As all UK-regulated private fund managers will know, the Financial Conduct Authority (FCA) extended its “Senior Managers and Certification Regime” (SM&CR) to virtually all UK-regulated firms at the end of last year. Although it has big ambitions for the regime, the FCA did not intend its extension to smaller firms to be an upheaval and, for most, the change was pretty smooth. Of course, the transition involved some paperwork and a training course for staff, but relatively little adjustment to internal organisation – although changes to recruitment and appraisal processes will be required in 2020, so the project is far from complete.
First, the ambition: the FCA’s expectation is that the SM&CR – which took effect in UK banks in 2016 – will change the culture in regulated financial services firms. At its core, the new rules apply personal responsibility – and, in theory, significant personal liability – to a relatively small number of named senior managers. Those people, usually the most senior partners or executive directors in the firm, are approved by the FCA and agree to discharge specified responsibilities. If failings are identified in the firm, the FCA will look to those individuals for an explanation. If not satisfied, the regulator can sanction the individuals personally if the senior manager(s) responsible had not taken “reasonable steps” to avoid the breach – with the powerful benefit, for the FCA, of hindsight. The firm cannot indemnify a senior manager for any fines, or take out insurance on their behalf.
Alongside this new “duty of responsibility”, the SM&CR also makes the firm itself, and one of its senior managers, responsible for certifying that other senior staff are “fit and proper”. Anyone who has the potential to do “significant harm” to the firm or its customers must be certified by the firm, both as to their conduct and their competence, and the FCA no longer has to approve that person. From now on, responsibility for doing any required checks on recruitment falls squarely upon the firm, as does an annual certification process that will need to be built into HR and assessment processes in the coming months.
Whether the new regime will affect culture in firms in the way that the FCA hopes is, of course, an open question, and no doubt firms will react differently. The compliance heads of many firms certainly feel that making the most senior partners in the firm personally accountable to the regulator for compliance failings could help them to embed a compliance culture, but many others are more sceptical that the SM&CR will lead to any real change on the ground. It may be that the regime’s focus on banks – and, in particular, the apparent need to concentrate the minds of senior individuals on the risks attached to each of the bank’s business areas – does not lend itself to firms where the management team is already immersed in the business line(s) on a day-to-day basis.
Processes will also need to be updated this year. For example, another important change that the SM&CR will bring is the application of the FCA’s Code of Conduct to virtually all staff (anyone not defined by the FCA as “ancillary”, which will include cleaners, receptionists, catering staff and security staff). During the course of this year, and then on an ongoing basis, firms will have to ensure that all staff are aware of this obligation and are trained on it. Any disciplinary action for breach of the Code of Conduct will need to be reported to the FCA.
By December 2020, all firms must have completed conduct and competency checks of all existing senior managers and certified staff, and will need to send the FCA a complete list of certified staff. In the meantime, they will have to certify any relevant new staff and that may involve background checks and regulatory references.
Firms have had plenty of time to prepare for these changes and the FCA has issued some helpful guidance, so they should not find the transition to the SM&CR to be particularly problematic. But, equally, the FCA may not be very sympathetic to those who do not get their act together in time.