The Senior Managers and Certification Regime (SMCR) was initially implemented for the majority of PRA-authorised firms in March 2016. It was then extended to include FCA solo-regulated firms in a proportionate reduced format on 9 December 2019. However, many of the key aspects of this implementation process were delayed until 31 March 2021 due to the Covid-19 pandemic.
As with any new piece of regulation, the regulator cannot be expected to cover every potential variation in the matters relevant to regulated firms, but the staggered deadlines gave firms an opportunity to reflect on the practicalities of implementation, as well as the question of what they consider to be proportionate.
As compliance consultants, we applied our knowledge and experience of pre-existing requirements and the practical experience and response of clients to guide our broader client base of advisers/arrangers and investment managers. The purpose of this blog is to consider the various (and in some cases unexpected) questions that came up and share our thoughts on appropriate responses.
Senior management functions
In response to SMCR, many clients, particularly small clients, have taken the opportunity to introduce regimented management structures with formal documentation such as terms of reference and standing agendas to evidence delegation of the performance of responsibilities and the management information received. Detailed minutes that evidence challenge can be a great tool for tracking deficiencies and the manner in which they are addressed and resolved. This may all feel like unnecessary paperwork, but it can help senior managers and the firm mitigate personal and governance risks.
Non-executive directors (NEDs)
This has been an area of some confusion for clients as the Financial Conduct Authority (FCA)’s otherwise extremely helpful SMCR Guide for FCA Solo-Regulated Firms does not explicitly address the implications of SMCR for NEDs, other than those who require FCA approval such as the chair of the governing body.
All incorporated firms with directors who do not hold senior management functions (SMFs) should recognise those directors as NEDs. In addition, in our view, where firms appoint NEDs who are not directors at Companies House, those individuals should also be treated as NEDs for the purposes of SMCR. Firms should perform criminal record checks, regulatory referencing as well as initial (and thereafter annual) fitness and propriety assessments of NEDs. NEDs should be informed that they are subject to the individual conduct rules, as well as Senior Manager Conduct Rule 4 (“You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice”). NEDs should also be entered as ‘directory persons’ on FCA Connect, so they will be categorised on the Financial Services Register as ‘Director of firm who is not a certification employee or a SMF manager’. In general, in the case of core firms where NEDs will not hold prescribed responsibilities, we do not see statements of responsibility as a requirement.
The scope of certification functions
Many certification functions, such as that of ‘material risk taker’, are precisely defined or at least specific enough to allow prompt identification of the individuals to which the regime should apply, but the scope of some functions (such as ‘significant management’) allow for some discretion. In this regard, many firms have approached SMCR as a way of emphasising the importance and sensitivity of the roles performed by senior individuals who are not ‘senior managers’. As with the previous Approved Persons regime, some firms have taken the view that senior individuals in client service and business development should be certified for the purpose of ‘client dealing’, a function that would have previously been covered by the CF30 Customer controlled function.
Fitness and propriety assessments with regard to competence
Senior managers are required to be certified as fit and proper for a certification function where those certification functions vary from their senior management roles. We consider this to be appropriate to ensure that they are assessed as fit and proper for all relevant activities. For instance, this approach is relevant where a senior manager occupies the SMF27 Partner function but also advises clients or exercises discretion over client assets, as is often the case within many smaller investment management firms.
In practice, this would only broaden the workload marginally, as the ‘Competence & Capability’ element of the fitness and propriety assessments is broadened and the only administrative elements are certification and additional entries in the new Directory, which is incorporated in the Financial Services Register.
Material risk taker
Intuitively, and based on the aforementioned Guide for FCA Solo-Regulated Firms, the term ‘material risk taker’ would appear to cover a broader range of individuals than remuneration code staff, where this is relevant. However, the FCA Handbook gives a stricter definition, which is restricted to the remuneration code. This would imply that this function is only relevant to BIPRU, IFPRU and collective portfolio management firms, to which the remuneration code applies.
In addition, our original position on this matter was that it was not necessary for senior managers, where they are by definition code staff, to be certified for this purpose, as senior managers are naturally risk takers and this is very much a part of their role. However, we have noticed a preference amongst some clients to be consistent in identifying material risk takers across the board, as it can appear inconsistent to only recognise ‘other remuneration code staff’ as material risk takers on the Financial Services Register without doing the same for senior managers. We have no issue with this more transparent approach.
Conduct staff and conduct rules
SMCR firms are under an obligation to ensure that all staff members, including NEDs, are aware of the conduct rules that apply to them and how they might breach them. The quality and effectiveness of such training is a key concern for the FCA, emphasised by the video it released in November 2020.
We have helped many firms with training as well as conduct-focused workshops. An unexpected outcome of these workshops has been the exposure of poor knowledge of broader regulatory requirements amongst some staff members, which further supports our view that interactive training in smaller groups is preferable to traditional training presentations (with Q&A) or online training.
Some clients have taken our advice a step further and, with our assistance, built out a culture and conduct framework that is broader than the conduct rules, to emphasise and memorialise their firm’s approach and values in one document. While this may be a step further than envisaged by SMCR, it is probably an astute way to embed controls deep within a firm’s fabric and mitigate conduct risks that can be detrimental to the broader firm, as well as to individuals. Furthermore, culture and conduct is a key focus area for the FCA, meaning this approach fits nicely with the FCA’s expectations.
Ultimately, it is important for all solo-regulated firms to start thinking of SMCR as ‘business as usual’ in terms of ongoing training, annual fitness and propriety assessments, hiring and firing.
If you need support ensuring your firm is SMCR compliant, please contact our team at [email protected]