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The FCA Senior Managers' Regime - Transitioning to the New Regime

19 January 2018
This article examines the key proposals for how firms, not currently subject to the FCA's Senior Managers'  regime, will be transitioned into it when it is extended to all firms.

Earlier last year, the FCA published its main proposals for the extension of the Senior Managers' and Certification Regime (SMR) to all FCA authorised firms. It has now announced its proposals in Consultation Paper CP 17/42 for how existing firms and individuals should be transitioned into the new regime.

Good News

A number of proposals will be welcome to the majority of firms:

  • A later implementation date for SMR- Whilst original expectations had been for implementation of the new regime as early as late 2018, for the majority of firms this is now expected to be mid to late 2019.
  • Automatic transition - As previously indicated, the FCA has confirmed its intention to make the transition as smooth as possible for the majority of existing firms. It is proposed that Controlled Functions which apply to currently Approved Persons which are equivalent to new SMR functions will largely convert automatically to equivalent SMR Functions with limited requirements. This will be on the basis of the FCA's proposals for mapping equivalent functions. This note will later touch upon some exceptions.
  • Approved Persons who have Controlled Functions that don’t map because there is no equivalent function under the SMR, will no longer be approved and indeed don’t need to be unless they perform another Controlled Function which applies under the SMR for which they need to be approved (whether via the mapping process or under a fresh application) for that function prior to the start of the SMR.
  • There will be no requirements for regulatory references and criminal records checks for these transitioned personnel.
  • Appointed Representatives will remain in the existing Approved Persons Regime unless they are also consumer credit limited permission firms which can be authorised for limited types of regulated activity at the same time as being Appointed Representatives for certain other types of activity (e.g. car dealers who are limited permission brokers but who also carry out insurance mediation).
  • Certification Requirements will be delayed for 12 months after start of regime-firms must still have their certified employees in place at the start and from that point those staff must meet the Conduct Rules but firms will have 12 months to complete fitness assessments.
  • Staff who are not Senior Managers or Certified Employees will have 12 months from start to complete training and comply with the Conduct Rules. Most staff other than those who perform certain types of non-critical back room functions will be subject to the Conduct Rules.

What are the exceptions to automatic transition for Approved Persons?

  • Whilst automatic transition applies to firms which fall within the FCA's proposed "Enhanced Scope" category (only the very largest firms) there will be additional paperwork requirements primarily in the form of a Conversion Notification.
  • Existing Non-Executive directors who occupy the position of Chairman, or to use the FCA's new non-gender neutral term "Chair", need to be approved for the new SMF9 Chair Function and  will have to do so in form K before the start of the SMR, or their approval will lapse. Otherwise, non-executive directors will no longer need to be approved under the SMR.
  • An existing executive Chair who is currently a CF1- Director will need approval for the new SMF 9 function before the start of the SMR.

What should firms be doing now?

Firms should keep abreast of the developments as further detail of how the new arrangements will work is published. Details already published are only proposals at this stage but should be regarded as likely to be implemented in more or less the form proposed. Whilst implementation is still almost 2 years away it may be thought by firms to be too early to start any detailed planning for how they will manage the changes. However, there will need to be considerable involvement by a firm's HR and Compliance teams, as well as the Finance function, from a budgetary perspective, given the compliance cost implications. Key areas to consider are:

  • The roles of those holding existing Controlled Functions and how they will map into the SMR.
  • Considering Statements of Responsibilities- these will have to be in place for all Senior Managers by the start date for SMR but do not need submitting to the FCA unless requested by them (except for Enhanced Firms).
  • Have regard to how the SMR will impact upon future recruitment plans.
  • Consider how the firm's training obligations can be met for those holding SMR Controlled Functions, Certified Employees and all other staff subject to Conduct Rules, although there will be a longer implementation regime for such staff.

Firms will be well advised to start thinking about the transition process and setting up project teams during 2018, if they have not already done so. Particularly important is the need to ensure that the required culture has been well embedded (if it has not been already) by the time the SMR starts. Whilst the introduction of the SMR should not be the required catalyst for change, given the current key requirements on compliance and culture, business audits should place particular emphasis on areas of business risk that might impact upon potential Senior Manager liability. Senior Managers will bear an increased responsibility and enhanced personal liability and changing culture and mindset within a business, if it is needed, is a long term process. 

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