Who does the SM&CR Apply To?

From 9 December 2019, the Senior Managers & Certification Regime (SM&CR) applies to all financial services firms and their employees who are regulated by the Financial Conduct Authority (FCA). Therefore, solo-regulated firms and dual-regulated firms must be prepared to comply with the SM&CR appropriately.

Who does the SM&CR Apply To?

Compliance Knowledge Base | FCA Compliance Training

Posted by: Morgan Rennie Published: Tue, 22 Oct 2019 Last Reviewed: Tue, 22 Oct 2019
Who does the SM&CR Apply To?

The Senior Managers & Certification Regime (SM&CR) will apply to all financial services firms regulated by the Financial Conduct Authority (FCA) from 9 December 2019. SM&CR is an important part of the drive to improve the culture and integrity of the financial services industry, and therefore it is being applied to a huge number of financial services firms and their employees in the UK. The SM&CR will focus on ensuring Senior Managers and other employees are held to account for their actions in the market, in the best interest of consumers. Therefore, it is important to understand who the SM&CR applies to now.

What is the SM&CR?

The SM&CR has replaced the FCA's Approved Persons Regime, which only regulated the conduct of directors within financial services firms, not all employees. The SM&CR broadens requirements and now applies to all employees who deal with clients, in particular, Senior Managers.

The SM&CR aims to deter those in financial services from engaging in financial misconduct and corruption, by ensuring they are accountable for all of their actions.

Who does the SM&CR apply to?

From 9 December 2019, the SM&CR applies to any employee who deals with clients in a financial services firm which is authorised by the Financial Services and Markets Authority (FSMA) and is regulated by the FCA.

Consequently, the SM&CR will apply to the vast majority of financial services firms in the UK. These firms have been separated into three tiers: Core Firms, Enhanced Firms and Limited Scope Firms.

Core Firms:

Most financial services firms will qualify as Core firms. Core firms must comply with the baseline requirements of the SM&CR.

Core firms will have to comply with the following three features of the SM&CR:

Senior Managers Regime (SMR):

This applies to the employees who have a Senior Management Function (SMF). The FCA will approve those employees who have an SMF. The employees who have an SMF are the individuals in a firm who pose the greatest potential risk to clients and the market. The individual in this role must be regularly assessed by the firm, using a Fitness and Propriety test, to ensure they are fit and proper to perform their role.

Those with an SMF must provide a Statement of Responsibility to the FCA, stating all of their responsibilities, and the FCA will issue some additional 'Prescribed Responsibilities' for the employee to fulfil.

Certification Regime:

This applies to employees who are not Senior Managers, but their job could pose a risk to the firm or the customers. The firm will be responsible for annually assessing the ability of these employees, using a Fitness and Propriety test. If the individual completes their assessment, they will become Certified Individuals and able to work appropriately. The Senior Manager will be accountable for the Certified Regime and ensuring employees are annually certified.

Who does the SM&CR Apply To?

Conduct Rules:

Conduct rules are separated into two tiers.

  • First Tier: Individual Conduct Rules, which relate to all employees, apart from ancillary staff.
  • Second Tier: Senior Manager Conduct Rules, which are additional rules related to the employees who hold an SMF.

Enhanced Firms:

These firms are larger in size and complexity, and therefore these firms will receive more oversight and scrutiny from the FCA. These firms are subject to enhanced requirements by the SM&CR. These firms tend to earn approximately £35million or more from intermediary income and therefore make up approximately 1% of FCA regulated firms in the UK.

Enhanced firms will need to comply with the three features which Core firms abide by, and some additional requirements. Additional requirements include:

  • Responsibility Map: A Responsibility Map must be completed and presented to the FCA. This Map will demonstrate the firm's management and governance arrangements, creating an overview of the responsibilities which are included in the firm. Therefore, if the FCA needs to identify who is responsible for particular actions, they can consult the Responsibility Map.
  • Overall Responsibility: This applies to Senior Managers and states that they must assume Overall Responsibility for each area of the firm.
  • Handover Procedures: This applies to Senior Managers and states that procedures must be in place when a Senior Manager needs to hand over their role.

Limited Scope Firms:

These firms are subject to a reduced set of requirements under the SM&CR and will already have exemptions under the Approved Persons Regime, for example, sole traders.

What is the difference between Solo-Regulated Firms and Dual-Regulated Firms?

A solo-regulated firm is currently only regulated by the FCA. Solo-regulated firms can be very small firms, such as sole traders and limited permission consumer credit firms. From 9 December 2019, solo-regulated firms will be required to comply with the SM&CR, but until recently they have not had to do this.

A dual-regulated firm is regulated by the Prudential Regulation Authority (PRA) and the FCA. Dual-regulated firms have had to comply with the SM&CR since March 2016, when it replaced the Approved Persons Regime. A dual-regulated firm includes banks, building societies, credit unions and the UK designated investment firms

However, from 9 December 2019, both solo-regulated firms and dual-regulated firms have to comply with the SM&CR. Therefore, knowing who SM&CR applies to and what it entails is essential.

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