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How is the SM&CR Shaping Up?

By James Marshall 29/12/17

The extension of the Senior Managers and Certification Regime (SM&CR) will impact approximately 47,000 firms across the breadth of the industry and the FCA’s latest consultation (CP17/42) provides the clearest indication of how the regime will be rolled out across the industry.

 

Why is the regime being extended?

In response to the banking crisis the FCA reviewed the senior management responsibilities and accountabilities within the Banking sector.  One of the challenges the regulator faced was identifying who was the relevant Senior Manager with accountability and responsibility for the key areas within the banks. Their solution was to introduce the Senior Managers & Certification Regimes (SM&CR), including a Duty of Responsibility for senior managers and Conduct Rules which apply to all staff.

Now that these have been embedded within the Banking Sector the FCA is consulting on extending the Conduct Rules to staff of insurers and FCA solo-regulated firms who carry out financial services work and extending the Duty of Responsibility to Senior Managers of those firms.

 

What are the key features of the regime?

Senior Manager Functions

The Senior Managers Regime will replace the existing significant functions outlined in APER and cover those who have overall responsibility for business activities, are key decision makers and have the potential to cause harm and negatively impact market integrity. The allocation of these functions will depend on a firm’s categorisation and organisational structure.

Conduct Rules

The Conduct Rules will be extended to staff of insurers and FCA solo-regulated firms who carry out financial services work.  This means the FCA may take disciplinary action against individuals whose conduct falls short of these standards. There are conduct rules which are applicable to all staff, and others that are specific to Senior Managers functions.

The Conduct Rules that apply to Senior Managers include:

  • The requirement that senior managers take reasonable steps to ensure that the business of the firm is controlled effectively;
  • Taking steps to ensure the business complies with regulatory requirements;
  • Any delegation of responsibilities is appropriate and properly overseen.

Duty of Responsibility

Duty of Responsibility enables the FCA to take action against Senior Managers where:

  • There has been a contravention of a relevant requirement by the Senior Manager’s firm;
  • At time of contravention, or during part of it, the Senior Manager was responsible for activities relating to the contravention;
  • The Senior Manager did not take steps a person in their position would reasonably be expected to take to avoid/prevent contravention occurring or continuing.

The FCA has confirmed that the burden of proof lies with the them to show that the Senior Manager did not take steps that would reasonably be expected.  The DEPP sourcebook sets out the circumstances in which the Duty of Responsibility will be applied and provides a non-exhaustive list of considerations that may be taken into account.

When considering whether a Senior Manager has complied with the Duty of Responsibility the FCA will look at whether the Senior Manager has acted in accordance with:

o    Statutory Law;

o    Common Law;

o    Other obligations;

o    Conduct Rules; and

o    Other relevant rules in the Handbook

 

The regulator has purposefully chosen not to state that it will consider whether an individual took reasonable steps to manage competing priorities. This is to avoid giving the impression that Senior Managers won’t be found guilty of misconduct under the Duty of Responsibility because they were able to demonstrate that they were faced with competing priorities, or that it’s acceptable for a Senior Manager to deprioritise concerns about conduct.

When deciding whether to take action against the Senior Manager the FCA will look at the:

o    Circumstances of the case;

o    Seriousness of the breach;

o    Relevant individual’s position, responsibilities and seniority;

o    Need to use enforcement powers effectively and proportionately.

The FCA has confirmed they will not apply standards retrospectively or with hindsight.  They will consider what steps a competent Senior Manager could have been expected to take at the time.

 

What does this mean for Senior Managers?

The Duty of Responsibility may not only be applied in relation to those responsibilities detailed in the Statement of Responsibilities, as the FCA has said it will look wider to gain an understanding of the areas the Senior Manager oversees. Whether a Senior Manager was responsible for the management of any of a firm’s activities will be a question of fact. The FCA may not be able to check that Statements of Responsibilities and management responsibilities maps fully and accurately describe the activities a Senior Manager was responsible for managing without looking behind them. Statements of Responsibilities and management responsibilities maps will be relevant, but the regulator will also take other factors into consideration.

Under the Duty of Responsibility, Senior Managers are accountable for their individual contributions to collective decisions, where they impact the business area(s) that senior manager is responsible for.

When determining whether a Senior Manager took reasonable steps to prevent or mitigate the firm’s contravention, they will consider all the circumstances and have regard to whether a Senior Manager delegated appropriately, and to the nature, scale and complexity of the firm’s business.

 

What’s next?

The FCA will publish a Policy Statement in 2018, setting out whether any further changes to the Handbook, beyond those proposed in the July CPs, need to be made to reflect the extension of the Duty of Responsibility to insurers and FCA solo-regulated firms. The extension of the Duty of Responsibility is also subject to agreement by the Treasury.

The FCA is targeting the extension of the SM&CR to insurers to commence in late 2018, followed by commencement of the regime for FCA solo-regulated firms in mid to late 2019. The regulator anticipates that the extension of the Duty of Responsibility will align with these start dates. The actual commencement date will be set by the Treasury in due course.

Many firms and recruiters are already seeing a reticence among potential applicants to take on senior roles due to the perceived onerous individual accountability regime.  This could be an indicator that these individuals lack confidence that firms and senior management have an appropriate and positive approach to regulation.

Creating and embedding a positive, customer-focused culture is essential to preventing staff breaching conduct rules and giving senior managers the confidence that they can take responsibility for the actions of the business areas for which they are responsible.

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