In the wake of the 2008 financial crisis, parliament and banking regulators took measures to update and improve the Approved Persons Regime (APR) and to replace them with a new set of rules that would be more targeted at senior managers and encourage responsibility at an individual level. That process led to the creation of the Senior Managers and Certification Regime (SM&CR) which replaced the APR on 9 December 2019 and changed the way FCA-regulated firms operate and engage with the regulator. The intention of the SM&CR is to enable firms and regulators to hold individuals to account by encouraging staff members to take responsibility for their roles and actions.
There are some key differences between the APR and SM&CR that regulated firms should be aware of. The SM&CR:
- replaces the concept of Approved Persons with senior managers;
- identifies certification functions and individuals within organisations performing those functions (Certified Persons);
- imposes a requirement for the evaluation and training of Certified Persons;
- includes a set of conduct rules applying to all staff save for a limited category of ancillary staff; and
- imposes a requirement on firms to provide regulatory references covering a six year period for all individuals operating in SM&CR functions.
All solo-regulated financial firms were required to comply with SM&CR with effect from 9 December 2019.
In light of the impact of the Covid-19 pandemic on the economy, the FCA has extended the deadline for regulated firms to have undertaken the first assessment of fitness and propriety of their Certified Persons until 31 March 2021 (from December 2020). While this is good news for firms, as it gives some much-needed breathing space, the FCA has issued guidance warning that implementation of the SM&CR regime requires 'planning, time and effort'. Accordingly, firms are being encouraged to start taking action as soon as possible (and where possible, to meet the original deadline).
In view of this, we have set out the key action points and a suggested timeframe below.
|Today||Identify whether the SM&CR applies to your firm, and whether you fall into the category of a Core Scope firm (subject to the requirements of the core regime), a Limited Scope firm (subject to fewer requirements) or an Enhanced Scope firm (subject to the most stringent requirements).|
Senior Manager Regime
Identify your Senior Managers. These are the individuals at the top tier of the firm who hold FCA specified senior management functions (SMFs). The SMFs are specified by the FCA and examples include chief executive function, executive director function and chair of the governing body function.
Senior Managers must be pre-approved by the FCA, but prior to submitting the application for approval, firms must conduct their own assessment of fitness and propriety of the individuals.
Each Senior Manager will need to compile a statement of their responsibilities and SMFs.
November 2020 – January 2021
Identify the individuals who will be subject to the Certification Regime.
The regime applies to individuals whose roles pose a risk of significant harm to customers, the firm and markets. As an example, individuals working in HR, legal, compliance and audit are all likely to be within scope of the Certified Regime.
They do not need to be pre-approved by the FCA but must be certified as fit and proper by the firm before taking on a role subject to the Certification Regime. The certification must also be undertaken on an annual basis and whenever a material change occurs to their role.
The firm will need to put in place a system for assessing individuals.
Training on the conduct rules
The conduct rules are enforceable, high-level rules which will apply to almost all staff at a firm. The intention is to raise standards across the board by requiring individuals to take personal responsibility for their actions.
Firms are required to ensure that (i) all persons subject to the rules are notified of the rules that apply to them, and (ii) the persons understand how the rules apply to them.
Firms must, therefore, provide training for all employees on the conduct rules before the extended deadline of 31 March 2021. It is also advisable to have in place a system that is clearly understood throughout the business for assessing any breaches of the conduct rules.
January 2021 – March 2021
(Deadline 31 March 2021)
First assessment of fitness and propriety of Certified Persons
The first assessment of Certified Persons must be conducted by 31 March 2021, and, under FCA rules, must be judged by reference to a person's:
The assessment must be conducted in relation to each of the certification functions performed by an individual.
Firms should note that assessments must also be carried out on recruiting new individuals to the business, and on an annual basis. They should therefore consider incorporating the assessment of fitness and propriety into annual appraisals.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.