The SM&CR is an important regime, enforced by the FCA to improve the conduct of employees within financial services firms by holding them to account for their actions. Previously, the FCA used the Approved Persons Regime, which applied to the directors of financial services firms to ensure they were honest and appropriate for their role. However, the FCA has decided to enhance the entire industry, and ensure that all employees who deal with clients in financial services are conducting themselves properly.
The FCA decided that the entire financial services industry needed to be improved following the effects of the 2008 financial crisis. The financial crisis significantly reduced confidence in the financial services industry, and therefore the FCA's drive to restore confidence involves holding all employees in firms accountable for their actions. Moreover, there is a focus on Senior Managers, placing a specific duty of responsibility on Senior Managers to hold them responsible for their own actions, and the actions of colleagues beneath their leadership.
There are three main features of the SM&CR:
- Senior Managers Regime
- Certification Regime
- Conduct Rules
Senior Managers Regime
The Senior Managers Regime demands that Senior Managers fulfil the following responsibilities:
- Statement of Responsibilities: This statement must list all of the responsibilities a Senior Manager holds; this must be clear for colleagues to understand and submitted to the FCA.
- Duty of Responsibility: A Senior Manager has a Duty of Responsibility, which essentially means that they are responsible for the actions of those beneath them.
- Senior Management Functions: Senior Managers have Senior Management Functions (SMF) which must be reported to the FCA for approval.
- Overall Responsibilities: Senior Managers must be responsible for each of the firm's business functions and activities, and the colleagues who conduct these.
- Responsibility Map: A Responsibility Map must establish the responsibilities of all Senior Managers, the management process and the governance arrangements. This will help the FCA to identify who is accountable for misconduct through consulting the Responsibility Map.
- Completing Fitness and Propriety Tests: Senior Managers must complete a Fitness and Propriety test annually, which will assess whether they can fulfil the functions and responsibilities inherent in their role.
The Certification Regime applies to employees in a firm whose role could potentially pose a risk to the client or the market. These employees are considered to have Certification Functions. To carry out this role, the employee must complete a Fitness and Propriety test to assess how fit they are to perform their role. It is the Senior Manager's responsibility to ensure all appropriate employees have completed a Fitness and Propriety test and are therefore certified to work.
- First Tier of Conduct Rules: These rules apply to the majority of employees in a financial services firm, apart from ancillary staff. These rules include acting with integrity, due care, skill and diligence.
- Second Tier of Conduct Rules: These rules apply to Senior Managers. This includes ensuring that Senior Managers take steps to understand the firm is controlled effectively and to delegate responsibilities to appropriate persons.
Who does SM&CR apply to?
The SM&CR currently only applies to firms which are regulated by the Prudential Regulation Authority (PRA) and the FCA, such as banks, building societies, credit unions and the UK designated investment firms. The SM&CR has applied to these dual-regulated firms since March 2016, when it replaced the Approved Persons Regime.
However, from 9 December 2019, the SM&CR applies to all FCA regulated firms in the UK. This means that a huge number of solo-regulated firms across the UK need to revise their governance, management and reporting processes to abide by the SM&CR guidelines.
Consequences for not complying with SM&CR
Since March 2016, the FCA has launched 19 investigations under the SM&CR but have only enforced one penalty. This penalty was inflicted upon Jes Staley, the Chief Executive of Barclays Group, in June 2016. Mr Staley was found guilty of failing to act with due care, skill and diligence, one of the important First Tier Conduct Rules. Consequently, the FCA and the PRA inflicted a joint fine of £642,430 upon Mr Staley for misconduct.
Moreover, the FCA has issued Barclays with special requirements which stipulate that they must provide annual reports to the FCA stating how they handle their whistleblowing procedures. The Senior Managers must provide personal attestations in these reports, to demonstrate they are maintaining their functions for relevant systems and controls.
From 9 December 2019, the SM&CR applies to a huge number of financial firms across the UK, and thus there is potential for the FCA to increase their enforcement powers. Therefore, it is important to understand what the SM&CR is and ensuring compliance from 9 December 2019.