Senior Managers and Certification Regime (SMCR)

What is the Senior Managers & Certification Regime?

The Senior Managers and Certification Regime (SM&CR or SMCR) is a financial services regulation in the UK designed to impose personal accountability on senior managers at financial services firms and improve the conduct of all employees at these firms. This regulation replaces the Approved Persons Regime (APR) that applied to certain senior/approved persons at regulated firms (in case of insurance firms, it replaced the Senior Insurance Managers Regime or SIMR).

Below we explain each of the key areas you need to know about when implementing the SM&CR:

What are the three key parts to SM&CR?
SM&CR scope
Steps firms need to take to comply with SM&CR
SM&CR training
What are Senior Management Functions?
What are Prescribed Responsibilities?
Duty of Responsibility
Assessing fitness and propriety
Individual and Senior Manager Conduct Rules

1. What are the three key parts to SM&CR?

There are three key parts to the SM&CR: Senior Managers Regime, Certified Persons Regime and Conduct Rules.

1.1 Senior Managers Regime

Enforces a detailed and clearer allocation of responsibilities between senior managers at each firm, with particular emphasis placed on key documents - 'Statements of Responsibilities' and 'Responsibilities Maps'. These will help to record the allocation of responsibility to individual Senior Managers and to demonstrate to the regulators that there are no gaps or excessive overlaps.

Senior Managers have a statutory duty of responsibility "to take reasonable steps to prevent regulatory breaches in the areas of the firm for which they are responsible".

1.2 Certification Regime

Requires firms to check and confirm that employees performing roles relating to the firm's regulated activities are fit and proper, based on their qualifications, competence and personal characteristics. Upon confirming this, the firm needs to issue them with a certificate that must be renewed at least once a year.

1.3 Conduct Rules

A set of rules provided in the FCA's Code of Conduct Handbook (COCON) that cover all individuals: Senior Managers, Certified Persons and other employees.

2. SM&CR scope

The SM&CR has been rolled out in three waves:

Wave 1: Banks, building societies, credit unions and large investment firms in March 2016 (updated July 2018)
Wave 2: Extended to insurance firms (those regulated by the FCA and PRA) in December 2018
Wave 3: The remaining financial services firms (the so-called 'solo-regulated firms' since they are regulated only by the FCA, not the FCA and PRA) come under the scope of this regime from December 2019.

The range of firms in the third wave is very diverse. So the FCA has grouped them into three categories to ensure that the regulation is proportionate to their sizes and activities.

Core: firms that will have to comply with the baseline requirements for solo-regulated firms
Limited scope: firms that already have exemptions under the Approved Persons Regime, and are hence exempt from some requirements and will require fewer senior management functions
Enhanced: firms that will have extra requirements - these are large, complex firms with potential impact on consumers or markets to warrant more attention from the FCA

3. Steps firms need to take to comply with SM&CR

Complete the Statement of Responsibilities setting out the areas for which each Senior Manager is personally accountable
Generate the Responsibilities Map that knits together the Statement of Responsibilities
Pre-approval for all Senior Managers by the regulators before they carry out their roles
Ensuring that Senior Managers understand the Duty of Responsibility and that they have to take reasonable steps to prevent any regulatory breach in their area of responsibility
Identification of all Certified Persons (ie material risk takers)
Fit and proper assessment of all Certified Persons (re-assess on an annual basis)
Training all persons who are subject to the Conduct Rules

4. SM&CR training

The FCA has guided that all firms must ensure that all employees subject to the conduct rules must be notified and provided with 'suitable' training, such that they have an awareness and broad understanding of all of the conduct rules, and a deeper understanding of the practical application of the specific rules which are relevant to their work.

Skillcast provides a comprehensive set of e-learning courses for all financial firms, including banking and insurance firms that are already in scope, and the solo-regulated firms that will come into scope from 9 Dec 2019.

Skillcast provides a set of courses for each type: Banking, Insurance, Core, Limited Scope and Enhanced

Overview of SM&CR (mainly meant for senior managers)
Conduct Rules for Senior Managers
Conduct Rules for Certified Persons
Conduct Rules for non-Certified Persons

We provide further variations of conduct rules course for Certified Persons to cover specific positions in banking, e.g. corporate finance and customer functions.

5. What are Senior Management Functions?

The Senior Managers Regime (SMR) applies to those perform a Senior Management Function (SMF). The FCA has classified particular functions as SMFs, so that it knows who a firm's senior decision-makers are, and to make sure that firms clearly allocate specific responsibilities to those key individuals. In certain circumstances, firms can have more than one individual performing a single SMF. However, the FCA expects the SMFs to be shared only where it is appropriate and justified.

The list of SMFs that applies depends on the type of firm.

5.1 Governing Function SMFs

SMF1	Chief Executive	Core and Enhanced firms
SMF3	Executive	Core and Enhanced firms
SMF7	Group Entity Senior Manager	Enhanced firms only
SMF 9	Chair (non-executive)	Core and Enhanced firms
SMF10	Chair of the Risk Committee	Enhanced firms only
SMF11	Chair of the Audit Committee	Enhanced firms only
SMF12	Chair of the Remuneration Committee	Enhanced firms only
SMF13	Chair of the Nominations Committee	Enhanced firms only
SMF14	Senior Independent Director	Enhanced firms only
SMF27	Partner	Core and Enhanced firms

5.2 Required Function SMFs

SMF16	Compliance oversight	Core and Enhanced firms (and sole traders, authorised professional firms and oil market participants)
SMF17	Money Laundering Reporting officer	Core and Enhanced firms and (and sole traders and oil market participants)
SMF18	Other Overall Responsibility	Enhanced firms only
SMF29	Limited Scope Function	Limited Scope firms (e.g. limited permission consumer credit firms, authorised professional firms, firms that intermediate insurance without this being principal business)

The Overall Responsibility requirement means that an Enhanced firm will need to make sure that every activity, business area and management function has a Senior Manager with overall responsibility for it. This is to prevent an unclear allocation of responsibilities.

