2019 brings with it another raft of regulatory changes for the UK Funds industry as well the wider Financial Services industry. Not that we have had that many in recent years, I hear you say!! Only this time the UK seems to be listening to Europe, which may come as surprise to many Brexiteers. 

The Senior Management & Certification Regime (SM&CR yes, another acronym we can add to our collection), basically tells senior management positions in Financial Services to ‘behave’ and to act ‘professionally’ at all times with ‘integrity’ and ‘responsibility’ not just for ourselves but for that of the people who report into us.  So, what’s new? A tad insulting to many who have done exactly that for many years.   However, what is interesting is the accountability and evidencing that is now required. In essence, this is replacing the Approved Persons Regime(APR).

For those in the funds business who straddle the UK and Ireland, there is a certain amount of double-take/déjà vu.  For the last nine months in Ireland, under the direction of the CBI, we have been working under the rules of CP86that went live in June 2018, albeit many of us started in 2016. Under CP86, fund boards have to assign responsibility to designated persons with functions such as Distribution, Financial, Compliance and Investment Management etc. The accountability of these ‘Designated Persons’ and subsequent functions, gives the Irish funds industry an edge over many areas.  There is no hiding for a senior manager who fails in their job. It’s all about accountabilityfor individuals ensuring the protection of shareholders in the funds they invested in. 

So, what does the SM&CR mean?

Ultimately reassurance – the investment company they have invested in is conducting itself in a manner fit and proper and there are individual(s) they can point the finger at if things go wrong. 

As Martin Wheatley, then CEO at the FCA said in 2015 “… for senior managers, most of the steps you’d expect them to take appear common-sense, frankly. Behave with integrity; delegate appropriately; make sure you understand your business area; and comply with common law, existing rules and legal obligations.”

In essence, just do your job properly and who would disagree with that? 

However, Tracey McDermott in December 2015, as Acting CEO of the FCA, threw her rattle out of the pram and challenged the industry “…the SMR was created against the backdrop of a clear – and shared – understanding that culture needed to change, and a culture of personal responsibility had to be embedded.” 

So, don’t hide behind the curtain of the collective responsibility regime and instead, take a personal approach to the responsibilities as dictated by your role. Again, sensible for many but some senior individuals may find that a little intrusive, they are, after all, ‘senior’!  Who cares, we are talking about protecting investors interests so we should all step up to the plate.

The SM&CR isn’t really that onerous once you understand the requirements. In fact, companies should already be applying it in one way or another – it’s just bringing everything together under one ruling which is: 

  • To reduce harm to consumers and strengthen market integrity by creating a system that: encourages staff to take personal responsibility for their actions. 
  • Improve conduct at all levels. 
  • Ensure companies and staff clearly understand, and can demonstrate, who does what; 
  • Focus regulatory approval on fewer senior individuals in a company than under the current Approved Persons Regime.
  • Requirement to assess the fitness and propriety of specific individuals who could harm your organisation, its customers or the market. 

So, what’s different from the current APR? In a nutshell: 

  • The current Approved Persons Regime will disappear and be replaced by the Senior Managers Regime for the highest- ranking management, but for the most part by the Certification Regime (which will apply to at least as many people as the Approved Persons regime, and probably more); 
  • Senior Managers will be identified, and they will have clearer individual responsibilities and accountability than previously; 
  • Companies will take on the responsibility for the certification (and assessing suitability, fitness and propriety) of certain individuals from the FCA; 
  • There will be a new Duty of Responsibility for Senior Managers, making them more accountable for regulatory contraventions in the part of the business for which they are responsible; and 
  • New ‘simple’ code of conduct rules will apply to almost everyone in the company. THIS AD

Senior Managers Regime

The most senior people in a company will be approved by the FCA, with companies also having a responsibility to ensure they are suitable (fit and proper) for their role (with a review at least once a year). 

It will require the company’s senior managers to be allocated Senior Management Functions (SMF) and to clearly allocate their roles and responsibilities through a document called a ‘Statement of Responsibilities’ (also known as a SOR).As an SMF, an individual will need to ensure they take reasonable steps to prevent regulatory breaches for the areas which they are responsible for. Senior Managers will be required to have:
  • a Statement of Responsibilities – mapping what they are responsible and accountable for; 
  • a Duty of Responsibility – meaning if something goes wrong in an area they are responsible for, the FCA will consider if they took “reasonable steps” to stop it from occurring; and 
  • Prescribed Responsibilities – responsibilities that the FCA will require companies to allocate to their Senior Managers.

