SMCR (Senior Management & Certification Regime) – Core Firms

Hi, my name’s Jeff Abbott. I am Regulatory Services director here at 2be Development Consultancy.

In this short presentation, I’m going to take a closer look at the Senior Managers Regime and how it applies to core firms. So don’t worry if you don’t know what a core firm is I will cover this during the presentation. But to start with, let’s just have a quick look at where these regulations come from.

The increased accountability regulations as they are referred to, came into being, in 2016 following the collapse of the banks a review by the Parliamentary Commission on Banking Standards and enacting the appropriate legislation, these regulations came into force.

They’re all about ensuring standards of accountability, lines of responsibility and raising standards of conduct within the industry. At this stage, these regulations don’t affect appointed representatives, although they do actually affect the principles of appointed representatives. It’s our understanding that as soon as possible the regulator would like to extend these regulations to appointed representatives.

We’re told by the regulator that these changes represent a key part of cultural changes and governance changes for the financial services industry. The overall aim is to try and boost the confidence in the financial services market and ensure consumers are protected. You can see these directly align with the FCA objectives. So as far as consumer protection and enhancing the integrity of the financial services system there’s a direct link between those objectives and the increased accountability regulations.

Thinking about culture, the FCA and their business plan last year and in this year’s business plan shared with us their views on culture and how they think it’s very important, why they think it’s very important that a firm can explain what their culture is, understand the drivers of that culture and know-how to change those drivers or change the indicators, should it be deemed necessary. In this year’s business plan, they went on to share with us their thoughts on some of the key drivers of culture whereas it would be the purpose of the firm, the leadership, the remuneration and managing people approaches.

These things were listed but it’s up to each firm to clearly identify what their culture is, the drivers and how they might change. Culture itself, it’s the way we do business. Every firm has a culture and it’s brought together by the values, the vision, the actual behaviours in the workplace, the norms, the habits all these things that you do on a day to day basis. Ideally, these things come together to form a great culture that gives clear lines of accountability and responsibility and focussed on achieving the consumer outcomes that the FCA requires us to achieve.

Now the increased regulation, or the increased accountability regulations, are in three parts. I’m only going to concentrate on the Senior Managers Regime for this presentation, and the Certification Regime and code of conduct are covered in other presentations.

Where we are on the timeline is that these regulations were first introduced to the relevant authorised persons in 2016, extended to insurers in 2018, and will be with the rest of the insurance and the financial services industry by 2019. The key parts is these regulations replace the approved persons regime and in future, the FCA will only be interested in approving a very small proportion of the people within the industry namely the most senior managers in an organisation where they will actually be required to give their approval before appointment.

They then require firms to confirm the fitness of people that perform certification functions. Now, this list includes various people, some senior managers, some advisers, that have to require qualifications, supervisors, there are eight different categories that are included. The key point to bear in mind is the fitness assessment is an annually reoccurring event. So firms have to develop appropriate processes in place to ensure that this work is done.

Now, what type of firm are you? Well if we look at the list of firms don’t worry because most of these are from the insurance, and banks and building societies regulations. You’re likely to be either a core enhanced or limited scope firm. So let’s have a look at the requirements.

The enhance firms tend to be the really large quite complicated or complex structured firms and you can see from the different criteria, what criteria you need to meet in order to be classified as such. At the other end of the scale, there’s a variety of firms where the application of the approved persons regime is more of a limited scope. And so things like sole traders are very much as part of this category. So if you’re not an enhanced firm, if you’re not a limited scope firm, you tend to fit into what is the core firm category.

Now the thing to bear in mind is that core firms can become enhanced firms, now that might be because they volunteer to go up a category. But why on earth would you do that? Well if you think about a group of companies where some companies within the group are enhanced firms it might be easier for the firm to opt up to be treated the same as the other firms within the group. The regulators quite clear though that they don’t want firms to use this as an opportunity to opt up to create more scope for having senior management functions to allocate the prescribed responsibilities to.

The other contender is that the firm through organic growth might become a category where it falls within the higher enhanced category. Now in both cases, if you opt up, you have three months to make sure you satisfy the criteria. If you’ve grown organically, it’s 12 months from the day you trigger the indicator to ensure that you meet the enhanced requirements that you have to meet.

Now, what are those enhanced requirements? Well let’s look at the component parts of the Senior Managers Regime and you can see on the screen there’s a couple that are emboldened the responsibilities maps and the handover procedures. These are two aspects that only apply to enhanced firms. However, it’s recommended, and we do recommend, that firms consider utilising these two aspects if it is appropriate to the nature of their business. The other one’s the senior management functions, the statement of responsibilities, prescribed responsibilities, reasonable steps and duty of responsibility, all apply to core firms.

So we’ll have a look at those.

