Andrew Sheen March 10, 2021

Don't Tell Your Regulator... (6)

"I am an SMCR Senior Manager but don’t know what that means"

Regulator-6

This blog is one of a series designed to identify common mistakes made by firms. It explains why the mistake is damaging and could lead to regulatory sanctions, a capital add-on and even a skilled persons review (S166). If you are making this mistake then you need to change your practice.

The Risk

The Senior Managers and Certification Regime (SMCR) has been in existence for about five years and replaced the Approved Persons Regime (APR). Unfortunately there is scope for confusion as the application of the SMCR is determined by the nature of the firm and its activities. In addition, many staff captured by the regime are remarkably ignorant of their obligations.

The SMCR was introduced following the Global Financial Crisis, to reduce harm to consumers and strengthen market integrity by driving cultural change in the industry. This is achieved by creating a system that embeds accountability and enables regulators to hold firms and individuals accountable for their actions. The aim of the SMCR is to:

  • Encourage staff to take personal responsibility for their actions;
  • Improve conduct at all levels;
  • Make sure firms and staff clearly understand and can show who does what.

Senior Managers in FCA regulated firms should be aware that they are subject to two tiers of Conduct Rules:

  • Tier one – Individual Conduct Rules applicable to most staff:
    • You must act with integrity;
    • You must act with due care, skill and diligence;
    • You must be open and cooperative with the FCA and 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.
  • Tier two – Senior Manager Conduct Rules:
    • You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively;
    • You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system;
    • You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively;
    • You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice.

As a result of this regime, firms may face regulatory sanction, a capital add-on and a skilled persons review. In addition, the increased emphasis on individual accountability could mean senior managers face financial penalty or public censure. I understand actions have already been taken against individuals and more are underway.

What Every Firm Must Know

Every PRA and FCA regulated firm must be able to answer the following questions:

  • Does my firm have individuals who perform relevant Senior Management Functions?
  • Which Prescribed Responsibilities, if any, apply to my firm?
  • Which Senior Manager should be allocated each Prescribed Responsibility?
  • Is the Prescribed Responsibility clearly included in their Statement of Responsibilities?
  • What are my firm’s activities, business area and management functions?
  • Has every activity, business area and management function been allocated to a Senior Manager under the Overall Responsibility requirement?
  • Where Senior Managers delegate responsibility to other staff, are those delegations clearly articulated and are there robust mechanisms for providing oversight?
  • Do I need any individuals to be approved under the SMF18 (Other Overall Responsibility Function), if they have Overall Responsibility for an area but aren’t already a Senior Manager?
  • Are there Senior Managers located overseas who need to be captured?
  • Are Overall Responsibilities clearly included in Senior Managers’ Statement of Responsibilities?
  • Do we need to prepare and maintain a Responsibilities Map?
  • Does my firm have in place the appropriate Handover Procedures?
  • Do we have a process in place for requesting, providing and assessing regulatory references (going back six years)?

Requirements for Senior Managers

If you are a Senior Manager, you should be fully aware of the requirements imposed on you by the relevant regulatory authorities. For example, all Senior Managers for FCA solo-regulated entities should read the Guide for FCA solo-regulated firms. The key points include:

  • Anyone who performs a Senior Management Function needs to be approved by the regulator;
  • Every Senior Manager will need a document clearly setting out their ‘Statement of Responsibilities’. This covers what they are responsible and accountable for and not how they carry out those responsibilities;
  • Every Senior Manager must have a Duty of Responsibility. If a firm breaches one of the requirements, the Senior Manager responsible for that area could be held accountable if they failed to take reasonable steps to stop or prevent the breach. The FCA will take action against the Senior Manager, the firm or both;
  • Senior Managers must be fit and proper to do their jobs;
  • Firms must give a Senior Manager specific Prescribed Responsibilities as defined by the authority.

As firms produce and maintain this information, they must ensure all documents are comprehensive, consistent and updated as appropriate. Sadly, this is not always the case.

We hope you find this blog helpful. Chapelle Consulting can help firms and Senior Managers assess their compliance with the SMCR – not least because ‘absence of evidence is evidence of absence’, as we have noted in a previous blog.

For a full overview of our approach to framework, improvements, please contact us.