Certification Regime

The Certification Regime puts the onus on a company, (rather than the Regulator), to identify staff who could cause significant harm to a company or its clients. It will also require the company to ‘certify,’ on a yearly basis, that these staff continue to be ‘fit and proper’ to perform their certified roles.

This includes employees who are not only Senior Managers but who may have a significant impact on clients, markets, or the company (‘significant harm functions’). The roles include proprietary traders, the CASS oversight function, functions subject to qualification requirements, client dealing functions, algorithmic traders, material risk takers, and any supervisor or manager of someone who is a certified person. 

As mentioned above, these individuals will not be approved by the FCA but will be approved by their own company. Accountability – no bad thing eh?! 

Conduct Rules

The Conduct Rules are a set of new rules, which will apply to all ‘Conduct Staff’. Conduct Staff is almost all employees within a company, including senior management, certified staff and any other employees whose role is specific to the financial services industry, for example, back-office staff. 

These rules will be:

  • you must act with integrity;
  • you must act with due skill, care and diligence;
  • you must be open and cooperative with the FCA, the PRA and other regulators; 
  • you must pay due regard to the interests of customers and treat them fairly; 
  • you must observe proper standards of market conduct.

For most of us this is business as normal with the people we employ and is a no brainer. There is however, another layer of conduct rules applying to Senior Managers: 

  • you must take reasonable steps to ensure the business of the company for which you are responsible is controlled effectively; 
  • you must take reasonable steps to ensure the business of the company for which you are responsible complies with the relevant requirements and standards of the regulatory system; 
  • you must take reasonable steps to ensure any delegation of your responsibilities is to an appropriate person and you oversee this effectively; 
  • you must disclose appropriately any information of which the FCA or PRA would reasonably expect notice. THIS AD

Deadline:All Senior Managers and Certification Staff must be identified and trained by 9 December 2019. The Conduct Rules will apply to them from that date. However, as with most new legislation from the FCA they have given a 12-month transitional period in which to complete the certification process for existing Certified Staff and to train other staff on the Conduct Rules. This process must be completed by 9 December 2020from when the Conduct Rules will apply to other Conduct Rules staff.

Public Directory 

The FCA has also launched a consultation (CP18/19) on a new Directory to help clients and companies check the status and history of individuals working in financial services offering accessible ‘transparency’ –  something our industry talks about all the time. The proposed directory will include:

  • those who hold Senior Manager positions requiring FCA approval;
  • those whose roles require companies to certify that they are fit and proper under the Certification Regime;
  • non-Senior Manager Function (SMF) Directors; and
  • sole traders and appointed representatives where they are undertaking business requiring qualification in their capacity as an individual.

Currently, many of these individuals do not appear in the FCA’s Financial Services Register (FS Register) which has been a cause for concern by both the financial services industry and consumer groups. The enhanced directory will plug this gap. The FCA plans to upgrade the FS Register providing better access to the full record of information on authorised companies and the individuals it has approved. In particular, it intends to make the common search functionality clearer and simpler, showing both suspensions and applications for entry.

The following is a non-exhaustive set of practical considerations that may help Senior Managers to evidence their reasonable steps on an on-going basis. 

  • Minutes from Board and Board Committees 
  • Statements of Responsibilities and Management Responsibilities Maps 
  • Organisation charts 
  • Handover material 
  • Management Information (MI) and Reports 
  • CV, Role Profile and Job Description 
  • Email records 
  • Meeting invites and standing agendas 
  • Departmental action logs 

Whilst to some, the deadline for this piece of regulatory change from the FCA may seem initially daunting, I am optimistic for those of us that have applied the rules of the Central Bank of Irelands with CP86 and Designated Persons and Functions, SM&CR will be a ‘walk in the park’ and something to be welcomed by all, especially clients and those of us who take overall Corporate Governance seriously. 

Have a great weekend and enjoy the sunshine!!

Stuart Alexander

CEO Gemini Investment Management Limited

Sources: MacFarlanes, Deloittes, Laven Partners, RBC Investor & Treasury Services

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