The Senior Managers and Certification Regime (SMCR) has been with us since December 2016 for larger firms and December 2019 for firms regulated by the FCA alone. The SM&CR is an individual accountability regime. It seeks to promote safety and soundness, reduce harm to consumers and strengthen the functioning of the market by making financial services professionals individually accountable to their employers and to the regulators. It also aims to ensure that all financial services staff meet expected standards of conduct. It is set out in FSMA and implemented through the FCA Handbook for solo-regulated firms, and through PRA rules for dual‑regulated firms.
A review of SMCR was announced in December 2022. Since March 2023, in conjunction with HM Treasury and the PRA, the FCA published a Discussion Paper (DP1/23) and the Treasury a call for evidence.
The review has allowed the Regulators to assess how the regime has met its objectives, and how it could be made more effective and efficient. The review will be in two phases. The changes proposed in phase one may be implemented following the consultation, those in phase two require changes to legislation, hence the involvement of HM Treasury.
The changes proposed in phase one may be implemented following the consultation, those in phase two require changes to legislation, hence the involvement of HM Treasury
If changes to legislation are brought forward as outlined in the Treasury’s consultation then the FCA would explore how it could make use of both of the flexibilities proposed to reduce the number of pre‑approvals and the number of roles included in the regime. The FCA also plans to explore additional changes to further streamline the regime. Key changes it would explore to further reduce regulatory burden include looking at how it can:
- reduce the number of SMF approvals, by removing SMF roles or reducing pre-approvals;
- provide more flexibility to appoint interim SMFs before seeking approval by expanding the use of the 12‑week rule;
- further streamline the SMF assessment process, e.g. the documents that are requested and the relevant systems;
- reduce the frequency of submission of SoRs, review the list of PRs, and simplify the Management Responsibilities Maps;
- design a streamlined regime to replace certification in a way that minimises burden and complexity while ensuring fitness and propriety of individuals;
- remove the Directory and explore with industry alternative ways to ensure consumers have other sources of information they require; and
- streamline Conduct Rule breach reporting.
FCA’s desired outcomes
The FCA has articulated three outcomes they want the review to achieve:
- Increased proportionality of SMCR requirements
Proportionality is already a key feature of the SMCR with different requirements applying to different firms depending on size and complexity. The FCA expects the proposed changes to result in a further reduction in the administrative burden of compliance, while standards of governance and accountability are maintained. The FCA expects to see
- reduced compliance costs for firms
- fewer requests for forbearance from firms seeking to manage changes in SMFs
- Statement of Responsibility submissions to be less frequent
- fewer cases of inappropriate allocation of PRs to SMFs
- fewer firms in scope of the Enhanced Regime thresholds
- Improved efficiency of SMCR requirements
Reduced compliance burden and costs, meaning that firms and the FCA can redirect resources.
- Greater clarity on the application of some SMCR requirements
Higher levels of compliance in the SMCR areas in which they provide updated or new guidance. A reduced administrative burden on firms but with no consequential reduction in the benefits of the regime
These outcomes should be welcomed by firms as the results of the review are implemented.
Further clarification
Chapter 4 of the consultation paper details the operation of SMCR, below is a summary of the proposals.
The SMF assessment process
The FCA states that proportionality already exists in the SMF assessment processes, and that it applies differing levels of scrutiny to applications using a risk‑based approach. It appreciates, that the way in which proportionality is applied might not have been visible enough to firms and individuals. The level of scrutiny the FCA applies to applications depends on several factors and risks associated with the firm and the skills and experience of the individual. This includes;
- the nature of the SMF role,
- the market in which the firm operates,
- the firm’s governance structure, and
- its specific circumstances.
For example, the assessment of whether a candidate is competent for the role of Chief Financial Officer (CFO) in one firm may be different to the assessment for the CFO role in another firm depending on the circumstances.
Criminal record checks (CRC) and disclosures
There is no rule or guidance on the validity period for CRCs. However, the SMF application forms ask for an explanation if the check was not undertaken within the 3 months prior to the submission of the application. In light of feedback that a 3‑month period was too short, the FCA proposes to set the validity period for CRCs obtained for an SMF candidate to 6 months. The FCA also proposes to remove the requirement for firms to undertake a CRC for an existing SMF holder who moves within the same group.
Senior Manager Regime – 12-week rule
The FCA acknowledges that the 12‑week rule does not always give firms sufficient flexibility to manage changes in SMFs. Its proposals aim to balance improving the usefulness of the 12‑week rule for firms in managing changes in SMFs, while ensuring good standards of governance and accountability are maintained.
The FCA proposes to change the 12‑week rule so that firms that use it would have 12 weeks to submit an application for an SMF, rather than 12 weeks to get a decision on an application. Once an application has been submitted, the person performing the role under the 12‑week rule could continue to perform it until the application is determined. As long as a firm submitted an application within the 12‑week period, it would not have breached the rule
Senior Manager Functions and Prescribed Responsibilities
In this phase of the reform the FCA does not propose to remove SMF roles or add additional ones. However, it plans to explore whether SMF roles could be reduced or applications for approvals reduced, in the next phase of the reforms to further streamline the regime.
Similarly, in this phase of the review, the FCA proposes no change to prescribed responsibilities.
Duty of Responsibility
The Duty of Responsibility is set in legislation and changes to it can only be made by changing the law. In light of the feedback that the Duty of Responsibility is useful and supports the aims of the SMCR, the FCA does not consider it is necessary to change it. It agrees that there is overlap between the Senior Manager Conduct Rules and the Duty of Responsibility, and that in many cases following either route would lead to the same result. The FCA considers that the Duty of Responsibility continues to perform a useful role, and that this overlap does not cause significant issues and is generally handled effectively by firms.
Statements of Responsibilities (SoRs) and Management Responsibilities Maps (MRMs)
The submission of SoRs to the regulator is required by the legislation. In support of growth and being a smarter regulator, while keeping in line with the legislation, the FCA proposes to streamline the submission of updated SoRs, by allowing periodic submissions. Under the proposal, firms would still have to keep SoRs (and, for relevant firms, MRMs) up to date at all times at the firm, but they would not need to submit them each time they make a change. Instead, it would allow submission of changed SoRs on a periodic basis and no later than every 6 months after the last submission. This would reduce the administrative burden on firms as they would have more time to comply with the requirement to submit these documents.
Solo‑regulated firms could gather all SoRs that had changed across the last 6 months and submit only the latest version of each (together with one up to date MRM, where relevant), all at once. Flexibility is built in and firms that have made changes to any of their SoRs could choose when to submit their updates, within the 6‑month limit since their last update. As now, firms that have made no changes to SoRs would not be required to submit anything.
The devil is always in the detail
This is a very high-level summary of the proposals within the Consultation Paper, and you are recommended to read the full detail of the feedback to the FCA and its proposals.
If you require a review of your firm’s SMCR arrangements, please contact me contact@compliancematters.co.uk.
