SMCR (Senior Management & Certification Regime) for Enhanced Firms

Hi, I’m Jeff Abbott, I’m 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 an enhanced firm. Don’t worry, if you don’t know what an enhanced firm is that’s covered in this presentation. But before we get into the detail let’s take a look at the background of these regulations.

It was some 10 years ago after the collapse of the banks that the investigation started to look into the root causes of the problems. And following the recommendations of the Parliamentary Commission on Banking Standards, there was legislation that was enacted designed to improve the accountability and lines of responsibilities within financial services firms. And also ensure that the code of conduct across the industry was improved. This led to the increased accountability regulations as they’re referred to, they don’t apply to appointed representatives at the moment, though they do apply to principles of appointed representative firms.

It’s our understanding that these regulations will be extended to the appointed representatives at a future date.

The regulator cites these changes in regulation are very much focussed around the culture and governance of firms, trying to ensure that the consumers are protected and the financial services system is robust and is trustworthy.

If we look at the FCA statutory objectives we can see that there is a strong link between the protecting consumers and the enhancement of the financial services system correlating to these regulatory changes. Where we are on the timeline, these regulations were introduced to the banks and the building societies or the relevant authorised persons back in 2016, extended to insurers in December 2018 and will be across the rest of the financial services industry by December this year.

Let’s take a closer look at culture and why the regulator is so adamant that this is a prime change. Culture is about the way in which we do things, the way we work. And it’s very important that firms can understand and describe their cultures. But more importantly, understand the drivers of that culture. The FCA in their business plans both last year and this year have articulated how important it is and give us an insight to their thinking about the drivers of culture; whether it is the purpose of the firm, their leadership styles, their remuneration and management of people, different areas that are drivers.

But it’s up to each firm to understand not only what their drivers are and how they measure them but how they change them if they need to.

Culture is the way in which we do business. The day to day, every firm has a culture and so effectively understanding the values the behaviours, the habits within the firm. They create the culture and it presents a face to the outside world of what the firm is like. The regulations themselves the principal part is the approved Persons Regime is disappearing. In future, the regulator will only be interested in approving a much smaller group of individuals. These are the most senior managers within an organisation and must be approved before they can take up their position.

The regulator has passed the responsibility for ensuring that a group of people who perform certification functions are fit and proper to the firm themselves so they have to make sure that they undertake the annual assessments of these peoples fitness and proprietary.

The senior manager regime is a third of the power of the overall increased accountability regulations. We’ve got the Certification Regime and the code of conduct as well. In this presentation, I’ll focus just on the Senior Managers Regime.

So which type of firm are you? As you can see they’re from the list there are different types of firms. This one, this presentation, is solely focussed on the requirements of what you call an enhanced firm. What is an enhanced firm? Well the FCA lists the criteria that they expect and enhance firm to meet. You don’t have to meet all of them but obviously, there are various triggers as to what constitutes an enhanced firm. These tend to be the larger and more complex firms.

Here’s an overview of the various components of the Senior Managers Regime that need to be met for an enhanced firm. And I’ll touch on each of the ones that are there. The reason why there are two that are emboldened, the responsibilities maps and handover procedures is these two requirements don’t actually apply to other parts of the industry such as core firms or limited firms. But we do recommend these firms follow these as best practice.

Now within the population of senior management functions under an enhanced firm, there are 17 senior management functions. Now, this compares to six for the core firms so there are more senior management functions to use. They’re split between the governing required systems and controls and they’re very much dealt with on an entity by entity basis. So although you can have multiple SMF roles in the same firm, roles across the group are not actually permitted. There are separate processes you’d have to if you worked as an SMF for Company B within the group you’d have to go through a separate process.

You can, well if you don’t have a person performing the SMF function unless it’s a required function you’re not obliged to actually create that position. Here is a list of the current approved persons the currently controlled functions and how they correspond to the new SMF functions. You can see the colour coding there ranging from the normal type to be the governing functions. The red ones refer to the required functions and the bold ones are the system and control functions. So you can see it’s a much smaller audience than the current approved persons operated by the regulator.

One of the consequences of these changes is affecting non-executive directors, under the existing approved persons they are approved by the regulator they will not be part of the audience that will be of interest to the regulator in future unless they hold a chair position. Now from the various SMF roles that are there they only would really apply for the internal audit compliance and risk as shown on the slide. However, if the NED falls out of the scope of the interest of the regulator they are still subject to the fitness and regulatory references unless they belong to a limited scope firm.

Now from the regulator’s point of view, they don’t know whether that non-executive director holds a chair position. So the way you deal with that is you have to fill in forms that is form K unless there is an executive chair where you have to fill in form A.

One of the things, one of the roles, within the SMF list within the enhanced firms is a role called SMF18 other overall responsibility. Now here is a situation where the regulator is interested in the various business functions of the firm and wants to be clear who takes overall responsibility for a given discipline. In SYSC25, they provided the list, which is not a binding list on the firm, and it’s not a comprehensive list but nevertheless, it provides an indication of the business functions that the FCA wants to know who has overall responsibility.

Now in that respect, the SMF18 cannot hold a prescribed responsibility unless it’s for the CAS responsibility. That’s the only exception, something worth bearing in mind.

The overall responsibility as it says here, that it’s the most senior manager, and you’re looking for a situation where they either brief or report the board or sort of reporting to members of the board it’s a very senior appointment in that respect. But it really has to be the most credible person within the organisation to carry that responsibility. In a lot of organisations, of course, the overall responsibility still rests with the CEO so the SMF18 role is redundant in that respect.

