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Extension of the SMCR to FCA FSMA-authorised regulated firms
The FCA has today published its long awaited consultation paper (CP17/25) on the extension of the Senior Managers and Certification Regime (SMCR) to FCA FSMA-authorised firms. A separate consultation paper (CP17/26) covers the proposed extension of the regime to insurers who are currently caught by the Senior Insurance Managers Regime (SIMR). The regime is designed to bring about increased accountability within financial services firms, good practice and a general change in culture away from excessive risk taking.
The key points in CP17/25 – the general extension of the regime - are as follows:
Who is caught?
The new regime is intended to apply to all FSMA-authorised firms regulated by the FCA, including incoming branches of non-UK firms, which means that almost all financial services firms will be caught by the regime. It does not apply to Approved Persons at Appointed Representatives, for whom a separate Consultation Paper will apply in due course.
When does it come into effect?
It is not yet clear when the new regime will come into effect. The regulators will publish final rules in 2018 once they have reviewed the responses to the consultation paper, and an implementation date will apply thereafter.
What does the regime entail?
The regulators recognise that it is not appropriate to apply the new regime in exactly the same way as it applied to banks. Whilst they are keen to ensure consistent principles across financial services firms, the new regime needs to be proportionate and flexible enough to accommodate different business models and governance structures. They also want the regime to be as simple as practicable for firms to understand and implement.
In summary, the new regime proposes:
- A standard set of requirements for all FCA solo-regulated firms – to be known as the core regime
- An extra set of requirements for bigger firms (fewer than 1% of all solo regulated firms) known as the enhanced regime
- A reduced set of requirements for a group of firms known as Limited Scope firms (this includes firms that currently have a limited application of the Approved Persons Regime, such as sole traders)
A flow chart at page 14 of the CP will assist firms in working out which regime will apply to them.
The Core Regime
- The Senior Managers regime will apply to all firms which will mean:
- certain senior management functions will need to be designated as Senior Managers with specific prescribed responsibilities, and will require prior approval of the FCA before starting their roles
- Senior Managers will need clearly articulated statements of responsibility
- Senior Managers to comply with Conduct Rules including additional ones just for Senior Managers
- A Certification regime will apply to staff in all firms:
- whose roles can cause “significant harm” to either firms or their customers, whereby firms rather than the FCA are responsible of assessing fitness and propriety
- these staff will no longer be approved by the regulator but will need to be certified by their firms each year as being “Fit and Proper”
- Conduct rules will apply to staff in all firms (other than purely ancillary staff) including NEDs
- The current regulatory reference requirements will apply to all FCA firms
The Enhanced Regime
Firms in this regime will need to comply in addition with the following requirements:
- Responsibilities Maps
- More Senior Manager functions will need to be ascribed
- Handover procedures when Senior Managers leave employment
The key points in CP17/26 – the general extension of the regime to insurers - are as follows:
As with the general extension, the regulators recognise that insurers differ in size and scale and a one size fits all approach is equally inappropriate for them. Whilst the FCA and PRA are keen to ensure consistent principles across financial services firms, the new regime needs to recognise these differences.
In summary, the new regime proposes:
- Full application of SMCR to Solvency II firms and large NDFS (Non-Directive Firms)
- A streamlined regime for small NDFS, small run-off firms and ISPVs (Insurance Special Purpose Vehicles)
- All insurers will need to apply:
- - the Certification Regime to staff in roles which could cause significant harm to the firm or customers
- - Conduct Rules
- - The Senior Managers regime, except that not all features will apply to small NDFs and ISPVs
- Modified rules will apply to incoming branches of non-UK firms
- The current regulatory reference requirements will apply to all insurers
The Regulators will consult separately later this year on how firms should transition into the new regime and on any changes that will be required to forms and Handbooks.
Consultation paper – responses sought
The FCA is seeking responses to its proposals by 3 November.
What should firms be doing now?
Whilst the FCA will no doubt take firms’ comments into account, it is likely, given their stated aim of raising standards and increasing accountability, and the intended time frame, that the current proposals may not change very much between now and the implementation date. That said, firms with comments on the proposals should respond to the consultation paper by the deadline. Our experience from round 1 of SMCR implementation is that consultation responses can make a difference – with a number of changes having been made by the regulators before final rules in the original regime were published.
Separately, firms should start thinking about how best to prepare for the new regime.