Consultation Papers: Transitioning Firms & Individuals to SMCR

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The Financial Conduct Authority (FCA) has published a consultation paper on individual accountability (CP17/40) that is supplemental to a previous consultation paper published in July (CP17/25) on the extension of the Senior Managers & Certification Regime (SMCR) to all FCA solo-regulated firms. The SMCR will replace the current Approved Person Regime (APR), although for fewer senior individuals, and will require firms to assess the fitness and propriety of certain employees who could pose a risk of significant harm to the firm or any of its customers. The Conduct Rules will apply to most staff in FCA solo-regulated firms.

CP 17/40 covers operational aspects of the new regime. Chapter 3 sets out transitional arrangements for moving from the APR to the SMCR and the proposed approach to converting relevant individuals is set out in chapters 4 and 5.

The FCA asserts that it wants to make the conversion process simple, clear, and as proportionate as possible as well as flexible enough to accommodate differing business models. The proposal is to automatically convert most of the approved persons at Core and Limited Scope firms into the corresponding new Senior Manager (SM) Functions. This means that moving individuals will require little or no interaction with the FCA for most firms. Enhanced firms will need to submit a conversion notification (Form K) plus documents including Statements of Responsibilities and Responsibilities Maps.

The extension of the SMCR does not affect individuals and Approved Persons working at Appointed Representatives (AR). Principal firms remain fully responsible for their ARs and Senior Managers to ensure FCA rules are met.

The key driver, explained in Chapter 2 of the CP, is the FCA’s priority to reduce harm to consumers and markets by making senior individuals more responsible and accountable for their actions. The FCA’s position is that the proposals made are intended to have a positive impact on each firm’s behaviour, culture and governance, to increase conduct standards and customer protection, and to create greater sustainability of any market growth.

On the same day, another paper was published, CP17/42, on the Duty of Responsibility for insurers and FCA solo-regulated firms. The Duty of Responsibility, which currently applies only to senior managers of banking firms, specifies that the FCA can take action against a Senior Manager if:

  1. There was a contravention of a relevant requirement by the Senior Manager’s firm;
  2. At the time of the contravention, or during any part of it, the Senior Manager was responsible for the management of any of the firm’s activities in relation to which the contravention occurred, and
  3. The Senior Manager did not take such steps as a person in their position could reasonably have been expected to take to avoid the contravention occurring or continuing.

With regards to the third point, the burden of proof lies with the FCA.

The deadline for comments on CP17/40 and CP17/42 is 21 February 2018 and, the related policy statements are expected to be published in the summer of 2018.

No indication has been given on the date of commencement of the new regime. HM Treasury will set the date, however the FCA assumes that rules will apply to solo-regulated firms in mid-to-late 2019 and possibly late 2018 for insurers.

The process, surprisingly, seems less onerous than many had anticipated with only Enhanced firms required to submit notifications and documents. However, the burden of instilling a demonstrable culture of personal accountability and to raise standards of conduct should not be underestimated.

With the expected implementation of SMCR in mid-to-late 2019 for most firms, that should leave enough time to deal with all the changes brought on by MiFID II, MiFIR, PRIIPs KID, PSD2, GDPR, and possible amendments to the Capital Requirements Regulation. However, politically uncertain environment (e.g. Brexit) and other international dynamics will no doubt lead to many challenges for firms large and small.