Solo-Regulated Firms and The Senior Managers & Certification Regime

The Senior Managers & Certification Regime (SM&CR) is due for implementation in solo-regulated firms on 9 December 2019. With 2019 just around the corner, firms should be using the recently published Guidance document to plan their transition to the new regime, and preparations should be well underway. The regime replaces the previous Approved Persons Regime after a Parliamentary Commission found that the APR did not apply widely enough within firms. This week, we look at what solo-regulated firms need to know, one year out from transition to the new regime, in our brief overview.

How the SM&CR affects firms depends on their status. Solo-regulated firms will fit into one of three regimes; depending on its size and risk profile a firm will either be Limited Scope, Core or Enhanced.

Firms that are currently subject to a limited application of the APR will be Limited Scope SM&CR firm. Firms that are not subject to a limited application of the APR will be Core SM&CR firms unless one of the following applies:

• The firm is a Significant IFPRU firm

• The firm is a CASS Large firm

• The firm has Assets Under Management of £50bn or more as a three year rolling average

• The firm has a total intermediary regulated business revenue of £35 million or more per annum, calculated as a three year rolling average

• The firm has annual revenue generated by regulated consumer credit lending of £100m or more calculated as a three year rolling average

• The firm is a mortgage lender or administrator (that is not a bank) with 10,000 or more regulated mortgages outstanding

If one or more of the above apply, the firm is an Enhanced firm, and extra rules will apply.

Senior Managers Regime and SMFs

Senior Management Functions are a new type of controlled function under FSMA. Which functions apply will depend on the status of the firm. People who hold these functions are called Senior Managers – they are the most senior people in a firm with the greatest potential to cause harm or impact upon market integrity.

Senior Managers need to be approved by the Financial Conduct Authority (FCA) before they can start their role. The FCA will, therefore, know who a firm’s most senior decision makers are, and the Regime is designed to make sure firms clearly allocate responsibilities to key individuals.

Statements of Responsibility

SoRs are a single document – which should be self-contained and not require cross referencing to another document - that each Senior Manager needs to have, and which sets out their role and responsibilities clearly.

The document should show what the Senior Manager is responsible and accountable for. It should not set out how they carry out those responsibilities, and should be designed to be useable by regulators and those without a working knowledge of the organisation or its structure. SoRs should include succinct descriptions and avoid unnecessary detail.

SoRs are required when firms apply for a Senior Manager to be approved by the FCA. Firms need to keep the document up to date, and re-submit to the FCA whenever there is a significant change to the responsibilities.

Duty of Responsibility

Every Senior Manager has a Duty of Responsibility – if the firm breaches requirements, the Senior Manager responsible could be held accountable if they did not take reasonable steps to prevent or stop the breach.

Every Senior Manager should familiarise themselves with the criteria that the FCA will use to make a decision - published in the Decision Procedure and Penalties Manual (DEPP) - and the FCA’s final guidance on enforcing the Duty of Responsibility (PS18/16) prior to the start of the Regime.

Fit and Proper Requirements

A major feature of SM&CR is to reinforce that firms need to take responsibility for their staff being fit and proper to do their jobs. Firms will need to make sure that anyone performing a Senior Management Function is fit and proper for their role and must assess those in SMF roles at least once a year. Full guidance is provided in the FIT section of the FCA Handbook.

Those applying for SMF roles need to declare if they have a criminal record, and firms must also undertake criminal records checks as part of each Senior Manager application for approval. Firms will need to ensure they are registered with the DBS or equivalent agencies in Scotland and Northern Ireland; smaller firms may need to use an umbrella organisation.

Firms will need to request a ‘regulatory reference’ for SMF and Certification Function candidates from all past employers for the previous six years. Firms will also be required to disclose certain information, including details of any disciplinary action taken due to breaches of the Conduct Rules, and any findings that the person was not fit and proper. Firms should confirm that their policies and procedures ensure that records of disciplinary and fit and proper findings are retained for six years, to facilitate the requirements.

