10 November 2017
BY Marta Hermannsdottir

In 2016, the Financial Conduct Authority (FCA) replaced the Approved Persons Regime (APR) with the Senior Managers and Certification Regime (SM&CR) for banking firms. SM&CR is an accountability framework focused on senior management set up with the goal of strengthening market integrity and reducing risk to consumers.

In July this year the FCA published its proposal to extend the framework to all sectors of the financial services industry, replacing the APR completely. This is part of an ongoing effort encouraging firms to take more responsibility for ensuring the quality of their staff, and to set better standards of conduct at all levels in the financial services industry. Through this extension, the FCA aims to drive a culture change towards increased personal accountability and improved governance in all sectors of the industry – a key priority for the regulator.

The extended regime is expected to commence late 2018, but with MiFID II and other important regulations being implemented the same year it is important to start considering how the extended SM&CR will affect the financial services industry – and how firms can start preparing.

What is the objective?

The goal of the SM&CR is to reduce harm to consumers and to improve market integrity by holding individuals accountable for their conduct – an ongoing priority of the regulator since the 2008 financial crisis.

As with the APR and SM&CR in banking firms, the focus of this extension is not firms but individuals. According to Jonathan Davidson, Executive Director at FCA, the extension of SM&CR is key in driving forward culture change and ensuring accountability among Senior Managers for their own actions, and the actions of their staff. This reflects two important shifts from previous regulations:

• Responsibility and accountability is to be largely achieved ‘from within’ and not through micro-management by the FCA. Responsibility for assessing fitness and quality of staff is being shifted away from AFC to the firms, and the regime is intended to encourage a culture of responsibility and clear understanding of where responsibility lies.
• A second profound change arising from the extension is the scope of individuals it applies to. Culture change requires action from the majority of employees, not only senior management. The majority of employees will have to follow rules of conduct set by the FCA and firms will have to certify certain employees that are not in senior manager positions.

Who will be affected?

The extended regime will apply to nearly all firms that are regulated by the FCA, including investors and solo-regulated firms. It also affects branches of non-UK firms permitted to carry out any activities regulated by the FCA in the UK. This means approximately 47,000 businesses in total – and nearly all the individuals that work for those firms, not only senior managers.

What will it involve?

The extended regime involves three main elements, largely retaining the features of the existing banking regime. A key change to the existing regime is that the FCA wants the extension to reflect the diversity that exists within the financial services, and ensure that the requirements are proportionate to firms’ size, scale and complexity. The proposal therefore suggests a baseline of requirements, or ‘core regime’ that will apply to majority of firms, and more stringent requirements or ‘enhanced regime’ which will apply to approximately 350 of the largest, most complex firms such as large asset managers, non-bank lenders and intermediary firms.

The three key parts of the regime are:

– Senior Managers Regime:
As with the existing SM&CR, this element will apply to the most senior staff in a firm. Everyone holding a Senior Management function must be approved by the FCA before starting their role, and firms need to provide a statement for every Senior Manager confirming hers/his area of responsibility. All Senior Managers will have a ‘Duty of Responsibility’ and if something should go wrong in an area they are responsible for, they can be held personally accountable for their actions, as well as the actions of their staff.

– Certification Regime:
This element applies to people that are not covered by the Senior Managers Regime, but who can in their roles have big impact on customers, firms, or markets. Firms must provide certification at least once a year to confirm that these people are suitable and skilled for their roles. Certain roles that fall under this regime are currently assessed by the FCA, but the regulator wants to shift responsibility for assessing the propriety and qualification of staff to firms.

– Conduct Rules:
A set of rules will apply to nearly all staff in financial services and aim to improve their behaviour. These rules include acting with integrity and treating customers fairly. FCA has proposed that these rules be applied to majority of employees and not only senior management, as they are an important tool in achieving a cultural change within firms.

What are the next steps?

Firms in the financial services industry operating in the UK are already burdened with implementation of a huge volume of EU and UK regulation. Complying with the SM&CR will add to that workload, but it will require a distinctively different approach than other regulations. Because it addresses underlying causes of misconduct, such as culture and organisational structures, preparation will require cross-departmental and company-wide actions that are led by example from the top.

• Designing well-defined governance structures will be vital: The extension will require firms to re-think their existing governance structures and communication policies. Firms will need to ensure that staff are taking personal responsibility for their actions – which requires a clear understanding of who does what within the firm. Requesting Senior Managers to be personally accountable for their staff’s actions will furthermore require improved communication processes and clear distribution of responsibility. It is especially important for firms with a European or global presence to identify where personal accountability should lie without unreasonably affecting Senior Managers located in head-office. Firms should aim to spread responsibility across local offices through clear and well-defined governance structures. Individual responsibility and accountability is moreover bound to be an emotional subject, so good communication will be key in all groundwork for the SM&CR.

• Starting implementation early is essential: The extended SM&CR does not only require compliance with code and regulations, but changes in business practices and corporate culture – and such changes take time. Driving cultural changes towards individual accountability will require firms to establish clearly communicated governance structures and work processes; senior management to act as role models; and the whole firm to share a common sense of core values. Implementation of the SM&CR will therefore require firms to introduce immediate changes to their compliance and human resources frameworks, and to work towards a long-term transformation of their corporate culture and governance.

The extension will require all firms operating in the financial services industry in the UK to make fundamental changes in advance of its implementation. Given the diversity of businesses affected the preparation will vary in scale, but starting the groundwork early will bring benefits later on. The over-arching scope of the regime across organisational structures, governance, infrastructure, responsibility mapping, training and compliance renders the implication far from straightforward. It is impossible to determine at this point whether the costs of implementation will be outweighed by the potential benefits – and only time will tell whether the regime will in fact attain the goals of increased accountability, market integrity and reduced risk to consumers. One thing is certain; it will bring profound changes to the entire financial services sector in the UK.

[1]FCA, ‘FCA outlines proposals to extend the Senior Managers and Certification Regime to all financial services firms’ (https://www.fca.org.uk/news/press-releases/fca-outlines-proposals-extend-senior-managers-certification-regime-all-firms)