Following the publication of the treasury’s commencement order on July 18, 2019, the Financial Conduct Authority (FCA) has published PS19/20 setting out the final rules on the extension of the Senior Managers and Certification Regime (SMCR) to solo-regulated firms. In January this year, the FCA published CP19/4 where it sought feedback on its attempts to ‘optimize’ the SMCR, and this present paper contains the responses to that feedback.
Broadly speaking, the SMCR will be implemented in accordance with the ‘near final rules’ published in CP18/14 a year ago. However, there are four key changes which are explained in greater detail below.
The FCA has also clarified some issues emerging from previous consultation papers that market participants felt were unclear. These clarifications are set out at the end of this article.
The head of legal will be excluded from the requirement to be approved as a senior manager
The FCA had earlier sought feedback on whether or not to include or exclude the head of legal from the requirement to be a senior manager. Responses to this proposal consistently raised the incompatibility of Senior Conduct Rule 4 (the requirement to disclose appropriately any information of which the FCA or PRA would reasonably expect notice) with the concept of legal privilege. The FCA agreed with the feedback it received and consequently, has decided to remove the head of legal from the senior manager’s regime.
The head of legal will, however, be included in the certification regime, and will be subject to the conduct rules which the FCA believes will deliver most of the benefits of the Senior Manager’s Regime (SMR) without compromising the principle of legal privilege. However, it is important to note that despite the head of legal no longer being an SMR, this does not mean that lawyers are excluded from performing a role in the SMR.
Amendments to the intermediary revenue criterion for the enhanced regime
In the near final rules published in PS18/14, the FCA set out six criteria to identify those firms that should be classified as enhanced. However, in applying this criteria, not all firms that were intended to be caught by the regime were in fact captured. The FCA has therefore made some changes to criterion relating to Non-Retail Mediation Activity (RMA) B firms in order for them to be brought into scope of the enhanced regime. Currently, firms with total intermediary regulated business revenue of £35m or more per annum, calculated as a 3-year rolling average, would be caught by the enhanced regime.
Accordingly, non-RMA B firms with the relevant permissions will be required to self-assess annually and notify the FCA where they have (as a 3 year rolling average) over £35m in regulated revenue from the activities undertaken using any of the permissions below
- Retail investment activities
- Advising on P2P agreements (except when carried on exclusively with or for professional clients)
- Advising on pensions transfers and opt-outs
- Arranging (bringing about deals)m in retail investments
- Home finance mediation activity; or
- Insurance mediation activity (non-investment insurance contracts)
Amendments to the certification regime – Client Dealing Function
The FCA is amending the Client Dealing Function to look to exclude individuals with no scope to choose, decide or reach a judgment on what should be done in a given situation, and whose task does not require them to exercise significant skill. It has amended the rule in SYSC 27.8.19 which contains a definition of Client Dealing Function to provide firms with the flexibility to consider which individuals should be included in the role. The relevant factors that firms will now need to consider when making this assessment are whether the role
- Is simple or largely automated
- Involves exercising discretion or judgment
Applying SC4 to non-approved executive directors at limited scope firms
Senior Conduct Rule 4 (SC4) requires senior managers to ‘disclose appropriately any information of which the FCA or PRA would reasonably expect notice’. In addition to applying to senior managers, PS18/14 proposed that it also applied to non-executive directors (NEDs), even where they are not approved.
Limited scope firms have a narrower set of senior manager functions, and in certain circumstances, not all executive directors at these firms would need to be approved. This is despite the fact that that the FCA intended on applying SC4 to all NEDs, regardless of whether they were approved or not.
The consequence of this proposal however was that non-approved executive directors would not be subject to SC4, notwithstanding the fact that they would often be more involved in the day to day running of the business than a NED.
The FCA has therefore decided to extend the application of SC4 to non-approved executive directors, to bring its expectations of their conduct in line with its expectations on NEDs.
In addition to the four key changes set out above, the FCA also helpfully made the following clarifications in response to questions on its previous consultations papers
- How should we treat the individual who the head of legal reports to, where that individual would otherwise be out of scope of SMCR? This individual should in any event, always be caught by the certification regime.
- Where a head of legal has been approved as a senior manager, can the individual be converted into the certification regime without having to repeat regulatory referencing and fit and proper assessments? Yes – provided the individual’s job has not changed, they will not be required to undertake further fit and proper assessments or resubmit regulatory references.
We offer a range of support in relation to SMCR, including our SMCR toolkit, which provides access to all of the key documents that are needed in order for firms to implement the regime in their business. The toolkit comes with legal support and compliance support from Norton Rose Fulbright should that be required. Please contact Simon Lovegrove for more information.