Regulatory Bulletin: Senior Managers and Certification Regime

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Senior managers and certification regime

WHAT is it?

Senior Manager’s and Certification regime (SM & CR) is a series of measures aimed at improving standards of financial services through increasing accountability of the most senior individuals within banks and financial institutions.

WHO will it affect?

During 2017 the FCA has proposed to extend the scope of the regime to cover all regulated firms in the UK. More specifically, it will affect all senior individuals in those firms and all ‘significant harm individuals’. Certification regime rules also apply to the branches of foreign banks.

Currently, most regulated financial sector firms must apply to have any individuals conducting regulated activity added to the FCA register under the Controlled Functions regime.

WHEN does it come into force?

  • From the 7th of March 2016, new regime commences for banks and insurers. Conduct rule only applies to SMs
  • From March 2017
  • The 7th of November 2017 is the deadline for responses to FCA’s SM&CR consultations (If you wish to get in touch with the FCA and participate in the consultation process, follow this link)
  • Following the consultation there will be final rules published by the FCA during 2018
  • The regime commences for all regulated firms the regime has been extended for later in 2018.

WHAT are the key focus areas?

The new regime consists of three main parts: Senior Manager’s regime, Certification regime and Conduct Rules

Senior manager’s regime

Focus: the most senior individuals in firms, those who hold key roles and responsibilities for whole areas

Firms will need to prepare and submit a Statement of Responsibilities for all persons who will be Senior Managers (SMs), this applies to Board members and senior individuals who run the organisation. These individuals need to be chosen before the SM regime commencement, however SMs remain subject to prior approval by the FCA. These individuals will include existing SMs who will ‘grandfather’ into the new regime.

Firms must map out all responsibilities across the firm and show what those Senior individuals are responsible for. In practise, this means SMs will expect increased scrutiny from the regulators.

Certification regime

Focus: applies to all material risk takers, or those who could potentially cause ‘significant harm’ to the organisation where they belong. (The FCA provides a definition on a Significant Harm Function here)

In order to prevent ‘significant harm’ to the firm and its customers, these individuals will need to be tested for fitness and propriety. Firms can issue a certificate to the relevant persons if it finds them fit and proper for their function. Once certified, these individuals will be listed on the The FCA Guidance dictates that the certificates issued are only valid for 12 months, which means firms will need to certify their Significant harm individuals on an annual basis.

There is no requirement for pre-approval of these persons by the FCA, this puts more responsibility on the firms to ensure all relevant persons are fit and proper. Previously such individuals would have normally registered as CF30 (the “customer function”) as these individuals would be performing regulated activity for clients. As these individuals are likely to pose the most serious harm to the organisation in the case of misconduct, it is likely that there will be significant crossover between a firm’s existing CF30s and individuals coming under the scope of the Certification regime.

Under Section 63F of the Financial Services and Markets Act , firms must have regard to whether Significant Harm person:

(1) has obtained a qualification;

(2) has undergone, or is undergoing, training;

(3) possesses a level of competence; or

(4) has the personal characteristics,

required by general rules made by the FCA.

Regulatory reference will be of higher importance, since the rules dictate that firms must request a reference from all previous employees in the last six years for candidates. Firms must also disclose any information relevant to the fitness and propriety assessment covering the previous six years of their career.

Please note:

  • The Financial Register has information relevant to the SMs and Certification Regime
  • Persons who have been approved by the FCA in the past will have a status “Inactive”
  • All FSMA-authorised who are regulated by the FCA must be in compliance with regulation by Summer 2018

Conduct Rules

This regime is replacing existing Statements of Principles for Approved Persons. The key change here is the widened scope of Conduct rules who now apply to almost all staff with a few exceptions (ancillary staff, eg.: catering staff), in the past these persons had to be approved. Conduct rules include “Individual Conduct Rules”, which apply across the whole industry. Firms must ensure that staff who are subject to the rules are aware of them and how they apply to their jobs.

First Tier: Individual conduct rules.

1 You must act with integrity

2 You must act with due skill, care and diligence

3 You must be open and cooperative with the FCA, the PRA and other regulators

Second Tier: Senior management conduct rules.

1 SMs must take reasonable steps to ensure that the business of the firm is controlled effectively

2 SMs must take reasonable steps to ensure that the business complies with relevant requirements and standards of the regulatory system

3 SMs must take reasonable steps to ensure that any delegation of their responsibilities is to an appropriate person and that they oversee the discharge of the delegated responsibility effectively

4 SMs must disclose appropriately any information of which the FCA or PRA would reasonably expect notice

Firms must make all staff aware of these rules, as all relevant persons should be notified in advance of the commencement of the regime. Training of staff must be tailored appropriately to their role.

Breaches of Conduct Rules must be reported to the FCA (or PRA if appropriate) within seven days.

WHAT do firms need to do to comply?

  1. Ensure all staff are aware of coming new regulation, as the rules now cover almost all staff
  2. Perform a scoping exercise in order to identify relevant individuals – this should include current and future Senior managers and ‘material risk-takers’
  3. Start mapping out firm’s roles and responsibilities
  4. The process of certification of relevant individuals may require the establishment of new processes within the company including training to ensure all staff are fit and proper for the functions they perform
  5. Employment contracts may require amendments in order to comply with the SMs regime
  6. There might be changes required to the recruitment process and firms’ governance structure
  7. Make sure the relevant individuals are pre-approved by the FCA and are aware of Conduct rules

WHAT can we do to help?

The FinTech Compliance team have considerable expertise in Fitness and Propriety issues and would be delighted to assist your firm with SM & CR implementation. In particular, we can help with:

  • Designing certification procedures for key individuals
  • Working with the firm to conduct an ad-hoc fitness and propriety check for new individuals (or conducting a review of individuals already employed by the firm)
  • Advising on the scope of SM&CR more generally
  • Providing a fully compliant suite of template procedures to allow firm to assess fitness and propriety of key staff

Please do not hesitate to contact us to via telephone at +44 (0) 207 100 4058, or visit our Contact page on our website if you require more information on SM&CR or you would like to engage our assistance.