Senior Managers and Certification Regime: how to prepare for the transition

The FCA has published its proposals for transitioning approved persons into the Senior Managers and Certification Regime.

This follows the FCA’s consultation in July 2017 on the extension of the regime across the entire financial services sector.

The FCA's intention has been to simplify the process of transition as far as possible, and it has largely achieved that goal from a procedural point of view. Nevertheless the scale of the implementation project for solo-regulated firms should not be underestimated.

The regulator has also published a consultation on transitioning insurers into the new regime, as well as a third consultation paper on the application of the Senior Managers’ duty of responsibility.

What is the timetable for implementing SMCR?

The final timetable for implementing the regime will be set by the Treasury, but the FCA has confirmed that it is working to the following schedule:

• SMCR to be implemented for insurers in late 2018.
• SMCR to be implemented to solo-regulated firms in mid to late 2019.
• The requirement for firms to certify relevant employees as fit and proper will come into effect 12 months after implementation (although the new conduct rules will apply to the certified population from the implementation date of the rules).
• Firms will be given 12 months from commencement to prepare for the application of conduct rules to all staff.

Firms have some time before the implementation of the rules to make the necessary preparations. However, there are steps that firms will need to take in advance of implementation. These steps are set out below.

Transition for limited, core and enhanced firms

The FCA has committed to implementing the regime in a way that is proportionate to the size and complexity of solo-regulated firms. Different categories of firms will be treated differently under the regime.

• Firms which were exempt from the approved persons regime will remain outside the scope of SMCR.
• Firms that were subject to a limited application of the approved persons regime will continue to be a “limited” scope firm under SMCR. This includes sole traders, limited permission consumer credit firms and other similar less complex businesses.
• All other firms will fall into the “core” firm category, unless they are an “enhanced” firm.
• A small number of firms will be enhanced firms and subject to additional regulatory requirements. These include:
  • significant IFPRU firms (as defined by IFPRU 1.2.3)
  • firms with assets under management of £50 billion or more at any time in the last three years
  • other large mortgage lenders, large CASS firms and other firms where the FCA has judged that additional regulation is required to mitigate the risks posed by the firm's activities.

Firms should assess whether they fall into the limited, core or enhanced category at an early stage as that will determine the approach they take to implementation. The FCA has provided a checking tool to assist that process (PDF), which is available at section 1.3 of CP17/40.

Transition process to SMCR

The FCA has stated that its desire is to make the transition from the approved persons regime to SMCR as smooth as possible without the need for large amounts of paperwork.

Core and limited scope firms

Individuals who are approved persons within the approved persons regime will automatically be transitioned into the applicable Senior Manager functions (SMF) on commencement of the new regime, without any need for further action by firms. There will be no need for re-approvals or any background or criminal records checks for individuals already approved.

The complete table (PDF) is available at section 4.7 of CP17/40.

• Although firms are not required to submit it to the FCA, nevertheless they will need to prepare a Statement of Responsibility for each approved person who is transitioning into a SMF.
• Some approved roles will not transition into SMFs, but instead will fall into the Certification Regime, including CF2s (Non-Executive Director), CF28s (Systems and Controls), CF29s (Significant Management) and CF30s (Customer). These roles will no longer require direct regulator approval, but instead firms themselves must satisfy themselves of the individual's fitness to perform that role on an annual basis.
• The one exception to the automatic mapping process. This arises where a Non-Executive Director holds the position of Chair, as firms will need to notify the regulator that they wish to allocate SMF9 to that individual.
• Ongoing applications for approval of individuals under the current regime will continue to be accepted right up to implementation, and will be automatically converted to SMF applications.

Enhanced firms

• Reflecting the more complex structures and activities of enhanced firms, there are additional requirements on transition. There will not be automatic mapping of existing CFs to SMFs. Instead, enhanced firms must identify the individuals who will perform the appropriate SMFs and notify the regulator using Form K.
• Form K must be accompanied by a Statement of Responsibilities for each SMF and an overall management responsibilities map.
• However, there will be no need for re-approvals or additional background or criminal records checks provided that the approved person will perform a corresponding SMF.
• As with core firms, many CFs will now fall within the Certification Regime and therefore will not need direct regulator approval.
• Failure to submit a conversion notification for an enhanced firm could lead to a breach of the relevant rules because individuals will not hold appropriate permissions.

What should firms do now?

Many firms have now commenced their preparations in earnest. Steps which can usefully be taken now include the following:

1. Identify your project team, including senior management, HR, legal, risk and compliance.
2. Assess whether you are a limited, core or enhanced firm, and consider whether that assessment might be revised prior to implementation.
3. Review allocation of responsibilities among your existing framework, and consider how this will map across to SMCR.
4. Consider any adjustments that might be needed to management structures or the allocation of CFs to ensure a smooth transition.
5. Prepare a draft project plan to capture the steps necessary for implementation.
6. HR can usefully identify which procedures will need to be introduced or modified in order to implement the new regime and in particular to establish a process to certify all Certified Persons on an annual basis. That will include appraisals, disciplinary procedures, handovers, the provision of references, staff training and others.
7. Consider training for HR and Senior Managers on the implications of the new regime.

How can Burges Salmon help?

We have significant experience of implementation of the existing Senior Managers and Certification Regime so if you would like to discuss how the proposed regime might affect your business, please get in touch.

Our experience is that the new regime will have a profound impact on firms, and we are developing a range of tools to assist with cost-effective implementation, including training staff, drafting compliant employment contracts, policies and procedures and providing guidance on issues such as fitness and propriety and regulatory references.

This article was written by James Green.