Now the core firms I said that there was going to be fewer roles that the FCA were interested in. And this literally is the list of potential senior management functions the regulator wants to actually take a closer look at. Ranging from the chief executive, the executive director, if it’s a partnership or the chair of a board committee and then there are the required functions which are compliance oversight and money laundering. And they are the only roles that the regulator will be interested in future.

What they also tell us if you haven’t got one of these roles you don’t create one. It’s very much based on your own structure and the way of operating. Now what this does mean of course is their approvals that come to an end as far as the regulator is concerned. That doesn’t mean these people disappear off the radar completely because effectively what you’ve got is a number of roles within this list that fall within the Certification Regime.

The exception to that, of course, is the non-executive director because the certification regime can only apply to employees. But the other ones, there something like the CFO 29 significant management is likely to fall into the Certification Regime, possibly could be a material risk taker by definition, the customer function does fall in certification as well.

Now as a senior manager every senior manager carries this duty of responsibility where they’re expected to take reasonable steps to discharge the responsibilities that are placed upon them. And this particularly relates to the prescribed responsibilities that we will look at in a moment.

Now, what are reasonable steps? The place to look at is the decision procedures and policy and penalties manual and where it gives you examples of what the regulator would expect to see in given circumstances. So if we look at the number 10 on the list you can see where it talks about the firm had appropriate policies and procedures for reviewing the competence, knowledge, skills and performance. So it’s quite important that when you come to look at the fitness assessments for the people both in senior management and certification you have these items to hand.

As regards prescribed responsibilities each core firm has these prescribed responsibilities that must be allocated to a senior management function and it is normally the most senior person. You can see that there is one’s for the senior management regime, it’s also the Certification Regime and the Code of Conduct. Now interestingly, the Code of Conduct was added December last year, maybe a sign that the regulator wasn’t entirely enthralled by the progress that had been made by the banks, building societies and insurers in embedding the code of conduct within their respective businesses.

Therefore they’ve made a prescribed responsibility on want to know which senior manager is in charge of that.

As regards, the prescribed responsibilities they are normally only held, as I say, by the most senior person. You can’t actually split those, although you can divide those for instance if it is a legitimate job share or you’ve got somebody working on a period of notice and someone’s coming in and taking over. These are the sorts of things that are permitted.

The non-executive directors I’ve said are no longer of interest unless they hold a chair position. So we have got situations where non-executive directors fall out of the scope of the interest of the regulator, though they will still be subject in the core firm to both regulatory references and fit and proper checks. But as far as the regulator is concerned at this moment, they only know or have only approved a non-executive director. They don’t know the type of position that the director holds whether it’s a chair position or not. So to let the regulator know there is a form that you have to fill in.

So it’s a form K there as it says for approving it to a chair role. If it’s an executive chair then they need to fill in form A as opposed to the form K.

There is a statement of responsibility is required for every senior management function. The regulator has issued guidance of what to include but has told us that it has to be a self-contained document, it can’t refer to other documents. They’ve given us some guidance to say it’s unreasonable for instance for one person has the responsibilities for TCF. In a similar vein, one person cannot carry the responsibility for the culture and conduct of the firm. You’re not expected to share these prescribed responsibilities with a compliance function where you would divide across lines of defence.

The other side of it is that within a core firm effectively everything will fall on the chief executive unless you have clearly documented otherwise. And maybe what you need to look at is the guidance issued by the regulator sysc25 of the different business areas, to stimulate some thought as to who actually has overall responsibility for the different areas. Now in that respect, you can divide business areas by things like asset class, or customer type, product lines to make sure that the difference between the responsibilities is absolutely clear.

When it comes to drafting the statements of responsibilities. Yes, the first section covers prescribed responsibilities. The second section is on overall responsibility, apart from these prescribed responsibilities who has overall responsibility for given business areas. As I say SYSC25 might hold some clues for us to the different business areas so you can be quite specific in this particular section of the statement. There is an area for other responsibilities what they are looking at there are things as it says like strategic initiatives and finally supplementary information.

When it comes to moving across to the new regime it’s pretty much an automated conversion. However, as I said earlier you’ve got to tell the regulator the role of the non-executive chair. If there are new forms to submit to because of changes of roles you need to do that. You are also required to complete statements of responsibility but at this stage, you are not required to submit them.

The other thing to bear in mind is new entrants coming into your firm that you can use the old firms, old forms up to the date of change over. But beware of course at that stage the forms lacked, so if you haven’t completed the process you may have to start again.

Similarly, you can start to use the new forms prior to the date of the 9th of December but you can’t make those appointments effective until the 9th of December. This may affect your recruitment plans so it’s something worth thinking about.

I hope this short presentation gives you a quick insight into the SMR for core firms. Should you have any questions please don’t hesitate to get in touch.