FCA Senior Managers and Certification Regime – 1.0 Background

Introduction

By and large, responsibility for the 2008 financial crisis has been laid at the doors of the banking sector, and in response, Parliament set up the Parliamentary Commission for Banking Standards (PCBS) with a mandate to recommend how standards in the banking sector could be improved.

PCBS identified that firms should take more responsibility for the “fit and properness” of their employees, that a better standard of conduct should exist at all levels in banks and that a new accountability framework, focused on the senior management of banks should be established.

Based on these recommendations, Parliament passed legislation in December 2013, which lead to the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) applying the Senior Managers and Certification Regime (SM&CR) to the banking sector. In May 2016, further legislation was passed requiring the FCA to extend the regime to all FSMA authorised firms.

With ever increasing fines being imposed on banks becoming every day news, the aim of SM&CR needed to be simple; to reduce harm to consumers and strengthen market integrity by making individuals more accountable for their conduct and competence. In essence, no longer was it going to be acceptable for a senior manager or decision maker to make ill advised decisions, or take actions that would detriment the consumer, and then hide behind the protection of their firm’s corporate umbrella when the question of accountability was raised.

SM&CR dictates where responsibility should sit and provides direction as to who should be held accountable when things go wrong, and whilst a firm can still be sanctioned by the regulator under SM&CR, the first port of call will now be the individual who holds responsibility for the area in which the issue arose.

In addition, SM&CR aims to:

  • encourage a culture of staff at all levels taking responsibility for their actions, and
  • make sure firms and staff clearly understand and can demonstrate where responsibility lies.

Key Elements

There are three key elements to the Senior Managers and Certification Regime, namely:

1. The Senior Managers Regime

Every senior manager needs to be approved by the FCA and must have a statement of responsibility, which clearly states what they are responsible and accountable for. There are some specific responsibilities that firms need to give to their senior managers, known as “prescribed responsibilities”. This is to make sure there is a senior manager accountable for the SM&CR and key conduct and prudential risks.

A senior manager must also be responsible for each of the firm’s business functions and activities, known as “overall responsibilities”.

At least once a year a firm will need to certify to the regulator that its senior managers are suitable to do their jobs.

2. The Certification Regime

The Certification Regime applies to employees whose role means it is possible for them to cause significant harm to the firm or its customers. Such roles are known as “certification functions” and whilst such role holders do not need to be approved by the FCA, as the Senior Manager roles do, but the firms that appoint them need to check and certify that they are fit and proper to perform their role and this should be done at least once a year.

It is therefore similar to a pyramid effect, the FCA approve the Senior Managers and the Senior Managers approve the Certified Persons. The Senior Managers certify to the firm that the Certified Persons are fit and proper and in turn the firm certifies to the FCA that it’s Senior Managers are fit and proper.

3. Managers and Staff Conduct Rules

These are the high level standards of behaviour that apply to almost every employee including Senior Managers. Firms should ensure that all employees are trained in and know that the Conduct Rules apply to them. Notification must be made when someone breaches a Conduct Rule.

Key Dates

The Senior Managers and Certification Regime replaced the Approved Persons Regime for banks, building societies, credit unions and dual-regulated (FCA and PRA regulated) investment firms in March 2016.

The Senior Managers and Certification Regime will replace the Senior Insurance Managers Regime (SIMR) and the Revised Approved Persons Regime for insurance firms on 10th December 2018. This will include:

  • Insurers and reinsurers
  • ISPVs
  • The Society of Lloyd’s
  • Managing Agents
  • UK branches of third-country firms and European Economic Area (EEA) firms.

SM&CR will replace the Approved Persons Regime to almost every other FCA regulated firm, from very small firms those with limited permissions (including sole traders and limited permission consumer credit firms) to many of the largest global firms on 9 December 2019.

There will be three tiers under the SM&CR for this sector:

  • Core: firms int his tier will have to comply with the baseline requirements.
  • Enhanced: this will apply to a small number of firms whose size, complexity and potential impact on consumers or markets warrant more attention.
  • Limited: this will apply to firms who already have exemptions under the Approved Persons Regime. These firms will be exempt from some baseline requirements and will typically have fewer senior management functions.

Whilst the SM&CR will apply to all firms who are currently subject to the Approved Persons Regime, it is important for firms to establish which tier they belong to. To aid in this discovery, the FCA have published a Guide to the SM&CR for solo-regulated firms. https://www.fca.org.uk/publication/policy/guide-for-fca-solo-regulated-firms.pdf

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