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SMCR for Solo-Regulated Firms Key Questions Answered

Posted by

Sharon Williams

on 16 Sep 2020

17 FAQs Answered About SMCR for Solo-Regulated Firms

The extension of the SM&CR to FCA solo-regulated firms impacted over 50,000 financial firms. We try to answer the questions that everyone has been asking...

But how does extension of the Senior Managers and Certification Regime (SM&CR) to FCA Solo-Regulated firms impact yourself and your organisation?

Almost every employee at a firm regulated by the FCA is now affected by the regime. The SM&CR is designed to hold all financial sector employees to certain standards of conduct and to hold senior managers accountable for any misconduct that falls within their area of responsibility.

SM&CR questions & answers for solo-regulated firms

1. When did the regime become effective for solo-regulated firms?

The extension of the SM&CR to solo-regulated firms applied from 9th December 2019.

2. Do the same requirements apply to all solo-regulated firms?

No, the requirements are being applied proportionally. The FCA is categorising firms according to their size and complexity. Depending on the firm categorisation the regime will apply differently.

There are 3 categories:

  1. Limited scope: this categorisation applies to firms who already have exemptions under the Approved Persons Regime. Firms in this category will be exempt from some baseline requirements and will typically have fewer senior management functions.
  2. Core: firms in this tier will have to comply with the baseline requirements. The majority of solo-regulated firms fall into this category.
  3. Enhanced: this category will apply to a small number of firms whose size, complexity and potential impact on consumers or markets warrant more attention. These firms will have extra requirements.

3. How is the firm’s categorisation concluded?

The FCA is providing each firm with it’s assessment of the firm’s categorisation, however, the assessment is indicative. Firms are responsible for assessing which tier they fall into based on the rules. If firms disagree with the FCA’s assessment they must inform the FCA. There is an FCA online tool to assist firms in their categorisation.

4. What are the biggest changes for firms?

The new certification regime, the extension of conduct rules to all staff except for those in ancillary roles and for Senior Managers, the new duty of responsibility.

5. To what activities do the Individual Conduct Rules and Senior Manager Conduct Rules apply?

The conduct rules apply to an individual’s activities in relation to the firm’s regulated and unregulated financial services activities (including any activities carried on in connection with a regulated activity).

6. Which staff fall under the Certification Regime?

The Certification Regime applies to people whose roles the FCA has determined could cause harm to customers, the firm itself or the markets it operates in. The FCA has defined a series of "certification functions". The regime will also apply to anyone who supervises or manages a Certified Function, that isn’t a Senior Manager.

Not all of the certification functions will apply to all firms and firms are only required to apply those that are relevant to them. It is possible that in very small firms there will be no one in the Certification Regime if there are only a handful of senior individuals (who will be Senior Managers) supported by administrative staff. Also if the firm is a sole trader with no employees, the Certification Regime won’t apply to them.

The Certification Regime only applies to employees of firms, it doesn’t apply to Non-Executive Directors.

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7. How does the Certification Regime differ from the Approved Persons Regime?

Firms must assess each year whether any person that is to carry out a certification function is fit and proper to perform their role and issue a certificate to them if they are. Some of the staff in the scope of the Certification Regime may previously have been subject to FCA approval under the Approved Persons Regime. This will no longer be required under the Certification Regime. This reinforces that firms, rather than the regulator, are responsible for ensuring their staff are fit and proper.

N.B. Firms have until December 9 2020, to certify every individual member of their Certification Staff population.

8. What is the Duty of Responsibility?

Every Senior Manager will have a Duty of Responsibility as a result of the Financial Services and Market Act (FSMA). 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 did not take reasonable steps to prevent or stop the breach.

The Duty of Responsibility specifies that the FCA can take action against a Senior Manager where they can show that:

  1. There was misconduct by the Senior Manager’s firm
  2. At the time of the misconduct 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 misconduct occurred
  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 misconduct occurring or continuing

The burden of proof for all these elements lies on the FCA. The Senior Manager does not need to show that they took reasonable steps, it is for the FCA to prove that they did not.

9. Can an individual be both a Senior Manager and a Certified Person?

Yes, if a senior manager performs a role within their firm that is subject to the certification regime, and that role is not related to their Senior Management Function, then they also need to be certified.

