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The requirements and challenges of SMCR

With the Senior Manager and Certification Regime soon to extend to the investment community, Leigh Treacy looks at the requirements and challenges

Three people talking, one of whom is in a suit and sitting in a chair holding some papers.The extended Senior Managers and Certification Regime (SMCR) will replace the current Approved Persons Regime for most solo-regulated firms from 9 December 2019. It has been introduced to enhance personal responsibility for senior managers and as a more effective and proportionate means to raise the standard of conduct of key staff, following the implementation of the SMCR for banks and insurers.

It is worth remembering that the SMCR has three main strands – the Senior Managers Regime (SMR), which focuses on the most senior individuals in firms who hold key roles or have overall responsibility for significant areas within a firm; the Certification Regime (CR), that applies to “material risk takers” and other staff who pose a risk of significant harm to the firm or any of its customers; and finally, Conduct Rules, which are high-level rules about individuals’ conduct that apply to almost all staff.

About the new regime

The Financial Conduct Authority (FCA) has committed to implementing the regime for investment firms in a way that is proportionate to their size and complexity. To reflect this, firms will be categorised as Limited, Core or Enhanced SMCR firms, with varying requirements applicable to each.

It is expected that the majority of solo-regulated firms will be classified within the Core regime, meaning they will be subject to baseline requirements. There are increased obligations for firms covered by the Enhanced regime (larger, more complex firms), and reduced obligations for firms covered by the Limited scope regime. For example, only firms captured within the Enhanced regime will be required to submit a management responsibilities map setting out their governance arrangements and establishing a handover policy to ensure the smooth transition between outgoing and incoming senior managers.

The SMR requires that the most senior people in a firm will be approved by the FCA, with firms also having a responsibility to ensure these individuals are fit and proper to conduct their roles, something that should be revisited annually. A statement of responsibilities, including prescribed responsibilities, is required for these individuals and they have a statutory duty of responsibility to take ‘reasonable steps’ to fulfil their responsibilities.

The CR covers employees who are not senior managers, but who can have a significant impact on customers, markets or the firm (‘significant harm functions’). Examples may include those undertaking a significant management function; proprietary traders; the Client Assets Sourcebook oversight function; client dealing functions; material risk takers; and any supervisor or manager of someone who is a certified person, amongst others. They will not be approved by the FCA, but will need to be approved internally by their own firm. The firm will have to certify annually they are suitable to carry out their job.

Finally, the CRs are split into two tiers. The first tier of five conduct rules apply to all staff, with the exception of ancillary staff, while there are four additional rules that apply to senior managers only.

Senior manager functions

The table (below, right) shows the senior manager functions Core, Enhanced and Limited regime firms are required to have and shows the distinction between categories of firm, reflecting the differences based on size and complexity.

Prescribed responsibilities

Core and Enhanced regime firms have to allocate prescribed responsibilities to senior managers. Limited scope firms do not. Core firms have a minimum of four prescribed responsibilities to assign, with another possible two prescribed responsibilities. In addition, Enhanced firms have a further seven prescribed responsibilities to assign to senior managers.

Duty of responsibility and reasonable steps

Under the SMCR, a duty of responsibility applies to all senior managers and specifies the circumstances under which the FCA is able to take action against a senior manager. The burden of proof is on the FCA to demonstrate that the senior manager did not take reasonable steps to avoid misconduct occurring or continuing in their area of responsibility. This links into a senior manager’s statements of responsibility and it is important for senior managers to take reasonable steps to have effective oversight of the areas they are responsible for within the business. This is one of the areas that caused controversy when implemented for banks and insurers where a reverse burden of proof was initially contemplated.

Regulatory references

The regulatory references requirement within the SMCR means that firms have to request references from past employers, and also provide such references. This is more onerous than previous referencing obligations, enabling firms to obtain information to assist in assessing suitability and fitness and propriety of individuals. This applies to senior managers, certification staff and non-approved non-executive director roles and poses administrative challenges for firms, requiring enhancements to HR systems and record keeping, as well as the potential for litigation.

How conversion to senior managers should work

For Core firms, individuals will be automatically converted (with some exceptions) into a senior manager function where they already hold a corresponding controlled function, requiring limited action from firms. For existing approved persons there is no need for firms to perform any extra checks (such as mandatory criminal records checks and regulatory references) because firms should already being ensuring that these individuals are, and continue to be, fit and proper.

For Enhanced firms, there is no automatic conversion to a senior manager role. They will need to submit a Form K conversion notification for each senior manager function, together with statements of responsibilities and the firm’s responsibilities map.

How ready are investment firms?

The majority of investment firms we have spoken to up until now have identified their SMCR firm classification and progressed their project plans through active sponsorship and support by the board and senior executives. Firms should have identified their populations within the three tiers of the regime (in consultation with HR and compliance functions) and be in the process of delivering tailored training to these individuals on their specific responsibilities.

In addition, firms should have reviewed and rationalised their organisational, governance and committee structures and reporting lines to ensure that all staff are supported by an effective and embedded governance framework.

There are still some challenges that firms are faced with, not dissimilar to those experienced by banks from a practical and administrative standpoint, including:

  • demonstrating reasonable steps – articulating how this will be monitored in practice;
  • risk information and management information overload – duplication and excessive escalation of management information; and
  • delegation under SMCR – clarifying the difference between delegating responsibility versus accountability.

It is important that all firms in scope understand that SMCR should not be viewed as a ‘regulatory tick-box exercise’ but rather as an accountability framework to be embedded permanently into the business.


About the author

Leigh Treacy, partner and head of banking and financial services advisory, BDO