In some Limited Scope firms, the application of the rules differs slightly; sole traders are not required to seek regulatory references or criminal records checks for themselves, even where they also hold a SMF. Sole traders with employees should carefully consider whether any of these individuals meet the definition of a Senior Manager or perform one of the Certification Functions. If they do, the fit and proper requirements apply.

Prescribed Responsibilities

PRs are specific responsibilities defined in the FCA Handbook under SYSC 24 that a firm must give to a Senior Manager. Limited Scope firms and EEA branches won’t need to apply the PRs, but they will apply to all other firms. Firms need to carefully consider which Senior Manager is the best person to hold each PR; they should be given to the SM who is the most senior person responsible for that activity or area.

Responsibilities Maps

Enhanced firms must prepare and maintain a Responsibilities Map – a single document that sets out the firm’s management and governance arrangements:

• How PRs have been allocated

• Who has overall responsibility for the firm’s activities, business areas and management functions

• Details of individuals’ and committees’ reporting lines

• How any responsibilities are shared or divided between different people.

Handover Procedures

Enhanced firms are required to take all reasonable steps to ensure that a person taking a Senior Manager role has all the information and materials they could reasonably expect to have to do their job effectively. One way of doing this is to have the predecessor prepare a handover note. Affected firms must have a policy which explains how it complies with this requirement, and maintain adequate records of the steps it has taken.

Certification Regime

The Certification Regime is designed to cover specific functions that aren’t Senior Management Functions, but can have a significant impact on customers, the firm, and market integrity. The FCA has published a list of Certification Functions in recent guidance that firms can use to decide which will be relevant to their firm.

Those in roles covered by the Certification Regime don’t need to be approved by the FCA, but firms do need to check and confirm, via a certification process undertaken at least once a year, that these individuals are suitable to do their job.

Firms need to make sure they’re aware of which roles in their organisation will fall under the Regime (if any – it’s possible that in very small firms, there will be no one in the Certification Regime), and have put in place policies and processes that ensure that these individuals are certified at least annually. Certification should take into account whether the individual has obtained a qualification, has undergone, or is undergoing, training, and whether they possess a level of competence. Certificates issued by firms should state that the authorised person is satisfied that the person is a fit and proper person to perform the Certification Function, and set out the aspects of the firm’s business in which the individual will be involved.

Conduct Rules

The Conduct Rules apply to all firms – including branches. They are a new set of enforceable rules designed to set basic standards of good personal conduct and are set out in COCON, in the FCA Handbook. They aim to help shape the culture, standards and policies of firms as a whole and promote positive behaviours that reduce harm. The Conduct Rules apply to all Senior Managers, all Certified Functions, all Non-Executive Directors who are not Senior Managers, and all other employees, except ancillary staff.

Firms should ensure that they are clear about which employees are affected.

Firms are required to train relevant staff on how the Conduct Rules apply to their role. Senior Managers and Certification staff will need to have been trained in and abide by the Conduct Rules from the start of the new regime. For other staff, firms will have 12 months to comply with the training and reporting requirements, and to train these staff on the Conduct Rules.

Firms should also ensure that their policies and procedures cover the requirement to notify the FCA when disciplinary action has been taken against a person for a Conduct Rules breach; within 7 days for a Senior Manager, and annually using REP008 via GABRIEL for all other individuals. All firms are required to make an annual notification about Conduct Rules, even if there haven’t been any breaches.

Solo-regulated firms are due to move to the new regime from 9 December 2019. The FCA will contact firms ahead of that date with their assessment of their status, but firms are still responsible for assessing which tier they fall into based on the rules. This is important as firms need to ensure they use the correct forms – failure to do so may cause problems with a firm’s approval.

There are two transitional provisions to help firms move to the new regime:

• Firms need to identify their Certification Staff at the start of the new regime, but have 12 months from commencement to complete the initial certification process.

• Senior Managers and Certification Staff will need to have been identified and trained and abide by the Conduct Rules from the start of the new Regime, but have 12 months to train their other staff on the Conduct Rules.

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