On 9 December 2019, the Financial Conduct Authority will be rolling out the Senior Managers and Certification Regime (SM&CR) to all firms authorised under the Financial Services and Markets Act.
We look at what it is designed to achieve and how to implement it in your business.
SM&CR is replacing the Approved Persons Regime and its aim is to drive transparency and individual accountability. It requires all firms to clearly lay out senior managers’ responsibilities, as well as certifying certain individuals, who are not senior managers, as being fit and proper – a distinctive change from the current approved person process.
SM&CR was first rolled out to banks in 2016, and it was later extended to insurers. Three years on, some banks have reported that they have seen the quality of their discussions about accountability and decision making improve significantly, as well as being a useful process for reinforcing culture and reminding staff how they should conduct themselves.
Implementing SM&CR in your business is a journey that requires thought and planning. Here are a few things to keep in mind when applying the new rules:
1. What type of firm are you? Firms need to determine whether they are a limited, core or enhanced firm to apply the regime correctly, as not all Senior Manager Functions (“SMFs”) will apply to limited and core firms.
2. Producing statements of responsibilities (SoRs): SoRs should detail senior managers’ roles and responsibilities. They are not job profiles and they should focus on what the senior manager is accountable for, as well as stating what they are not responsible for.
3. Responsibilities map: enhanced firms are required to produce a responsibilities map, which is a document describing the firm’s management and governance arrangements. This map should be consistent with the statements of responsibilities mentioned above. While core firms do not have to produce a responsibilities map, it is a useful exercise, particularly for medium to large sized firms.
4. The transition process: For core firms, most approved persons currently active under the Approved Persons Regime will automatically be converted to a corresponding SMF under the new regime, with the exception of the non-executive director (CF2) role, where consideration needs to be given to whether the individual in question is performing the new SMF 9 Chairperson role.
For enhanced firms, this process is far more complicated, as there are significantly more SMFs applicable to a firm of this type, and careful consideration needs to be given to which SMF applies for a particular individual, taking into account their statement of responsibilities and the overall responsibilities map.
As a result, there is no automatic mapping exercise and firms will need to complete specific forms, informing the FCA of who is applying for what role, as well as providing a responsibilities map and statement of responsibilities.
5. Certification: any individual that has a “significant impact on customers, the firm and/or market integrity” must be certified as fit and proper by the firm. This is a broad definition and reaches far wider than the existing CF28, 29 and 30 definitions.
These controlled functions, as well as other key functions like CF10a (CASS oversight) will cease to exist. Instead, regulated firms themselves must assess whether these individuals are suitable to do their jobs. This is perhaps the biggest change to the existing regime, and regulated firms will need to be able to demonstrate that they can appropriately evidence that they have considered their employee’s fitness and propriety for the roles their Certification Staff perform.
Certification must be carried out at least once a year.
6. Everyone else? All other employees, with the exception of those performing purely ‘ancillary roles, will need to agree to abide by the FCA’s “First Tier Individual Conduct Roles”. This may well be the first time that a number of staff will have to formally attest that they will comply with FCA conduct principles.
7. The role of HR: unlike most other regulatory changes, which are heavily compliance focused, we urge firms to give serious consideration to the HR related considerations that these changes bring about.
It is clear that the FCA is attempting to drive cultural change across the industry by establishing accountability down to the individual level. The banks that appear to have benefitted from SM&CR have done so by taking the opportunity to review and redefine their organisational cultures. As a minimum, firms will need to put time into designing or evolving their systems and processes such as; recruitment and competence assessment, regulatory referencing, capability review and management, performance management, continuing professional development and whistleblowing.
We believe that changes of this nature require firm wide engagement and a comprehensive training approach to make sure that they embed and enhance ways of working and trust rather than building bureaucracy and organisational silos.
Firms are being asked to implement a suite of processes that they may feel are overkill; however seen in a different way this is an opportunity to reflect on the way that these firms operate, to reset or reinforce how they work, and to enhance business efficiency and performance.
At EIC, we’ve teamed up with OrchardHR to help provide clients with a complete picture of why the changes have come about, what the firm needs to do to implement SM&CR and how to go about doing it.
Over the next few weeks, we will be hosting dedicated SM&CR events to help you understand these key themes in greater detail.
If you would be interested in attending, or if you need any support with implementing SM&CR, please get in touch.