SM&CR to apply to almost all regulated firms – what do you need to know?


At the end of July, the Financial Conduct Authority announced plans to extend the Senior Managers and Certification Regime to almost all regulated firms.

The proposals (which you can read in full on the regulator’s website) recommend extending the SM&CR, which currently applies to banks, to the wider financial services industry, including financial advisers.

What is the Senior Managers and Certificate Regime?

The new regime aims to ‘reduce harm to consumers and strengthen market integrity by making individuals more accountable for their conduct and competence’.

Two key ways it hopes to achieve this are by:

  • encouraging a culture of staff at all levels taking personal responsibility for their actions.
  • making sure firms and staff clearly understand and can demonstrate where responsibility lies.

The three main areas of the regime

The regulator has set out three main parts for the new, extended regime:

1.  Five Conduct Rules that will apply to all financial services staff at FCA authorised firms. These rules are as follows:

  • You must act with integrity
  • You must act with due care, skill 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

  There are an additional four conduct rules for the senior managers within a firm:

  • 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

2.  The responsibilities of Senior Managers will be clearly set out and, should something in their area of responsibility go wrong, they can be personally held to
     account. The Senior Managers will be approved by the FCA and appear on the FCA Register.

3.  Under the Certification Regime, firms will need to certify individuals for their fitness, skill and propriety at least once a year, if they are not covered by the
     Senior Managers Regime but their jobs significantly impact customers or firms.

What does the new extended regime mean for you?

Firms must all follow the five conduct rules. Senior managers also need to follow the four additional rules.

Personal accountability is an increasing area of focus. This is something we’ve looked at previously in our blog Are you prepared for increased individual accountability?

And you will face increased bureaucracy around certifying individuals who are not part of the SM&CR but whose roles significantly impact your customers or firm.

Will any firms be exempt?

Sole trading financial advisers are classified as ‘limited scope’ firms under the new rules. This means that while they need to have a compliance oversight function in place, they will not have to allocate the Financial Conduct Authority’s necessary responsibilities to individual senior managers.

Everyone else is in scope – and although the regulator has stated that it is keen for the requirements to be ‘proportionate’, Ashurst partner Jake Green, quoted in a Money Marketing article, says that:

‘The FCA’s extension might make the administrative burden slightly less for smaller firms than for banks, but the proposed rules bring those running all types of financial services firms into the spotlight.’

What does the SM&CR extension tell us about the regulator's focus?

The extension of the regime continues a well-trodden path for the Authority.

It increases individual accountability – a theme we have seen come to the fore in recent years.

It puts the emphasis on ethical cultures. As the regulator’s executive director of supervision for retail and authorisations, Jonathan Davidson said when launching it, ‘Culture and governance in financial services and its impact on consumer outcomes is a priority for the FCA. The extension of the Senior Managers and Certification Regime is key to driving forward culture change in firms.’

We have looked at this need for culture change before. The regulator has stated that creating a compliant culture is central to ensuring suitability in financial services.

We’ve identified the steps you need to take to create a culture where good behaviours are embedded. This will help you to create financial promotions that are fair, clear and not misleading and deliver the required consumer outcomes.

Have your say on the proposals

The regulator’s proposals for SM&CR extension are open for consultation until 3 November.  You can read more about the proposals, and how to have your say, on the Authority’s website.

To read more about how to make compliance a central part of your corporate culture, you can read our whitepaper, How to embed a compliance culture into your business. It’s free to download and you can get a copy here.

Nothing in this document should be treated as an authoritative statement of the law. Action should not be taken as a result of this document alone. We make no warranty and accept no responsibility for consequences arising from relying on this document.

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