SMCR

Senior Managers’ and Certification Regime (SMCR)

The SM&CR came into effect for banks and building societies in March 2016, replacing the previous Approved Persons scheme.  The original legislation did not cover solo-regulated firms so, in May 2016, changes were made to the Financial Services & Markets Act requiring the FCA to extend the SM&CR to all firms authorised under that Act to provide financial services. SM&CR goes live for FCA solo-regulated firms on the 9 December 2019.  This page summarises the requirements of the scheme and gives general guidance on the action which firms should be taking to prepare for it.

Who is covered by the regime?

The SM&CR applies to “Limited”, “Core” and “Enhanced” firms.  Guidance published by the FCA in July 2018 (in its “Guide for FCA solo-regulated firms”) helps firms to identify what type of firm they are.  You are a Core or Limited firm unless one of the following applies:

• You are a significant IPRU firm
• You are a CASS large firm
• You are a firm with Assets Under Management of £3bn or more as a three-year rolling average
• You are a firm with total intermediary regulated business revenue of £35m or more per annum, calculated as a three-year rolling average
• You are a firm with annual revenue generated by regulated consumer credit lending of £100m or more calculated as a three-year rolling average
• You are a mortgage lender or administrator (that is not a bank) with 10,000 or more regulated mortgages outstanding

If one or more of the above applies – your firm is an Enhanced firm for the purposes of the SM&CR. If you are currently subject to a limited application of the Approved Persons regime then you are a “Limited Scope” firm.

Senior Management Functions

The FCA defines the “senior management functions” in its Handbook – SUP 10C.4.  Firms need to allocate each of the specific functions to the individual member of staff who will ultimately be responsible for ensuring they are carried out appropriately.

3 Senior Management Functions (SMF’s) apply to Limited Scope Firms.  6 SMFs apply to Core Firms and 17 SMFs apply to Enhanced Firms.  Page 72 of the FCA’s July 2018 Guide sets out a useful summary of the various SMFs and other requirements which apply:

As indicated in the table above, every Senior Manager will have a Duty of Responsibility.  This means that if a firm breaches one of the FCA’s requirements, the Senior Manager responsible for that area could be held accountable if they didn’t take reasonable steps to prevent or stop the breach.

Each Senior Manager must have a Statement of Responsibilities (SoR) setting out that individual’s role and responsibilities (see SYSC 25).  The SoR should be a self-contained document and should clearly state what the individual is responsible for, rather than how they are expected to carry out the role.  Firms are legally required to keep every SoR up-to-date. 

Enhanced Firms must also produce an over-arching Responsibilities Map, providing a clear and practical overview of all reporting lines and governance within the firm.  Where the firm is part of a larger group, the Map should show the individual firm’s place within the group.  As with the Statements of Responsibility, the Map should enable an outside third party to understand the firm’s/group’s governance structure.  Core firms are not required to produce a Responsibilities Map but may find it is good practice to do so.

The Certification Regime

The Certification regime applies to all employees who are not Senior Managers, but whose job could cause significant harm to the firm or its customers.  The FCA have defined a list of Significant Harm Functions (SHF’s) and it is for the firm to decide which ones apply to it and its employees.  It is the firms responsibility to identify those employees that undertake an SHF and ensure that they fall within the regime itself. The FCA does not approve such employees but firms need to check and confirm that they are fit and proper to carry out their job at least once a year.

The Conduct Rules

The Conduct Rules apply to:

• All Senior Managers
• All Certified Functions
• All Non-Executive Directors who are not Senior Managers
• all other employees, except ancillary staff (i.e. people who don’t perform a role

specific to financial services, who are listed below)

The list of roles considered to be ancillary and therefore out of scope of the Conduct

Rules includes:

• Receptionists
• Switchboard Operators
• Post room Staff
• Reprographics/Print room Staff
• Property/Facilities Management
• Events Management

The Conduct Rules are intended to improve standards of individual behaviour in financial services, and individual accountability and awareness of conduct issues across firms.

Two tiers of Conduct Rules apply to all firms.  The first is a general set of rules that applies to most employees and directors in a firm.  The second tier consists of rules that only apply to Senior Managers. There is also one Senior Manager Rule, SC4, that applies to NEDs who are not Senior Managers.

The Rules are as follows:

Training requirements

S 64B of the Financial Services & Markets Act requires firms to train relevant staff on how the Conduct Rules apply to their roles.  Senior Managers and Certification Staff will need to have been trained, and abide by the Conduct Rules, from the start of the new regime.  

Implementing the SM&CR – good practice hints

• Make sure the project is led by a Senior Executive
• Set up a project team which combines staff from the operational, compliance, HR and legal functions
• Make sure that sufficient time and resource is allocated to the project, allowing for issues such as training and systems changes 
• Where possible, include staff who have been previously employed in a banking environment, and are thus familiar with the former Approved Persons regime
• Ensure that the project is culturally aligned with the regulator’s expectations
• Make sure that the implementation teams stay in place and are not disbanded after the “go-live” date: the required documents (Statements of Responsibilities and Responsibilities Maps) need to be updated regularly.
• The requirement to certify on an annual basis that staff are fit and proper to carry out their roles will require (a) up to date job descriptions for all staff and (b) a robust performance appraisal process.  Job descriptions and the appraisal process should therefore be properly reviewed and amended as necessary prior to the start of the annual certification process.
• Firms may find it beneficial to run trials of their certification processes well in advance of the due date, rather than waiting until the end of 2020 to find that their processes are not fit for purpose and they have not left enough time to rectify this. 

Further reading and key SM&CR resources

The FCA’s Guide for FCA solo-regulated firms (July 2018) – The Guide for solo-regulated firms is also a useful summary of the FCA’s final rules and guidance on SM&CR – it gives an overview of how SM&CR works and how you will be moved to the new regime.

FCA Finalised Guidance (FG19/2) on Senior Managers and Certification Regime: Guidance on statements of responsibilities and Responsibilities Maps for FCA firms (March 2019)

Checklists for solo-regulated firms implementing SM&CR – Enhanced firms, Core firms and Limited Scope firms

 FCA SM&CR webpage:  www.fca.org.uk/smcr

The FCA have also recorded three short Inside FCA podcasts which provide a clear and concise overview of what firms need to do to prepare for SM&CR:

•             SM&CR and culture – Jonathan Davidson

•             Conduct rules – David Blunt

•             Certification – David Blunt

The FCA has released the transcripts of two of these SM&CR Podcasts. They are

Inside FCA Podcast: Interview with David Blunt on Certification and Regulatory References (SMCR). The full transcript can be found here.

Inside FCA Podcast: The importance of implementing the Conduct Rules for SMCR. The full transcript to this second in the series can be found here.

FLA SM&CR Podcast done in association with Julie Pardy from FLA Associate member Worksmart

FCA SM&CR video

FCA Culture & Governance webpage