Senior Managers and Certification Regime (SM&CR) is coming soon

The Senior Managers and Certification Regime (SM&CR) will come into force on 9th December 2019 for solo firms regulated by the Financial Conduct Authority (FCA). 

SM&CR is predicted to have far-reaching implications for almost everyone working in the regulated financial services sector in the UK.

The regulation aims to apply personal accountability and obligations on those working in the sector – as it has already done for firms regulated by the PRA (Prudential Regulatory Authority), who came under the regime in December 2018.

What is SM&CR?

A significantly updated and upgraded replacement for the FCA’s ‘Approved Persons Regime’, SM&CR aims to set a new culture in financial services, setting minimum standards of behaviour.

It demands that senior managers working in financial services have a clear understanding of their role, function and place in their business – and that they conduct themselves responsibly.

It makes it clear that individuals will be held personally responsible for their actions and will be directly accountable for them. 

The FCA has indicated that one of the aims is to move from a compliance culture to one in which personnel seek to ‘do the right thing’.

Who does it affect?

The introduction of SM&CR has been staggered but will cover all firms in the financial services sector except banks (which already have their own SMR).

What does the regime include and what do businesses need to do?

There are three key parts to the Senior Managers and Certification Regime:

• The Senior Managers Regime

• The Certification Regime

• Conduct Rules

The Senior Managers Regime

The most senior people in a business whose job is to perform key roles will need FCA approval before starting their roles.

This may include:

• Directors
• Non-executive directors
• Any employee who performs senior management functions (as set out by the FCA handbook)

In future, every senior manager will need to have a 'statement of responsibilities' which clearly outlines their role and what they are accountable for.

This includes ‘prescribed responsibilities’ and ‘overall responsibilities’.

A business must certify annually that senior managers in place are suitable to perform their roles.

The Certification Regime

The Certification Regime will apply to every employee whose role makes it possible for them to cause ‘significant harm’ to the firm or to customers. 

These employees do not need to be approved by the FCA. But firms must ensure they are fit and proper to perform their roles and review this annually.

The Conduct Rules

These high-level standards of behaviour are designed to apply to almost everyone – although there are also extra rules which only apply to senior managers.

All firms should ensure that staff are trained in Conduct Rules and are aware of which rules apply to them. Breaches must be reported.

How does it affect both businesses and individuals?

A senior manager has a ‘duty of responsibility’ which means that if a firm breaches any of the SM&CR requirements, the senior manager responsible for that area could be held accountable if they did not take reasonable steps to prevent it.
    
The burden of proof lies with the FCA to show that the senior manager failed to take the steps a person in their position could reasonably be expected to take.

Who will face action in the case of breach?

The FCA says sometimes it will be appropriate to take action against a senior manager, sometimes against a firm, and sometimes against both. These decisions will be made on a case by case basis.  

How does SM&CR affect your insurance?

If available, the Professional Indemnity and/or Directors’ & Officers’ Liability insurance needs to cover defence costs as a result of an Investigation. In addition, the definition of Insured Persons (e.g. Directors’ and Officers’) needs to include persons exposed under the Senior Managers & Certification Regime. Please speak with your insurance broker to see whether this is available under your policy(ies). 

A few key considerations:

• It is imperative that your Professional Indemnity and Directors’ and Officers’ Liability policies are broad enough to include the persons that fall under the regime.
• Directors’ & Officers’ policies typically limit cover to directors, officers and employees, some do not provide cover for employees who are not directors.
• Your policy limit must be sufficient to cover defence costs that might arise from an FCA investigation and/or legal prosecution of "Senior Managers" in your business.

The team at Howden are fully aware of the SM&CR and its implications on insurance cover and will be very happy to answer any questions you may have. 
 

Source: https://www.fca.org.uk/publication/policy/guide-for-fca-solo-regulated-firms.pdf