Getting to grips with SMCR

The Senior Managers and Certification Regime (SMCR) takes effect for FCA Solo Regulated Firms later this year, including advisers, and its reforms are wide-ranging.

The aim of SMCR is to “establish healthy cultures and effective governance in firms by encouraging greater individual accountability and establishing a new standard of personal conduct”, according to the Financial Conduct Authority (FCA).¹

The SMCR was implemented for banks, building societies, credit unions and dual-regulated investment businesses (those regulated by both the Prudential Regulation Authority and the FCA) in March 2016, replacing the Approved Persons Regime. On 9 December 2019 it will be rolled out to FCA Solo Regulated Firms.

Under the Approved Persons regime, an authorised company must have an approved individual responsible for ‘controlled functions’ and understanding the regulatory requirements and how they are applied. They have to meet the requirements of the FCA’s ‘fit and proper’ test and follow its principles; comply with the Statements of Principle and Code of Practice; and inform the FCA and the relevant firm of anything that could affect their ongoing suitability.²

SMCR brings a raft of significant changes, with firms being classed under different tiers, stiff penalties for non-compliance and a much greater emphasis on accountability.

Here we take a closer look at the main features of the new regime and key areas you should think about for your firm as the implementation date nears.

1 - Recognise your accountability

While the Approved Persons Regime was mainly about people carrying out certain functions being accountable directly to the regulator, in practice it was difficult to identify specific individuals (or groups of individuals) who could be held responsible for a firm’s failings.

Under SMCR there are more prescribed responsibilities, with the Senior Managers Regime covering the top layer of management in a firm and the Certification Regime setting out responsibilities held by other specific individuals in a firm.

Senior managers are considered the most senior people in a firm with the greatest potential to cause harm or impact upon market integrity.³ They bear a duty of responsibility, which means that if something goes wrong, the regulator is able to allocate accountability to that person.

2 - Know your firm type

Exactly how the new Regime applies to your firm will depend on which category it falls into. There are three different firm types under the SM&CR - Limited Scope, Core or Enhanced - and important differences between each.

These differences include the types of regulated activity undertaken, as well as criteria such as levels of assets under management. See SYSC Annex 1 in the FCA Handbook for more detail on the various definitions.

It’s the responsibility of each firm to determine which category is relevant to them. Your firm should have done this by now, but if you still need assistance in identifying the appropriate category you can use the FCA’s firm checker tool.

3 - Understand the responsibilities for your firm type

The majority of firms fall into the Core category. This means they are subject to the full Certification and Conduct Rules and many Fit and Proper requirements, such as appointing senior management functions, allocating prescribed responsibilities to appropriate senior managers and ensuring certain staff are fit and proper to perform their roles.

Core firms should - if they haven’t already - identify individuals who can perform relevant senior management functions, which prescribed responsibilities are relevant to them and which senior manager should be allocated each of those prescribed responsibilities.

Few, if any, advice firms will land in the Enhanced firms category, which covers the biggest firms with the biggest potential impact on consumers.

However some sole trading financial advisers will fall into the Limited Scope category, which applies to those already exempted under the Approved Persons Regime and so which have fewer baseline requirements to meet.

If you are a Limited Scope firm you are still subject to the full Certification and Conduct Rules and many Fit and Proper requirements, but you don’t need to allocate responsibilities to individual senior managers.

For full details of the responsibilities and roles under each category, see the relevant chapters in the FCA’s Guide for FCA solo regulated firms.

4 - Make sure you are ready

The new Regime takes effect for solo (FCA only) regulated firms on 9 December, but there are transitional and post-transitional dates it’s worth being aware of. For example, by 9 December this year firms must have identified senior managers and certification staff, provided training on the Conduct Rules and reviewed and updated relevant contracts of employment.

The transitional period lasts for one year, until 8 December 2020, by which point firms should have trained all other conduct rules staff, assessed the suitability of their existing certification staff and identified and assessed any new certification staff for suitability.

From then onwards firms have to continually ensure that conduct rules apply to all relevant staff, have their initial certification assessments completed, check their information is up-to-date and correct on the financial services register, meet ongoing requirements to train new staff in the conduct rules and at least once a year recertify certification staff as fit and proper.⁴

These are just some of the more important aspects to think about. While the changes are significant and may feel complex as you implement them, the FCA’s fundamental aim is a simple one. It’s to drive culture change through the allocation of accountability and by clarifying who has responsibility for what in each regulated firm.

¹ FCA - FCA outlines proposals to extend the Senior Managers and Certification Regime to all financial services firms - 26 July 2017
² FCA - Approved Persons - 12 May 2015
³ FCA - The Senior Managers and Certification Regime: Guide for FCA solo-regulated firms - July 2018 - pg 13
⁴ FCA - The Senior Managers and Certification Regime: Guide for FCA solo-regulated firms - July 2018 - Pg 51

Important information
Please remember the value of your clients investments and any income from them can go down as well as up and your client may get back less than the amount they originally invested.

Sara Wilson, Head of Platform Proposition, Alliance Trust Savings Limited

Sara joined Alliance Trust Savings in March 2013. Previously, she worked for Standard Life and Xansa, a technology outsourcing company. She received a BA Honours in International Business from the University of Teesside and a Post Graduate Diploma in Marketing of Napier University, Edinburgh.

On 29 October 2019 Embark announced it had agreed to acquire the adviser and partnership businesses of Alliance Trust Savings.

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