SM&CR- Happy Christmas from the FCA

Christmas came early yesterday with the publication of three papers by the FCA detailing the proposed transition from the Approved Persons to the Senior Managers and Certification Regime (“SM&CR“). We shall have a brief look at two of the papers: CP17/40: Individual accountability: Transitioning FCA firms and individuals to the Senior Managers & Certification Regime and CP17/42: The Duty of Responsibility for insurers and FCA solo-regulated firms. If you are not one of the 1% largest firms, transition will be a lot less painful than many feared- the proposals substantially decrease the administrative burden previewed in July’s consultation. We shall have a brief look at the major features.

As a quick reminder- a firm will be subject to the “enhanced regime” if it satisfies one or more of the following criteria:

1. It is a Significant IFPRU firm;
2. It is a CASS Large firm;
3. It has AUM of £50 billion or more (at any time in the previous 3 years);
4. It has current total intermediary regulated business revenue of £35 million or more per annum;
5. It has an annual regulated revenue generated by consumer credit lending of £100m or more; or
6. It is a non-bank mortgage lender with 10,000 or more regulated mortgages outstanding.

At the other end of the spectrum, a “Limited Scope” regime will apply a reduced set of requirements to a certain group of firms, such as limited permission, consumer credit firms, sole traders, oil market participants, service companies and subsidiaries of local authorities. Firms which are neither Enhanced nor Limited Scope are designated as “Core”.

Summary

• The vast majority of controlled function holders at Core and Limited Scope firms will be automatically converted to the relevant Senior Management Function;
• Core and Limited Scope firms will not need to submit paperwork to the regulator before the commencement date. The requirement to submit Statements of Responsibility has been dropped. However, these must be prepared and be ready for inspection;
• In order for automatic conversion to be effective, Core and Limited Scope firms should ensure full compliance with the existing Approved Persons Regime;
• The administrative burden is not relaxed for Enhanced firms who must submit full Senior Manager details including Statements of Responsibilities before the commencement date. Failure to do so will constitute a regulatory breach.

Core and Limited Scope

With a small number of exceptions (detailed below) Approved Person Regime controlled functions will be automatically converted to the following Senior Management functions:

APR Controlled Function	Senior Management Functions
CFI – Director	SMF3 – Executive Director
CF2 – Non-Executive Director	SMF9 – Chair
CF3 – Chief Executive	SMF1 – Chief Executive
	SMF19 – Head of 3rd Country Branch
CF4 – Partner	SMF – Executive Director (EEA and non-EEA branches)
	SMF27 – Partner
CF5 – Director of Unincorporated Association	SMF – Executive Director
CF6 – Small Friendly Society Function	SMF3 – Executive Director
CF8 – Apportionment and Oversight Function	SMF29 – Limited Scope
CF10 – Compliance Oversight	SMF16 – Compliance Oversight
CF11 – Money Laundering Reporting Officer (MLRO)	SMF17 – Money Laundering Reporting Officer (MLRO)
CF29 – Significant Management Function	SMF21 – EEA Branch Senior Management Function

Exceptions to Automatic Conversion

 

• Firms whose current Chair is a CF2 – Non-Executive Director will have to submit a Form K informing the FCA that they wish to convert that particular CF2 – NED function to the SM9 Chair function;
• Five Controlled Functions will not require authorisation under the SM&CR:
  • CF2 – Non-Executive Director (NED) excepting the above;
  • CF28 – Systems & Controls Function;
  • CF10a – CASS Oversight Function;
  • CF29 – Significant Management Function
  • CF30 – Customer Function

Enhanced Firms

Automatic conversion will not apply to enhanced firms. Enhanced firms will therefore have to submit the following prior to commencement:

• Statement of Responsibilities for each individual;
• a Responsibilities Map to allow for conversion of approved individuals to new Senior Management Functions; and,
• a Form K conversion notification detailing all of the approved persons to be converted

Failure to submit the Form K conversion notification will result in the loss of approval for all Approved Persons, leaving a firm in substantial breach. The list of potential Senior Management Functions is extended for Enhanced firms. All enhanced firms should confirm that existing approved persons have been mapped to the appropriate senior management function.

Other Amendments/Items of Note

CP17/40 also proposes a number of minor amendments. The fitness and propriety test has additional text requiring a candidate to declare whether their evidence has ever been found by a judge or tribunal to be unbelievable and whether they have ever participated in arbitration proceedings. A 10 year time limit is proposed to the lookback period during which a candidate must declare that they held an influential position in a firm that was found civilly liable. The FCA recognises that the utility of the Financial Services Register will be diluted insofar as it will only include Senior Managers, the Regulator is considering the situation. The paper contains proposed guidance on the SMF24- chief operations function with examples of the relevant function list. Finally, the FCA and the PRA intend to introduce gender-neutral language to SM&CR titles- no more Chairmen.

Duty of Responsibility

A single paper is devoted to the SM&CR’s duty of responsibility under the extended regime. The existing duty applies to banks and investment firms under the Financial Services Act 2016, empowering the FCA to discipline senior managers when the Regulator can prove the existence of three factors:

• the firm has breached a requirement;
• at the time of the breach the Senior Manager was responsible for the relevant area; and,
• the Senior Manager did not take reasonable steps to prevent the occurrence or continuation of the breach

CP 17/42 makes it clear that the current approach as laid out in the Decision Procedure and Penalties Manual in the FCA Handbook (DEPP 6.2.9) will be applied to the extended SM&CR. The standards will be applied from the date of commencement. Firms should note that the Statement of Responsibilities is not prohibitive, duty of responsibility is a matter of fact.

Conclusion

Although there is no Christmas joy for enhanced firms, automatic transfer will be widely welcomed by the circa 30,000 financial services firms that face the prospect of regulation under the SM&CR. The move is likely prompted by the Regulator’s own inability to effectively process and monitor such a large influx of applications. The papers contain no clue to the actual commencement date of the extended regime. It is still slated for late 2018, sources at the FCA have indicated that early 2019 is more likely.

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