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The following article was published in our article directory on November 18, 2016.
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Senior Managers And Certification Regime: Changes To Functions, Responsibilities And Scope Of Conduct Rules (COCON)

Article Category: Advice

Author Name: Lee Werrell

In September 2016, the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) issued a suite of publications setting out a number of proposed amendments and optimisations to the Senior Managers and Certification Regime (SMCR) for banking firms. Besides providing feedback on firms' grandfathering submissions they introduce a number of changes which will impact current Senior Manager Function holders (SMFs).

Below we have shown the proposed changes and determine the questions that firms should now be seeking to respond to ensure their SMCR frameworks factor these change in.

Duty of responsibility

The FCA is consulting on including guidance to the DEPP sourcebook on the statutory duty of responsibility for SMFs including guidance on:

The circumstances where the duty will apply;

The elements that it will bear in mind when establishing whether a SMF was accountable for the management of the firm's activities in regard to which a breach occurred; and

The factors that it will bear in mind when determining whether or not a SMF took reasonable steps to avoid a breach taking place (or continuing).

Through this proposed guidance, the FCA has made clear a variety of points raised in firms' responses to prior consultations on guidance on the presumption of responsibility. Most notably the FCA has stated that the duty of responsibility can involve activities outside those described in the SMF's Statement of Responsibilities, recognising that it is possible for SMFs as being responsible for the control of activities at their firm that fall outside their prescribed responsibilities.

Regulatory references

The FCA released its final rules on regulatory references for firms under SMCR. The FCA confirmed firms will will need to obtain and provide references encompassing a period of 6 years for individuals seeking SMF and Certified Persons roles. To support firms in this undertaking the FCA has provided a regulatory reference template requiring firms to present information specifying if individuals have had disciplinary action taken against them or has ever been determined not to meet the applicable requirements of fitness and propriety.

The controversial requirement for firms to update regulatory references where misconduct emerges after an employee has left remains in position. The FCA has clarified that firms only have to update the current employer (where that firm is a FSMA firm) and also it need only cover a time span of six years from the date the individual left the firm.

This reference regime will enter into effect on 7 March 2017.

Chief Operations SMF

A range of recent FCA, the PRA and the FPC initiatives and publications targeting the importance of operations, systems and technology within financial services firms. In recognition of this the PRA has established a corresponding requirement to ensure most suitable senior level accountability for these areas within firms.

To achieve this the PRA proposes:

To create an additional, optional, Chief Operations SMF (SMF23), for UK banks and branches of Non-EEA firms; and

To create a corresponding Prescribed Responsibility for "managing, and ensuring the operational continuity and resilience of, the internal operations, systems and technology of a firm".

Head of Key Business Area (SMF6) new requirements

The PRA has recognised that the current criteria for designating an SMF6 potentially exclude some business lines which would still be considered capable of having an influence on the safety and soundness of a firm on account of their commercial or strategic importance. Consequently, the PRA is proposing to amend the requirement so that individuals will also be in scope of the SMF6 if the business area they are accountable for either:

meets both of the existing criteria:

over ₤ 10 billion in gross total assets; and accounts for 20% or more of the firm's, or its group's, gross revenues; or

meets one of the above criteria and satisfies either of the following criteria:

it performs a 'critical function' as defined in sections 3( 1) and( 2) of the Banking Act 2009 (as amended); or it is a 'material business unit' as defined in Article 3( 6) of the Regulatory Technical Standards for the definition of material risk takers for remuneration purposes.

Extending Conduct Rules to notified Non-Executive Directors (NEDs).

Under current arrangements the regulators were unable to broaden the new Conduct Rules to notified NEDs, as they are neither 'employees' nor senior managers needing regulatory pre-approval. The FCA and PRA are now proposing to extend the following Conduct Rules to all NEDs irrespective of regulatory status:.

You must act with integrity;.

You must act with due skill, care and diligence;.

You must be open and co-operative with the FCA, the PRA and other regulators;.

You must pay due regard to the interests of customers and treat them fairly;.

You must observe proper standards of market conduct; and.

You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice.

The Legal Function.

The FCA has declared that its intention was always that the legal function should be considered a key function of any firm and that responsibility for it should therefore have been assigned to a SMF. However, the FCA has acknowledged that the comments received from firms highlighted that that this is not explicit and may be unclear.

Because of this, Discussion paper DP16/4' Overall responsibility and the legal function' lays out the key arguments for and against capturing the legal function, including things like the likelihood to impinge on the principle of legal privilege, and seeks feedback from business sector on whether the legal function should fall under the scope of the SMCR.

Questions for you to contemplate.

Firms really should now be considering the following key questions, bearing in mind their own structure and business model:

Have your SMFs received training on the duty of responsibility, reasonable steps and the regulators' guidance in connection with them?

Does your firm have the ability to provide and obtain regulatory references for SMF and Certified roles? Are your record keeping facilities set-up to retain relevant documentation for at least six years after an individual leaves the company?

Is your firm's COO currently an SMF? If responsibility for business continuity, operations, and technology is split between multiple individuals, which individual should undertake the new prescribed responsibility?

Do any one of your business units now meet the standards for allocating an SMF6? Does this bring different senior managers into scope?

Are your firm's notified NEDs informed of the upcoming application of the Conduct Rules? Are there any corresponding brand-new training needs?

Is the individual tasked with your firm's Legal Function currently an SMF? If not, who in the organisation holds, or could hold, this responsibility?

Organisations should read the most updated publications and take this chance to comment, with feedback sent to the regulators by 9 January 2017.

The content of this particular report is intended to provide a general guide to the subject matter. Expert advice should be sought about your specific circumstances.

Any assistance with the your existing or the setup of the SMR as it is implemented across the UK Financial Services Industry may be obtained from us at Compliance Consultant.

Keywords: smr,smcr,fca,pra,duty of responsibility,smf,senior managers regime,certification regime

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