Proportionality
The new rules will apply proportionately to firms, depending on their size and complexity. Firms will be divided into three categories with different rules applying to each category:
Core firms – includes most solo-regulated firms which will need to comply with a set of core requirements including the Senior Managers Regime (SMR), certification regime and the conduct rules.
Limited scope firms – such as sole traders and non-core financial services businesses which will be subject to fewer rules.
Enhanced firms - includes the largest asset managers, intermediaries and non-bank lenders which will be subject to additional requirements.
Helpfully, the FCA will contact firms ahead of 9 December 2019 with an indicative assessment of which tier they are likely to fall into, based on the information held about the firm. That said, it will be down to the firm to make a final assessment on the appropriate tier.
So what does the SM&CR mean for solo-regulated firms and their staff?
The SM&CR applies to three staff populations: senior managers, certification staff and conduct rules staff. Only a firm’s ‘ancillary staff’ such as facilities staff, receptionists and HR administrators/processors will fall outside the new regime.
Senior managers
The Senior Managers Regime (SMR) applies to a core list of senior managers responsible for the areas of a business with the greatest potential to cause harm or impact market integrity including the CEO, directors and the chair. Many of these roles, for example the SMF 17 Money Laundering Reporting Officer, will have inherent regulatory responsibilities allocated to them as an essential part of their role.
Under the SMR, in addition to any inherent responsibilities, every senior manager in a core or enhanced firm must be allocated ‘prescribed responsibilities’. These are recorded in a statement of responsibilities which sets out which areas of the business each individual senior manager is accountable for.
In enhanced firms, the SMR will apply to a broader population of senior staff and the organisation must also produce a ‘responsibilities map’ recording the firm’s wider management and governance arrangements.
However, perhaps the most significant change for senior managers under the new rules is that they will have a statutory ‘duty of responsibility’. If there is a regulatory breach within their area of responsibility and they failed to take reasonable steps to prevent it, they could face enforcement action by the FCA.
Much like under the current approved person regime, senior managers will need FCA approval before starting their roles and firms will need to satisfy themselves of a candidate’s fitness and proprietary through pre-employment vetting (including criminal records checks) before an application is made.
The SM&CR also introduces a requirement for firms to have handover procedures for incoming senior managers to ensure that they have all the information and materials they could reasonably expect to do their jobs properly.
Certification staff
This covers the population of employees who are not senior managers but whose roles mean that they could cause significant harm to the firm or its customers. It includes most of the current approved population but also anyone with a significant influence function, client dealing functions and material risk takers.
Unlike the approved person regime, these roles will not be subject to pre-approval by the regulator under SM&CR. Instead, firms will need to certify that such staff are fit and proper to perform their roles both annually and on an ongoing basis.
And in an attempt to stop the rolling bad apples, as part of the fit and proper assessment, firms will need to request regulatory references for certified employees, senior managers and non-executive directors from previous employers covering the last six years of employment. When giving such references, firms will need to use the FCA’s regulatory reference template and to update any such references if the information included changes over the next six years.
Conduct rule staff
The conduct rules are high level standards which replace the current Statements of Principle for approved persons and will cover a wider population – senior managers, certified staff and all other employees apart from ancillary staff.
The conduct rules are split into: individual conduct rules which apply to everyone including senior managers and certification staff and senior manager conduct rules which apply only to senior managers.