Here is the list of the business areas that the regulator has said that they’re interested in and you can see it’s right across the spectrum. It’s not just areas that produce new business, for instance, you’ve got marketing, customer service, human resources and IT’s in there as well. So there are all sorts of business areas that are covered off.

As I said the regulators interest in the current approved persons changes so this is the list of approved persons that don’t make it across to the new SMF rolls. That doesn’t mean to say they disappear completely. As I’ve said the non-executive directors are still subject to some of the regulations. And the chances are these other people listed here are very much going to fall into one of the categories of the Certification Regime. For instance, the systems and control might be a material risk-taker, the significant management might directly go across to the significant management function within the Certification Regime.

Now all senior managers will have this duty of responsibility where they’re expected to take reasonable steps to discharge that responsibility. It’s very much up to the regulator to prove whether or not the senior manager has fallen foul of the expectations placed upon them. But at the same time, the regulator also places some clear guidance as to what they expect. Now, this is covered in the decision penalties and procedures manual. Now if I just draw your attention to Number 10 there where it says that, “the firm has appropriate policies procedures for reviewing the competence, knowledge, skills and performance of each individual member”.

So it’s clearly telling us that the regulator has an expectation of documented processes and procedures in place. Similar to an expanded T and C scheme I suppose, but very much covering the various aspects of senior management and the Certification Regime.

For enhanced firms, the prescribed responsibilities are normally held. There’s not one person holds all of them but one person will hold the whole prescribed responsibility for a given area for a given rule. So the certification function, for instance, is the whole of the certification across the company, it’s not divided amongst different people. At the same time, of course, they recognize that there might be circumstances where job roles are legitimately shared or there’s a manager due to leave and he’s being shadowed or the job is being shared by another.

In those circumstances, it’s okay to share the prescribed responsibility.

Now the prescribed responsibility here is the first of two slides that lists what they are. So we’ve got ones for the senior management Regime Certification and the Code of Conduct. But you will see there that there are various other ones that have to be distributed amongst the SMF’s. Some of these roles are ideal for the non-executive directors for those firms that are able to do that.

Each senior management function has to have a statement of responsibilities and the regulator has provided some guidance, so I’ll come onto that in a minute. But basically, a statement of responsibilities have to be self-contained it can’t refer across to other documents. The regulators also told us, for instance, that not one person in the firm, not one person can take overall responsibility for things like TCF it’s a collective responsibility for dealing with the culture of the firm as well. You shouldn’t be sharing a responsibility, prescribed responsibility with a compliance function, a compliance manager because that’s crossing lines of defence.

And what you have to be clear, as it says, is you get a clear understanding of the business areas for which the person is responsible. However, when it comes to overall responsibility for a business area the way you manage it is it might be given overall responsibility for a particular asset class or customer type or product line so that’s a route you can take.

When it comes to drafting the statements of responsibilities, various sections that need to be completed, the first covering the prescribed responsibilities. The second is the other overall responsibilities as referred to in SYSC25. The third section is where they might have other sorts of project work that they’re undertaking whether it’s strategic initiatives or business transformation and then the last section is any additional information.

This is the useful guidance, it’s worth looking at it’s the finalised guidance issued by the FCA on the statements of responsibilities and responsibilities maps. It’s well worth a read. Here’s a couple of examples from that, they give an example of an SMF18 and how they’ve described their responsibilities. And you can see it’s quite wordy in places and the FCA has said well look, our view is that you have to apply it to a legal entity using the terminology, but not limited to implies there are other areas that haven’t been documented. There’s more detail than necessary because it’s almost crossing into what seems like to be a job description approach and that’s not what the regulator’s looking for.

So this document is well worth reading.

The other side of it is enhanced firms have to produce responsibilities maps. So essentially this is a document that lays down how the governing body works, how it reports into or how other committees report into the governing body, how the business is run as a whole, how the individual statements of responsibility to connect with each other. Again the regulator has given us an example in the finalised guidance and thought it might be worth showing you here is an example of from that very guidance and you can see one of the techniques to use its recommended is use diagrams, graphs, pictures it takes up a lot less room than all the words that you need to describe things.

And don’t forget one of the requirements is you have to keep these updated on an ongoing basis. So think about that in the design to make sure it’s as simple as possible.

Another aspect is you have to imagine a situation where a senior manager is leaving or is being replaced by another. And it’s a requirement that you have to have handover procedures. Therefore, you must have a policy that covers these off, you have to have appropriate records. But in essence, it’s a safeguard as well for the incoming manager to make sure that they’re not walking into a hornet’s nest that they’re actually taken to task over and it makes sure that any potential unresolved breaches or concerns expressed by the regulator are documented and clear action steps to be taken.

There are some forms to be submitted. Clearly one of the things that the regulator wants to know is how the SMF roles have been allocated, they also want statements of responsibilities. They’ll also want a responsibilities map. They’ll also want a form A for any new SMF role that’s being created, a new person appointed to an SMF role and they’ll also require a form E for any transfers. The thing that you need to be aware of is it says there forms not in on time. If you don’t have any approved persons you’ve almost got to go back to square one at the end of the day.

Finally, the point to think about is new people coming into the business before the 9th of December. You can use existing forms up to the 9th of December and existing processes but if they’re not complete by the 9th of December it’s almost going back to square one. You can use new forms from September, ready for appointments but they can’t be effective until December. So this is going to have an impact on your recruitment strategies

Hope you found this useful. If you have got any questions please do get in touch.