Funds

The countdown to the full implementation of the Senior Managers and Certification Regime (“SMCR”)  to cover all authorised firms including fund and asset managers is now well underway.

What is SMCR and which firms will it affect?

The Senior Managers and Certification Regime (“SMCR”) is designed to improving individual accountability and awareness of conduct issues across UK regulated firms. Banks and certain other PRA regulated investment firms have been subject to the SMCR since March 2016. In December 2018 regulated insurance and reinsurance firms came within scope.  On 9 December 2019 the SMCR will be extended to cover all other authorised firms including fund and asset managers.

Recognising that the firms within the scope of SMCR will vary considerably in size and complexity the FCA intends to operate a tiered regime, which distinguishes between “core firms” subject to “standard” SMCR requirements; “enhanced firms” whose scale or complexity will entail extra requirements, and “limited scope” firms  which will be subject to a reduced set of requirements. The core SMCR features, applicable across all tiers are as follows.

Senior Managers Regime

  • Individuals holding senior management functions (SMF) must be approved by the FCA . This group of individuals will likely be significantly smaller than the number of approved persons (with those falling out of SMF group typically falling into the certification regime)
  • Senior managers will need to have a ‘Statement of Responsibilities’
  • Senior managers will have a ‘Duty of Responsibility’, so that they are personally responsible for things that go wrong in their area. The FCA will be looking for senior managers to take ‘reasonable steps’ to ensure things don’t go wrong

Certification Regime

  • Those who are not senior managers, but their roles have an impact on clients, markets or the firm, will have to comply with the certification regime
  • Firms will be responsible for annually certifying that these members of staff are qualified and competent to carry out their roles

Conduct Rules

  • FCA rules that almost all individuals working in financial services must comply with, designed to improve standards of behaviour

What Implementation steps are necessary?

Firms should now have their implementation plans underway in earnest.  Firms will be focussing on

  • identifying those with senior manager roles and those within the certification regime and drawing up appropriate statements of responsibility.

For core and limited scope firms, the FCA will automatically convert the majority of approved persons into equivalent new senior manager functions.  Enhanced firms will be required to submit a Form K conversion notification, along with accompanying documentation

  • preparing for “fit and proper” assessments for certified staff. Firms will have a year to confirm their staff are fit and proper to carry out their roles (even if those staff members were already in these roles prior to implementation of the regime or were previously approved persons). Bear in mind, though, that certified staff must comply with the relevant FCA conduct rules immediately from the commencement date;  and
  • bringing their internal controls and reporting lines, staff handbooks and policies, training regimes and staff contracts are all brought into alignment with the new rules.

What further changes are in the pipeline?

Amidst all this activity, however, there is further change to absorb.  In a recent Consultation Paper FCA has proposed a number of changes to the SMCR.   Many of these are helpful clarifications, for example:

  • The Head of Legal function will not be a senior manager role. FCA has recognised difficulties which apply with legal privilege and fitting this within the supervisory aspects of the SMCR regime.
  • the “client dealing function” will not cover individuals who have a simple or largely automated role not involving dicretion or judgement

However others represent a tweaking of the scope of the enhanced regime.   FCA considers this is not catching all the firms that it should.  It is therefore tweaking the regime to ensure that more firms that have current total intermediary regulated business revenue of £35 million or more (based on a three year rolling average) are brought within the Enhanced Regime.

Further details of these changes are given in our legal update.

Karen Fountain

Partner at Brodies LLP
Karen is a partner at Brodies in the corporate team. She has over 20 years' experience of advising leading financial institutions, funds and intuitional and strategic investors across the globe with a broad range of matters.
Karen Fountain