Overall Responsibility means that a Senior Manager:

Has ultimate responsibility for managing or supervising a function
Briefs and reports to the governing body about their area of responsibility
Puts matters requiring decisions about their area of responsibility to the governing body

5.3 Systems and Control SMFs

SMF2	Chief Finance Function	Enhanced firms only
SMF4	Chief Risk Function	Enhanced firms only
SMF5	Head of Internal Audit	Enhanced firms only
SMF24	Chief Operations Function	Enhanced firms only

6. What are Prescribed Responsibilities?

In addition to the responsibilities inherent in the definition of each SMF, the regulators have listed certain 'Prescribed Responsibilities' (PRs) that the Firm is required to allocate between Senior Managers. Each PR would generally be allocated to the Senior Manager who performs the SMF most closely linked to the given responsibility. PRs can be shared but not split between Senior Managers. Where a responsibility is shared, it is recorded identically in each of the Senior Manager's Statements of Responsibilities. If there is a breach, all Senior Managers sharing that responsibility may be required to demonstrate that they took reasonable steps to prevent or stop the breach.

The list of PRs that applies depends on the type of firm. Responsibilities (a), (b), (b-1), (d) below cannot be allocated to SMF 18 (Other Overall Responsibility) and responsibilities (j), (k), (l) below should be performed by a NED if possible.

(a)	Performance by the firm of its obligations under the SMR, including implementation and oversight	All firms
(b)	Performance by the firm of its obligations under the Certification Regime	All firms
(b-1)	Performance by the firm of its obligations in respect of notifications and training of the Conduct Rules	All firms
(d)	Responsibility for the firm's policies and procedures for countering the risk that the firm might be used to further financial crime	All firms
(z)	Responsibility for the firm's compliance with CASS (if applicable)	All firms
(c)	Compliance with the rules relating to the firm's Responsibilities Map	Enhanced firms only
(j)	Safeguarding and overseeing the independence and performance of the internal audit function (in accordance with SYSC 6.2)	Enhanced firms only
(k)	Safeguarding and overseeing the independence and performance of the compliance function (in accordance with SYSC 6.1)	Enhanced firms only
(l)	Safeguarding and overseeing the independence and performance of the risk function (in accordance with SYSC 7.1.21R and SYSC 7.1.22R)	Enhanced firms only
(j -3)	If the firm outsources its internal audit function, taking reasonable steps to ensure that every person involved in the performance of the service is independent from the persons who perform external audit, including supervision and management of the work of outsourced internal auditors, and management of potential conflicts of interest between the provision of external audit and internal audit services	Enhanced firms only
(t)	Developing and maintaining the firm's business model	Enhanced firms only
(s)	Managing the firm's internal stress-tests and ensuring the accuracy and timeliness of information provided to the FCA for the purposes of stress-testing	Enhanced firms only
(za)	Responsibility for an AFM's assessments of value, independent director representation and acting in investors' best interests	Authorised Fund Managers

7. Duty of Responsibility

Senior Managers have a statutory duty of responsibility "to take reasonable steps to prevent regulatory breaches in the areas of the firm for which they are responsible".

The FCA can take action against a Senior Manager (SM) where it can show that:

There was misconduct by the SM's firm,
At the time of the misconduct or during any part of it, the SM was responsible for the management of any of the firm's activities in relation to which the misconduct occurred, and the SM 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 SM does not need to show that they took reasonable steps - rather it is for the FCA to prove that they did not. The defence against such action is if the senior manager can show that they took "the steps that are reasonable for a person in that position to take to prevent a regulatory breach from occurring".

8. Assessing fitness and propriety

All Senior Managers must be approved by the FCA, which assesses whether are fit and proper to perform the given function or responsibility.

Three key factors determine whether you are Fit and Proper:

Honesty, integrity and reputation
Competence and capability
Financial soundness

When determining a person's financial soundness, the FCA will not normally require a statement of assets or liabilities of the person. Limited financial means does not in itself affect the suitability of a person to perform an SMF.

When appointing a Senior Manager or Certified Person, firms are required to obtain a regulatory reference from all their past employers going back six years. This requirement also applies when appointing NEDs who are not Senior Managers. For this purpose, firms need to retain records of disciplinary and fit and proper findings going back six years, and not enter into arrangements that conflict with their disclosure obligations.

9. Individual and Senior Manager Conduct Rules

SM&CR incorporates new high-level standards of behaviour that will apply to almost all employees who carry out financial services activities in a firm. Some Conduct Rules apply to all employees, while others apply only to Senior Managers. The Conduct Rules are intended to drive up standards of individual behaviour in financial services. By applying them to a broad range of staff, the FCA aims to improve individual accountability and awareness of conduct issues across firms.

Individual Conduct Rules (ICRs): apply to all employees, with the exception of ancillary staff, such as facility managers, personal assistants, receptionists, medical staff, IT and HR, who perform a purely non-financial services role. These ICRs also apply to Non-Executive Directors.

ICR 1: You must act with integrity
ICR 2: You must act with due skill, care and diligence
ICR 3: You must be open and co-operative with the FCA, the PRA and other regulators
ICR 4: You must pay due regard to the interests of customers and treat them fairly
ICR 5: You must observe proper standards of market conduct

Senior Manager Conduct Rules (SMCRs): apply to only to Senior Managers, including NEDs (SC 4 even applies to out of scope NEDs)

SC 1: You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively
SC 2: 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
SC 3: 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
SC 4: You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice