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The FCA’s recent statement on the need for competency and capability in Head of Compliance and MLRO roles is an indicator of a renewed focus from the regulator on senior managers.
The clarification, published by the FCA at the end of January, outlines the areas it will particularly scrutinise when reviewing applications for new Heads of Compliance and Money Laundering Reporting Officers (MLROs). The publication – available on the FCA’s website here – discusses factors that should be considered when assessing the competence and capability in applicants for those roles. And the areas highlighted certainly reflect the direction of travel that we are seeing at the moment when helping clients with their senior manager applications.
In the statement, the FCA reminds firms that, “even if an applicant believes they have sufficient experience or training, it may still request an interview to test this”. We have seen evidence of this in a number of cases with clients receiving queries on SMF applications.
‘Knowledge and experience of key individuals’ is one of four areas of focus referred to in a recent interview with the FCA’s head of authorisation for banking, payments and insurance. Aligned with the FCA’s wider agenda to be more proactive and mitigate the risk of harm it looks like the regulator is taking a more hands-on approach to senior management applications than we have seen since the regime went live,
If you are preparing an SMF application it’s crucial to be well equipped to answer the FCA’s questions fully and give the regulator the confidence they’re looking for. Below are some of the key areas to consider when sourcing SMF 16 and SMF 17 candidates and preparing their application forms.
Who is the ideal candidate?
- The FCA has a preference for individuals who are independent from the client-facing side of the business. If the individual being considered is in a client-facing role, you will need to demonstrate you can effectively manage any conflicts of interest as part of the application. This could be achieved by having support from an external consultant to provide challenge and oversight.
- Individuals should be at an appropriate level of seniority.
- If you are considering a part time SMF 16/17, you will need to demonstrate the time commitment is proportionate – a few hours a week is not enough.
- The FCA expect MLROs to be UK based. Although the publication implies a preference for UK based Heads of Compliance, historically the FCA has approved overseas SMF 16 on the basis that the candidate can demonstrate the adequate time commitment and resources to carry out their duties effectively.
What is the expectation of regulatory ‘know-how’ and compliance experience?
- Individuals do not need to have held Head of Compliance and MLRO positions previously. However, it is obviously a big plus if they have done so – individuals who have some exposure or previous experience in compliance roles are likely to be considered more favourably by the FCA than individuals with no compliance experience.
- Both the type of training and timing of it matters. Firms are expected to ensure candidates can demonstrate the expected level of skill and knowledge to be able to carry out their roles.
- If candidates have not held roles as SMF 16 or SMF 17 for a similar type of firm previously, the candidate should demonstrate they have recently completed tailored regulatory and compliance training, relevant to both the firm and the role. The FCA is likely to delay the approval if relevant training is not delivered before the application is submitted.
- For smaller firms, the FCA has acknowledged that it may be the case that executive directors may carry out the SMF 16/17 roles. However, the training requirements still stand.
Third-party advisors – support or over-reliance?
- Using external advisors, for example regulatory lawyers or compliance advisors, is a widely acknowledged and accepted practice in the industry. Firms are encouraged to seek guidance and support where needed, however, you should be careful not to rely exclusively on these services.
- Even if using third-party support, Heads of Compliance and MLROs are expected to have the level of knowledge, competence and independence needed to be able to make relevant compliance decisions for the business and to know when to seek advice and know how to implement advice received.
- The FCA consider SMF 16/17 applications on the merit of the individual applicant only. However, external advisors can support with preparing the applications, upskilling individuals and providing ongoing support with the general arrangements of firms.
- Applicants should really be individuals who are directors of the firm and visible leaders – people who have the motivation to be effective in the roles.
How Bovill Newgate can help
We have been advising firms on regulatory compliance for over twenty years. We have supported firms of all sizes in preparing for the Senior Managers and Certification Regime and continue to help clients with preparing their senior managers and liaising with the FCA.
In particular we can help with:
- Preparing and / or reviewing SMF applications for FCA regulatory approval
- Preparing and delivering tailored regulatory trainings to prepare individuals for SMF roles
- Providing individuals with regular regulatory and compliance training
- Ongoing support with your compliance arrangements.
