Senior Managers Regime – What it means

There was never any doubt it was all about personal responsibility.

Just seven words neatly summed up a document running to 312 pages. “This is about individuals, not just institutions.”

This short sentence, attributed to the Financial Conduct Authority’s head of supervision, Jonathan Davidson, accompanied the watchdog’s press release on its plans to extend the Senior Managers and Certification Regime (SMCR).

SMCR, which has applied to banks for more than a year, will from next year cover the entirety of financial services, including investment management and insurance.

It will replace the Approved Persons Regime and has been estimated to bring around 50,000 additional financial services firms into SMCR.

The new regime represents a tonal shift and demands senior managers meet basic criteria including acting with integrity, cooperating with regulators, and treating customers fairly.

Senior managers will be personally held to account if something in their “area of responsibility” goes wrong, and they are subject to pre-approval by the FCA and annual review by their employers.

The senior manager, as well as the firm, could be fined if they are found not to have taken “reasonable steps” to prevent or stop a breach of the FCA’s requirements in their area of responsibility.

This new regulation reaches much further down the corporate chain of command than previously.

Companies will also have to certify employees at least once a year if their work could potentially pose a risk of significant harm to the firm or its customers.

This means staff in charge of claims, reinsurance, underwriting and even IT face certification.

The FCA describes this as “the single biggest change for insurers”.

The changes have been a long time coming; the Treasury first laid out its plans in October 2015.

The industry has the chance to air its concerns about additional red tape and costly systemic alterations in a consultation that will last until November.

Call for calm

However, some experts are calling for calm, believing the changes to be largely cosmetic.

David Sparkes, head of compliance and training at Biba, points out: “There’s a lot of read across. If a firm is already compliant with Approved Persons and Principles for Business [another FCA code that demands companies act with integrity and possess the skills necessary to undertake their work] then it shouldn’t see a great cultural shift. A lot of this is the FCA saying we want to see a good culture, so if people keep to that culture there should be no fines.”

Sparkes adds that Biba will shortly consult its membership before submitting its views, but he thinks this will “not be a book” in size due to the lack of fundamental changes.

The FCA has also been keen to point out the similarities with the existing regime. For example, regulators must provide a ‘Statement of Responsibilities’ document that state the areas of business for which prospective senior managers are accountable. This is, says the FCA, “identical in substance” to insurers’ existing Scope of Responsibilities document.

However, RWA Compliance director Robin Wood disagrees with Biba, arguing the changes are “not easy meat”. In particular, he believes there are substantial “practical difficulties” in human resources.

There is a potential problem in retaining or attracting senior staff who will bristle at the thought of being so closely watched by regulators, while others have warned employment contracts will have to be refreshed to take account of the new regime.

Wood says: “There have been comments of ‘don’t panic, just let this happen’. There is an assumption that everybody is compliant, but I don’t think everyone is compliant.

“There are changes to employment and the risks employees are taking. A lot of thought is going to have to be given to employees who will suddenly be treated as senior managers. The regulator will look more closely [at senior managers] and assess people each year, asking whether they’re competent to do their job.

“The plan is to make the profession much tighter, much better. How would you feel if a company turned round to you as an employee and said, ‘If you do certain things wrong, you could now be fined for that’?”

Wood argues the consultation paper “is meant to be looked at and brokers should actually do that – it’s not just a case of sitting back and doing nothing”.

Alex Alway, executive chairman at Compass Broker Holdings, is another industry figure who believes the changes are significant. However, he believes any substantial fines are unlikely until around 2020 because the regulator will first concentrate on embedding the system.

He adds: “It will take a while for this to make a change [in the market], because the practicalities will take a lot of effort from both the FCA and firms, such as unifying data. It will take a year or two to roll out to make sure it’s rigid enough – and then you’ll see some scalps.”

Whiter than white

Lockyers managing director John Newall argues brokers that have spent years – and plenty of money – complying with previous regulations will benefit from a tougher regime, because it will punish those who have previously sidestepped the rules.

He says: “I’ve seen some absolute sharks get CF1 status [the FCA’s code for the director function]. We’re putting everything together in an effort to try and be whiter than white, while others are just flying under the radar, going into insolvency and, phoenix-like, setting up again.”

However, those firms that have worked hard to be compliant in the past will also want to avoid the rigmarole of going through near identical processes.

Given that even a high street accountant is likely to come under the regime, the FCA has promised to be proportionate and make the changes as simple as possible.

Lawyer Farrer & Co says: “Hopefully this approach will avoid the need for individuals currently authorised as Approved Persons to go through a further extensive approval process to become approved as senior managers.”

Whether the changes are substantial or cosmetic, beneficial or burdensome, there is little doubt the FCA is placing greater onus on the responsibilities of the employee. The FCA has explained this over thousands of words and hundreds of pages, but Davidson’s short sentence says it all: anyone of any seniority in the industry will soon be accountable for their actions.

 

The Conduct Rules

The Conduct Rules replace the Principles for Approved Persons, but also extend their application to a much wider population of firms’ employees. Firms are required to make staff aware of the Conduct Rules and to provide tailored training as to how the rules apply in the context of individuals’ roles in the firm.

The Conduct Rules are split into two tiers and are a direct transposition from the existing SMCR.

 

FIRST TIER: INDIVIDUAL CONDUCT RULES

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

 

SECOND TIER: SENIOR MANAGER CONDUCT RULES

6. You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively.
7. 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.
8. 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.
9. You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice.