Locke Lord partner Jo Davis and paralegal Timothy Anson chart the progress of the FCA’s Senior Managers Regime.
Towards the end of 2015 the Treasury announced its intention to abolish the Approved Persons regime and extend the Senior Managers and Certification regime currently in place for banks, building societies, credit unions and PRA-designated investment firms to all regulated financial services firms. It is proposed that these changes will take place during 2018.
For many within the leasing industry these changes are likely to represent yet more compliance obligations that are disproportionate to the size of their regulated activities. However, if authorised by the FCA firms, will be obliged to observe the requirements of the new regime regardless of the extent of their regulated activities.
The new regime has three main components that work in conjunction with each other, so no part should be viewed in isolation. These are:
-The senior managers regime (SMR)
-The certification regime
Given their complexity, it is not possible to cover all three components in this article. However, we have set out a brief explanation of the SMR, its current application and where changes may need to be made before it is implemented within the leasing industry. So, to start, what is the SMR?
The new regime
Under the current Approved Persons regime firms will no doubt have become well acquainted with Significant Influence Functions. Under the SMR Significant Influence Functions are to be abolished and replaced with Senior Management Functions (SMFs). The SMR that is already in place for some financial services firms splits these into either FCA or PRA functions, with the respective regulator taking responsibility for assessing whether an individual is fit and proper. This reflects the dual-authorised status that firms currently subject to the Senior Managers have. However, the majority of leasing firms are likely to be authorised solely by the FCA, which currently only has responsibility for the following functions:
SMF3 – Executive Director function
SMF13 – Chair of the nominations committee function
SMF16 – Compliance Oversight function
SMF17 – Money Laundering reporting function
SMF18 – Other overall responsibility function
SMF21 – EEA branch senior manager function
SMF22 – Other local responsibility function
The PRA currently has responsibility for a number of SMFs that mirror Significant Influence Functions held by individuals at FCA-only regulated firms. This includes the CF3 Chief Executive function which is currently mirrored by the SMF1 Chief Executive Function. It is unlikely that the FCA will allow Chief Executives at FCA-only regulated firms to avoid the Senior Managers Regime, meaning changes to the current system are likely before the new regime is applied to the leasing market. However, given the complexity of applying the regime, firms should start giving consideration to how they will address the new regime now. So how?
Senior management functions – what do firms need to do?
One of the first exercises firms should consider undertaking is an assessment of whether anyone within their business is carrying out one or more of the SMFs listed above, as well as those PRA-regulated SMFs that may also fall under the FCA from 2018. Whilst this will be relatively straightforward for some of SMFs, for others it will be a more complicated question, with SMF18 (the ‘Other overall responsibility function’) the most likely category to present difficulties.
Firms should then consider to whom Prescribed Responsibilities should be assigned. Under the current SMR system there are 30 Prescribed Responsibilities that firms are required to assign to individuals holding SMFs. The following responsibilities apply to all firms under the current system:
– Responsibility for the firm’s performance of its obligations under the SMR.
– Responsibility for the firm’s performance of its obligations under the employee certification regime.
– Responsibility for compliance with the requirements of the regulatory system about the management responsibilities map.
– Overall responsibility for the firm’s policies and procedures for countering the risk that the firm might be used to further financial crime.
We are still awaiting confirmation as to whether this will remain the same once the system is applied to all financial services firms, but it is likely that these responsibilities will remain.
Once all Senior Managers have been identified, they will be required to prepare a Statement of Responsibility setting out the areas of the firm’s regulated business that the applicant is responsible for. The regulator has suggested that this statement should not be more than 300 words, although firms will have the opportunity to provide additional information to support and more thoroughly illustrate the scope of the applicant’s responsibilities.
Firms will also be required to submit a management responsibilities map describing the firm’s management and governance arrangements and setting out how its regulatory responsibilities are allocated across the business.
Senior managers’ liability
This greater documentation of how and where responsibility lies within financial institutions is intended to make it easier for the regulator to bring an enforcement action against the senior manager responsible for any regulatory breaches. This does of course significantly increase the exposure of a large number of Approved Persons who will go on to be Senior Managers under the new regime. Particular diligence should therefore be exercised by both firms and senior managers as they go about preparing for the new regime. The earlier firms start to examine how they will address these issues, the better prepared they will be once the time comes to start submitting applications.