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Meeting FCA expectations on SMCR

28 February 2020

With the recent UK General Election stealing the headlines, the extension of the FCA’s Senior Managers and Certification Regime (SMCR) in December passed relatively unnoticed.

This might explain why the FCA wasted little time in 2020 in issuing a clear reminder of its expectations under the wide-ranging reforms.

The SMCR was implemented for banks, building societies, credit unions and dual-regulated investment businesses in March 2016, replacing the Approved Persons Regime, before being rolled out to other firms, including advisory businesses, on 9 December last year.

If the big messages of the SMCR still weren’t clear to firms by then, the FCA wrote to chief executives over January and February with a refresher.

Shots across the bow

In its first letter, to wholesale general insurance firms, it called on executives to be proactive in dealing with non-financial misconduct. It said “poor culture in financial services can lead directly to harm to consumers, market participants, employees and markets” and that this was a “key root cause of recent major conduct failings within the industry”.

It also made direct reference to the SMCR’s emphasis on “senior managers taking responsibility for what happens in their areas”1.

A fortnight later it wrote to asset managers with a similar message, warning that “overall standards of governance...generally fell below their expectations”2. And in February it was the turn of platforms to hear from the FCA3.

All of the letters reinforced the overall aim of the SMCR to “establish healthy cultures and effective governance in firms by encouraging greater individual accountability and establishing a new standard of personal conduct”4.

Culture and accountability

The new regime is seen by the regulator as ensuring that senior individuals “feel genuine responsibility, and be held accountable for the decisions they make and oversee”5. In writing to chief executives within weeks of the rules being extended to a much wider range of firms, the FCA left little doubt that it would be keeping a close eye on firms’ responses from the word go.

The good news is that there is a 12-month transition period from the rules coming into effect, which gives firms until 8 December 2020 to have completed all relevant training and assessed the suitability of all relevant staff under the new regime.

With that in mind, here is a reminder of the key points on SMCR you need to be aware of.

1
Your firm type

The category that your firm falls into for the purposes of SMCR will determine exactly how the new regime applies to it. The three different types are Limited Scope, Core or Enhanced, with responsibility for identifying the relevant category down to your firm itself.

There are crucial differences between each category that are worth being familiar with if you’re not already, such as the types of regulated activity undertaken and specific criteria such as assets under management. The full criteria and definitions can be viewed at SYSC Annex 1 in the FCA handbook.

Most, if not all firms, will have identified their category well before 9 December. But if you’re still unsure or need more assistance the FCA’s firm checker tool is worth a look.

2
Your responsibilities

The vast majority of firms are in the Core category, making them subject to the full Certification and Conduct Rules and a wide range of Fit and Proper requirements.

Core firms should by now have identified individuals able to carry out the relevant senior management functions, which prescribed responsibilities are relevant to them and which senior manager should be allocated each of those prescribed responsibilities.

But, if you’re a sole trading financial adviser, you may fall into the Limited Scope category. That covers firms already exempted under the Approved Persons Regime and which therefore don’t have as many baseline requirements to meet. While Limited Scope firms are still subject to the full Certification and Conduct Rules and many Fit and Proper requirements, you don’t need to allocate responsibilities to individual senior managers.

Full details of the responsibilities and roles under each category can be found in the relevant chapters in the FCA’s Guide for FCA solo regulated firms.

3
Your accountability

SMCR includes more prescribed responsibilities than the Approved Persons regime, with the Senior Managers component covering the top layer of management and the Certification part setting out responsibilities held by specific individuals in a firm.

Senior managers are considered the most senior people in a firm with the greatest potential to cause harm or impact upon market integrity6. They bear a duty of responsibility, meaning the regulator can consider them accountable if something goes wrong.

4
Your need for action

If you’re already clear on what the regime means for you and your firm, the task of complying with SMCR has only just begun. As the new rules bed in, firms must ensure that conduct rules apply to all relevant staff, complete initial certification assessments, check their relevant information on the financial services register is accurate, train new staff in the conduct rules and at least once a year recertify certification staff as fit and proper7.

The purpose is clear

The FCA’s ‘dear CEO’ letters offered a reminder that compliance with SMCR will be monitored closely. But while the rules are in some ways very wide-ranging and may feel challenging to implement, the fundamental aim is a straightforward one: to drive culture change by allocating accountability and providing clarity around who has responsibility for what in each company.

Important information

Please remember the value of your clients investments and any income from them can go down as well as up and your client may get back less than the amount they originally invested. Past performance is not a guide to future performance.


1 FCA - Non-financial misconduct in wholesale general insurance firms - 6 Jan 2020

2 FCA - Our Asset Management Supervision Strategy - 20 Jan 2020

3 FCA - Platforms portfolio strategy letter – 6 Feb 2020

4 FCA - FCA outlines proposals to extend the Senior Managers and Certification Regime to all financial services firms - 26 July 2017

5 FCA - Getting culture and conduct right - the role of the regulator - 18 July 2016

6 FCA - The Senior Managers and Certification Regime: Guide for FCA solo-regulated firms - July 2018 - pg 13

7 FCA - The Senior Managers and Certification Regime: Guide for FCA solo-regulated firms - July 2018 - Pg 51