| UK & Europe | Articles
A lot has happened since the Senior Managers and Certification Regime, otherwise known as SMCR, came into force for solo-regulated firms in December 2019. While we wait for updated guidance from the FCA on some of the ongoing issues in this space, there are several areas Senior Managers need to be aware of to avoid possible enforcement action.
Do senior managers also need to be certified in the client dealing function?
Yes, most likely.
The FCA published non-handbook guidance to help firms implement the new regime. Within this guidance, the following was included:
If a Senior Manager is performing a Certification Function that is very different to what they are doing as a Senior Manager, they must also be certified. We expect that this will be uncommon in larger firms in practice.
This led many firms (particularly smaller operations) to assume that, by being a senior manager, it’s implicit that they’ll be involved in the regulated activities the firm performs for its clients, and as such, wouldn’t need to be additionally certified.
The FCA has actively reached out to firms who previously had CF30 approved persons (before the SMCR was implemented) and asked why they had no certification staff. We’ve also seen applications for authorisation where the FCA expects senior managers to additionally be certified where applicable.
Whilst it would be helpful to have additional clarity on this point, our current Chancellor of the Exchequer commented that she views the certification regime as overly costly and administratively burdensome in her Mansion House speech.
It will be interesting to see the FCA’s view on removing the regime after the vast amount of work that’s been put into implementing it, both by firms and the regulator itself. A number of firms have noted that having a directory of certified staff is beneficial when conducting background checks and due diligence on prospective employees as well as providing assurance to customers that the adviser they are in contact with has the appropriate competence and fit and proper status.
Is your fit and proper assessment sufficient?
Both senior managers and certified staff need to be assessed as fit and proper on an annual basis. We’ve seen several companies fail to complete a thorough review of an individual during their assessment. Common items missed out include:
- the capacity aspect when considering competency and capability. This includes whether the staff member has sufficient time to carry out their role, including taking into account other commitments (internal and external) individual may have.
- assessments of whether an individual is financially sound. Some will conduct a credit check every two to three years as part of this assessment, but it’s not common market practice..
- documented evaluations by firms ) of the honesty, integrity and reputation of an individual, rather than just a self-certification by the individual themselves. .
Quite frequently, the annual fitness and proprietary assessments have become a tick box exercise, rather than truly assessing whether an individual is fit and proper. Ensuring the template used to complete the F&P assessment asks the right questions is one way to address this..
Do you need to allocate other responsibilities to senior managers?
Technically no, although the FCA will question new senior managers who have no responsibilities allocated to them. This is particularly true for applications where all prescribed responsibilities have already been allocated elsewhere.
Broadly, we’ve found senior managers have appreciated the importance of clarity in setting out what they’re responsible for, although a number of firms have struggled with FCA’s preference for responsibilities not to be shared, especially in partnerships. Although not a defined requirement we have found that those firms who have taken the opportunity to document the ‘reasonable steps’ senior managers are taking to defray their responsibilities tend to achieve greater buy in from those senior managers and have put themselves in a good position to demonstrate compliance with the rules.
Can corporate partners be senior managers?
One of the main purposes of the SMCR is to allow the FCA to ensure there’s a framework for senior managers to be held accountable when things go wrong. As such, a corporate partner being approved as an SMF27 is arguably not in the spirit of the senior managers regime as this enables responsibility to be shared amongst a number of individuals. However, the handbook definition of a partner allows for a corporate partner to be an SMF 27.
Unfortunately, there doesn’t appear to be any significant guidance from the FCA in relation to what should be put in place for corporate partners. Despite this, we understand it to be a requirement for a statement of responsibility to be in place for corporate partners. There’s also a lack of advice on how you assess the fitness and proprietary of a corporate entity.
Where a corporate partner is in place, be aware that there’s a risk that one of their partners could be exerting influence on the governing of the regulated firm, thus carrying out the SMF 27 governing function without being approved by the FCA.
