Magazine Issues » September 2019

Regulation: SM&CR aims to strengthen firms and protect consumers

London Square MileFunds Europe explains The Senior Managers and Certification Regime (SM&CR), part of the UK financial regulator’s plan to improve culture, governance and accountability within financial services companies.

The regime, known as the SM&CR, aims to discourage misconduct by improving individual accountability for their conduct and competence.

More broadly, it also aims to help restore confidence in the financial services industry following the global financial crisis, strengthen market integrity and raise standards of governance.

The hope is that the regime will also encourage firms’ internal teams to take personal responsibility for their actions.

Since 2016, the regime has already applied to UK banks, building societies, credit unions, branches of foreign banks operating in the UK, as well as the largest investment firms regulated by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).

Andrew Bailey, chief executive of the FCA, says: “The basic principle of the Senior Managers Regime is that of responsibility and accountability.

“A senior manager has to take responsibility for the activities under their control. Likewise, they should be accountable for that responsibility.”

From December 9, the regime will be rolled out to solo-regulated firms, which are regulated by the FCA alone. Firms currently regulated under the Approved Persons (AP) Regime will be regulated by the SM&CR from that date and eventually, the SM&CR will replace the AP Regime completely.

The AP Regime had been designed to ensure that firms had directors who were honest, had integrity and had the skills to ensure consumer protection.

However, the AP Regime did not hold other employees, including many senior managers, to account.

It was to fill this gap that the SM&CR was introduced. The new areas covered by the SM&CR include:

  • an annual certification requirement for staff involved in senior management and “significant harm” functions;
  • conduct regulations for all staff; and
  • a requirement to provide details of disciplinary action taken against senior management staff.

Where responsibility lies
The FCA says it particularly wants to “encourage a culture of staff at all levels talking personal responsibility for their actions”.

It also wants to make sure “firms and staff clearly understand and can demonstrate where responsibility lies”.

The SM&CR was devised as a response to the 2008 global financial crisis and to prevent any repetition of conduct failings such as the manipulation of the Libor interest rate.

The regime came into being after the UK parliament set up a Parliamentary Commission for Banking Standards (PCBS) with a brief to make recommendations on how to improve standards in the banking sector.

The main recommendations of the PCBS was to introduce a new accountability framework focused on senior management.

The PCBS also recommended that firms take more responsibility for employees being fit and proper.

Although the SM&CR was initially applied only to the banking sector, parliament in 2016 decided to extend the regime to all financial services firms falling under the Financial Services and Markets Act 2000.

Firms first need to establish which of three categories they fall into: ‘limited scope’ (for firms that provide financial services but not as their main purpose), ‘core’ (for firms for whom financial services are their main operation) and ‘enhanced’ (for firms with assets of more than £50 billion who are subject to additional regulatory requirements).

It is estimated that less than 1% of firms regulated by the FCA will fall into the ‘enhanced’ category. Different requirements will apply to each of the three categories.

Each senior manager applying for approval will, under the new regime, be required to undergo criminal record checks. In addition, firms will be responsible for obtaining references from previous employers for six years.

Approvals
Individuals with a senior management function, whose roles the regulator deems to pose the greatest potential risk to customers or market integrity, will need to be approved by the FCA before they take up their new roles.

In addition, each senior manager will have to be furnished with a statement of responsibility document that stipulates their responsibilities.

As part of the referencing system, firms approached for references are required to disclose whether a candidate has previously breached any conduct rules or any other information considered to be relevant in deciding whether someone is a fit and proper person for their role.

Firms that fall into the ‘enhanced’ category will be required to guarantee that all of their activities, business areas and management functions have a designated senior manager who will take over all responsibility.

Tier 1 conduct rules, which cover all employees other than ancillary staff, require employees to act with integrity, due skill care and diligence. They also require employees to observe proper standards of market conduct.

Tier 2 rules, applicable to employees in a senior management role, require employees in such positions to take ‘reasonable steps’ to ensure that the business of the firm is controlled effectively and complies with the relevant requirements and standards of the regulatory system.

In addition, Tier 2 rules require that any delegation of senior management functions are handed to an appropriate person and that relevant information is disclosed to the FCA or the PRA.

Firms are also required to carry out full staff training of the conduct rules.

Any disciplinary action against a senior manager with regard to the conduct rules has to be reported to the FCA within seven days.

By December 9, firms should make sure they have identified their senior managers and that they have been given training on the conduct rules.

Moreover, by December 9, 2020, all of its other employees are required to have been given training about their responsibilities under the Tier 1 conduct rules.

In addition to the Senior Managers Regime (SMR), the regime also has a Certification Regime (CR) for employees who, while not senior managers, nevertheless carry out job functions that have the potential “to cause significant harm to the firm or its customers”. Included in this category are employees who, for example, are involved in algorithmic trading, material risk-taking, proprietary trading or client dealing functions.

Responsibility for a firm’s CR has to be allocated to a designated senior manager who would be personally responsible for the regime. 

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