10. What is a Statement of Responsibilities?

A Statement of Responsibilities (SoR) is a single document that every Senior Manager must have, which clearly sets out their role and responsibilities and what they are accountable for. Statements of Responsibilities must be submitted to the FCA when a Senior Manager is being approved and when there is a significant change. It must be kept up to date.

In March 2019 the FCA published final guidance to assist solo-regulated firms when preparing their Statements of Responsibilities.

11. Do firms need to appoint someone to each Senior Management Function?

The SMFs applicable to each firm vary according to SM&CR firm type. Seventeen SMFs apply to Enhanced firms, six apply to Core Firms and three SMFs apply to the Limited Scope tier. If a person is to carry out a role that is designated as an SMF for their firm type they must be approved as such, but otherwise there is no general requirement to appoint individuals to hold SMFs.

The FCA will automatically convert most firms Approved Persons Regime (APR) functions to the corresponding Senior Management Functions (SMFs), but some firms will need to complete a form to convert individuals manually.

12. Can a Senior Manager hold more than one SMF?

Yes, it is possible to hold more than one SMF. For example, an SMF3 – Executive Director may also hold the SMF17 – Money Laundering Reporting Officer function. The need for this will be determined by the governance structure of the firm. Where this is the case, the individual will need approval from the FCA for each function. The Senor Manager will only need one Statement of Responsibilities, but this must clearly describe all their responsibilities.

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13. What is the 12-week rule?

The Senior Managers Regime allows someone to cover for a Senior Manager without being approved where the absence is temporary or reasonably unforeseen, where the appointment is for less than 12 consecutive weeks. (SUP 10C.3.13R in the FCA Handbook provide more information).

14. The regime applies on a legal entity basis, what does this mean to firms?

The FSMA requires the SM&CR to be applied at a legal entity level and not at group level. This means that firms with group structures will need to consider the impact of SM&CR applicable to each legal entity.

For groups with several legal entities the SM&CR could apply in differing way to each entity. This means that there will be groups which will contain firms in different tiers of the new regime. Groups may choose to apply the highest tier of the regime to all entities in their group – for example, to make all entities Enhanced firms. However, there is no expectation or requirement for firms to do this.

15. Are there any training requirements?

Yes, firms must make individuals who are subject to the Conduct Rules aware that this is the case, and take all reasonable steps to ensure that they understand how the rules apply to them and their role. There are 2 tiers of Conduct Rules, individual conduct rules, which apply to the majority of individuals working in the financial services sector and Senior Manager conduct rules which apply only to Senior Managers.

Four Conduct Rules apply to senior managers and a further five individual conduct rules apply to all non-ancillary employees within a firm. Ancillary employees, in roles such as post room staff, receptionists, catering staff and cleaners are not required to comply with the Conduct Rules.

N.B. Firms have until December 9 2020 to train non-ancillary staff, Senior Managers or certification staff on the conduct rules.

16. What is the new handover procedures requirement?

This requirement only applies to firms categorised as ‘Enhanced’. Such firms must take all reasonable steps to make sure that a person taking on a Senior Manager role has all the information and materials they could reasonably expect to have to do their job effectively. One way of doing this could be for the predecessor to prepare a suitable handover note. Enhanced firms are also required to have a policy which explains how it complies with this requirement, and maintain adequate records of the steps it has taken.

17. Does the SMCR have an impact on recruitment?

HR processes will require modification to implement the new Regulatory Reference and Criminal Record Check Requirements. The regulatory reference requirements will apply when appointing an individual to a Senior Manager or a Certified role and will also apply to all NEDs who aren’t Senior Managers. The criminal records checks will apply to Senior Managers and NEDs (where a fitness requirement applies) as part of checking that they are fit and proper.

18. Are there any transition arrangements?

The FCA detailed transitional provisions to help firms move to the new regime:

While Senior Managers and Certification Staff will need to have been identified and trained and abide by the Conduct Rules from the start of the new regime, firms have 12 months to train their other staff on the Conduct Rules.

Firms had to identify their Certification Staff and ensure they meet the Conduct Rules by 9 December, then they had 12 months to complete assessments and complete the certification process.

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Want to learn more about SM&CR?

Our companion article covers similar questions for insurance firms.

If you would like to find out more visit our SM&CR hub plus we regularly publish informative SM&CR blogs. And we offer comprehensive SMCR Training including a new fully integrated SMCR 360 Compliance Toolkit to streamline, unify and automate your processes.

If you've any further questions or concerns about SM&CR, get in touch - we are happy to help!

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