t senior managers but perform “certification functions” – that is to say functions which mean they could cause significant harm to the firm or its customers. These individuals need to be certified as fit and proper by their firm, but will not be formally approved by the FCA. Firms will need to check and certify individuals at least once a year.
These are high-level standards of behaviour that apply to almost everyone in the banking sector. There are also some Conduct Rules that only apply to senior managers.
SC1. You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively
SC2. You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system
SC3. 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
SC4. You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice
The proposed Conduct Rules are intended to drive up standards of individual behaviour in financial services. The FCA considers that “they represent a meaningful change in the standards of conduct we expect from those working in the industry. By applying the Conduct Rules to a broad range of staff we aim to improve individual accountability and awareness of conduct issues across firms.”
There are six extra responsibilities that firms will need to give to their senior managers, known as “prescribed responsibilities”. This is to make sure there is a senior manager accountable for the SMCR and key conduct and prudential risks.
Firms that will have a baseline of SMCR requirements applied, who are currently subject to the Approved Persons regime.
Firms that will be subject to fewer requirements than core firms. This covers all firms that currently have a limited application of the Approved Persons Regime, including sole traders and professional firms not conducting mainstream regulated activities etc. Limited Scope Firms will not need to apply the Prescribed Responsibilities.
The enhanced regime applies to some firms whose size, complexity and potential impact on consumers or markets warrant more attention. Firms under the enhanced regime will need to apply all of the requirements under the core regime. In addition, there will be Additional Senior Management Functions that will need to be approved by the FCA with additional Prescribed Responsibilities that enhanced firms will need to give to their Senior Managers.
The Treasury sets the timetable for implementation of the regime. The FCA expects that the regime will commence from 2018.
The FCA’s original intention was to roll out the extension of SMCR in the first quarter of 2018. However, the FCA has indicated that SMCR will not be in its final form until Summer 2018, with HM Treasury to set an implementation date later in 2018.
The FCA has requested comments on its proposed rules by 3 November 2017.
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