Does prescribed responsibility Z need to be allocated if you’re only subject to CASS 8 mandates?
The only guidance available for whether prescribed responsibility Z, or your firm’s responsibility for compliance with CASS, is it should be assigned if applicable.
This has caused some to take the view that if you’re subject to a CASS 8 mandate and are in control of a client’s assets or liabilities but not holding them, it the responsibility doesn’t apply. This is because firms who are only subject to CASS 8 mandates won’t have the specific permission to hold client money or assets.
Other firms have taken the view that this responsibility applies only in respect of the CASS 8 mandates they have in place.
We’ve seen inconsistent approaches during senior manager applications to the FCA, and generally advise that the belt and braces approach is to apply this responsibility to those subject to CASS 8 mandates. We did see the regulator begin engaging with firms on this point individually, directing firms with permissions that can entail CASS 8 arrangements to assign prescribed responsibility Z.
Our team is keeping a close eye on these developments as the FCA might make this clearer by amending the rules at a later date, which would be a welcome development.
Do senior managers need to complete a handover note when leaving a firm?
The strict requirement to complete a handover certificate is not applicable to core and limited-scope firms. In an ideal world, there would be a sufficient handover period for the previous senior manager to handover their responsibilities to the incumbent, however this isn’t always possible.
While it’s not strictly required, we would consider it best practice for a senior manager exiting a role to leave a handover note, detailing the reasonable steps they’ve taken to ensure their assigned responsibilities (prescribed and other) have been performed effectively.
Has the SMCR regime provided the framework for the FCA to take enforcement action against individuals?
Bearing in mind the SMCR has been in force for banking firms since 2016 and investment firms since 2019, enough time has passed for the FCA to use this framework when conducting enforcement action. Despite this, we’ve not seen the volume of cases we were expecting.
While there have been a handful of failings at banks where the SMCR framework has been referenced, including the breach of conduct rules, the same cannot be said for solo-regulated investment firms. Recent final notices against individuals have tended to be on the extreme end of the spectrum, including the use of a machete, a stabbing and the handling of stolen goods, all of which would have been likely to cause action to be taken under the previous approved persons regime.
That’s not to say the framework hasn’t been a useful tool for the FCA to oversee firms more effectively. Removing the requirement to approve CF 30 and other approved person roles will have freed up a significant amount of internal resources. It has allowed the regulator to scrutinise senior manager applications in more detail and has given additional consideration to exactly what each new senior managers role will specifically entail.
We’ve also seen several skilled person requirement notices instructing those in scope to review the governance arrangements in place at firms, as well as specific requests of statements of responsibilities.
What should I expect going forward?
It’s unlikely that we’ll see how successful the SMCR has been until there’s a systemic regulatory failing where a high volume of customers is affected. There would potentially have been more successful prosecutions and enforcement actions in the wake of the libor fixing scandal if the SMCR framework had been in place.
We’ve certainly seen many individuals being reluctant to take on senior manager positions and a smaller pool of candidates willing to take on the SMF 16 (compliance oversight) and SMF 17 (MLRO) roles.
Perhaps the biggest success of the SMCR so far has been focussing the minds of senior managers on the importance of understanding their duty of responsibility and the liability they’ve agreed to take on. Not quite the sword of Damocles, but perhaps enough to help the FCA meet its operational objective of maintaining the integrity of the UK’s financial system.
How can Bovill Newgate help me stay compliant with the SMCR and avoid enforcement actions?
If you need SME advice on the regime, we will advise on how to implement the requirements while facilitating workshops to get the appropriate buy-in and engagement from key stakeholders. Our teams are at hand to help prepare and draft individual statements of responsibilities, and management responsibilities maps.
We can define and articulate the key processes to underpin the SMCR from scratch, or assess your existing processes and documentation, including your governance framework and disciplinary processes, suggesting any required changes or refinements.
Our specialists also provide targeted training on senior management responsibilities, broader training on the SMCR regime, and what it means for individuals affected.
Get in touch
Send a message:
