Taking responsibility

The Senior Managers & Certification Regime is being extended to include brokers, financial advisers, fund managers, insurers and reinsurers. James Moorhouse considers the implications…

The Senior Managers & Certification Regime (SM&CR) is a programme designed by the UK Financial Conduct Authority (FCA) to improve trust in financial services by making people accountable for their decisions.

The programme was originally designed in response to the 2008 financial crisis, when it was felt that not enough action was taken against the banking sector. At its launch in 2016, the SM&CR applied to banks and building societies and is now being extended to include brokers, financial advisers, fund managers, insurers and reinsurers.

As Andrew Bailey, chief executive of the FCA, says: “Trust in financial services will only be rebuilt when the public truly believe that senior managers in our financial institutions are taking responsibility for the actions they take.”

As a result, much of the SM&CR focuses on:

• Who are the senior managers in a firm?
• What are they taking responsibility for?
• What happens if they fall short of their responsibilities?

The SM&CR comes into effect for solo-regulated firms from 9 December 2019 and will replace the Revised Approved Persons Regime (it will not apply to appointed representatives). There are also two transitional provisions to help firms move to the new regime:

• Firms must identify their certification staff before the commencement date of 10 December, but will have 12 months afterwards to complete the initial certification process
• Senior managers and certification staff must be identified and trained on the conduct rules by the commencement date, but firms will have 12 months to train their other staff.  

Identifying senior managers within the firm

The FCA cannot oversee every single person who works in financial services. As a result, it has split those who work in financial services into three groups, according to staff seniority and exposure to the public:

• Senior managers: those with senior management functions (SMFs)
• Significant harm functions (SHFs): for SMF holders whose roles “are deemed capable of causing significant harm to its customers”
• Other staff: all other employees (except ancillary staff).  

Significant obligations Responsibilities for senior managers are significant and require a demanding compliance structure:

• Requirement for prior FCA approval: for each person appointed to perform one or more SMF before the person takes up the function. An ‘overlap rule’ will be applied in the case of when more than one SMF is to be held by the same person.
• Statement of responsibilities: setting out which aspects of the firm's affairs that person will be responsible for managing. For larger firms, a ‘management responsibilities map’ will show details of reporting lines.
• Allocation of prescribed responsibilities: this includes compliance with regulatory requirements, and training and professional development.
• Duty of responsibility: this requires senior managers to take reasonable steps to prevent poor outcomes for customers.

Certified individuals undertaking SHFs will need to meet certain requirements to be issued with a ‘fit and proper’ certificate, which is valid for 12 months. When firms are allocating responsibilities to individuals, they only need to have SMFs for duties they currently have. They do not need to hire extra staff to fill roles that otherwise do not currently exist.

When certified individuals move from one role to another, the previous employer(s) must give a regulatory reference. The FCA expects that any misconduct that led to formal disciplinary action will be included in this.  

Conduct rules

The FCA proposes to create two tiers of conduct rules – those for most employees within the firm (except ancillary staff), and those for senior managers:

• Individual conduct rules:   

 - You must act with integrity   

 - You must act with due skill, care and diligence   

 - You must be open and cooperative with the FCA, the Prudential Regulation Authority (PRA) and other regulators     

- You must pay due regard to the interests of customers and treat them fairly     

- You must observe proper standards of market conduct.

• Senior manager conduct rules:

-     You must take reasonable steps to ensure that the business [you are running] is controlled effectively

-     You must take reasonable steps to ensure that the business [you are running] complies with relevant requirements and standards of the regulatory system

-     You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively

-     You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice.  

What happens if individuals fall short of their responsibilities?

The SM&CR aims to promote a duty of responsibility that encourages self-governance and ethical behaviour. By placing a greater importance on accountability rather than just imposing fines, its aim is for individuals to be personally accountable for their actions. However, disciplinary action can include a formal written warning from the FCA or suspension/dismissal of a person.

If an individual does breach a conduct rule, then their firm must notify the FCA once disciplinary action has been taken. SMF holders must notify the FCA within seven business days of concluding the disciplinary action. The FCA will then maintain a public Financial Services Register, to be known as the FS Register, with only approved firms and individuals appearing on the published list. Under certain circumstances, it may be appropriate to take action against both the individual and the firm.

By clearly outlining levels of responsibility, the SM&CR will make it easier not just to identify areas of market abuse or insider dealing, but also to create a culture that promotes the fair treatment of customers. By placing equal importance on the responsibilities of senior managers as well as conduct, this will be an important step in improving public trust.

Tips to help comply with the SM&CR:

• Think about customers first: Once you have a clear picture of the risks your clients face, establish who in your firm is identifying and managing those risks, as well as how close the firm is to its clients’ experiences.
• Create the right culture: The FCA has encouraged firms to think about a strong organisational culture as an output. The inputs that managers have control over include:

-     Its purpose

-     The way it is led

-     Its governance processes and incentives

-     The diversity of people who work with it (especially as firms grow). (see figure below)

-     Do not pigeonhole: Aim for the right balance between concentrating on accountability and building a comprehensive view of the organisation. The best presentation is one that shows ultimate accountability being concentrated in a small number of individuals.

• Keep up to date: By certifying individuals as ‘fit and proper’ every 12 months, you will be able to monitor whether the firm is being run efficiently and ethically on a more regular basis.
• Make sure you are covered: Always check job references, do not pass responsibilities to outsourced roles and have a backup plan in case of unexpected absences.

James Moorhouse is content manager at the CII