Just as the summer was getting into full swing, the FCA issued its consultation paper on the extension of the Senior Managers and Certification Regime, setting out the whats and the whys.
The regime introduces some new concepts, most notably a three-tiered approach to compliance depending on the size, scale and complexity of a firm.
The FCA will consult further on how it proposes to implement the regime, including its plans for the transition of existing approved persons into it. It is expected to come into effect late next year.
The key aims of the extended regime are the same as those that have applied to the banks and other PRA firms under the current one:
- To reduce harm to consumers
- To raise the standards of conduct for everyone who works in financial services
These aims form a backdrop to a key priority of the regulator – improving culture and governance – as articulated in its business plan.
It is clear the FCA wants financial services staff to take personal responsibility for their actions in order to achieve an overall improvement in conduct. It is also clear that people need to understand, and can evidence, who does what within their firm.
There has been much talk about proportionality and tailoring the regime to fit the diversity of firms who will be impacted. So, what does it look like?
1. The core regime
This will apply to approximately 14,000 firms, covering most financial planning, wealth managers and advisory businesses.
Senior Managers Regime
The senior managers will need to be approved by the FCA before they start their role (as is currently the case under the approved persons regime) and firms will need to make sure their managers are suitably competent to do their jobs by obtaining references and conducting background checks such as criminal records.
The recent FCA final notice in respect of Goldenway Global, which saw it refuse an individual’s application for the CF10 and CF11 (compliance and money laundering officer) because it did not consider them to be fit and proper for the roles, demonstrates the increased level of scrutiny here.
A cornerstone to the Senior Managers Regime is the requirement to have a statement of responsibilities. This is a concise and clear record of a particular role that should be provided to the FCA and updated when there are major changes.
Senior managers will also have a duty of responsibility. This means that if something goes wrong in an area the manager is responsible for, the FCA will consider whether they took reasonable steps to stop it happening.
The certification regime will apply to staff who are not senior managers but whose roles mean they can be deemed material risk takers or potentially cause significant harm on customers, the markets or the firm itself. These staff will be certified by the firm, which will need to deem the individual fit and proper on an annual basis.
Five rules will apply to almost everyone who works in financial services. They are:
- You must act with integrity
- You must act with due care, skill and diligence
- You must be open and cooperative with the FCA, the 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
There are a further four senior manager conduct rules:
- You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively
- You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the 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
2. The enhanced regime
The FCA recognises there are a number of larger firms across all sectors, such as fund managers or retail finance firms. These will come within the enhanced regime and have additional responsibilities very much akin to that for banks.
These firms will require responsibilities maps and handover procedures, and will need to make sure there is a senior manager responsible for every area of the business, including operations, HR and IT.
3. Limited scope firms
As is currently the case, there will be a reduced set of requirements for limited scope firms where financial services activity is secondary to the main activity, such as retail firms, motor dealers and so on. There will be around 33,000 of these firms, and they will need just the one senior manager, as exists today.
The end of 2018 may seem like quite a long way off but with Mifid II and the General Data Protection Regulation to be implemented within the same year, getting your thoughts together on what this new regime will mean for your firm is important now.
The FCA has made it clear there is no requirement for firms to change their governance and organisational structures or to hire new people to fill specific functions, unless the firm considers that such changes would be beneficial.
Simon Collins is managing director, regulatory, at Eversheds Sutherland