May 2019: Extension of United Kingdom SM&CR to 'solo-regulated' firms

The UK Senior Managers and Certification Regime (SM&CR) for UK banks, building societies, credit unions, PRA-designated investment firms and branches of foreign banks operating in the UK came into force in March 2016. The regime was extended to insurers in December 2018 and, from 9 December 2019, will be extended to apply to all firms authorised under the UK’s Financial Services and Markets Act 2000. The upcoming extension will focus on Financial Conduct Authority (FCA) 'solo-regulated' firms.

The SM&CR focusses on senior managers and individual responsibility, replacing the previous ‘approved persons regime’. The new regime seeks to reduce harm to consumers and to strengthen the integrity of the market by making individuals more accountable for their conduct and competence, ensuring there is a clear understanding of responsibilities within the firm, and developing a 'culture of accountability' and improving conduct at all levels.

The precise impact of the SM&CR will depend on how the relevant firm will be categorised under the new regime. A firm will either be a ‘core firm’ (this will be most firms), a ‘limited scope firm’ (subject to the fewest requirements) or an ‘enhanced firm’ (subject to the most requirements). Firms should establish which category is relevant and understand the applicable rules. 

The 3 key parts of the SM&CR which will apply to all firms are as follows:

  • Senior Managers Regime - focussing on the most senior people in the firm. All senior managers will need to be FCA approved and there must be a clear statement of responsibilities, identifying what the senior manager is responsible and accountable for. All senior managers will be subject to a 'duty of responsibility'.
  • Certification Regime - focussing on employees who are not senior managers, but whose jobs mean they can have a big impact on customers, markets or the firm. Firms will need to certify that such employees are fit and proper to perform their role (at least annually).
  • Conduct Rules - new, high-level standards that apply to almost every person who works in the financial services industry.

You can find more information, including a guide summarising the FCA’s rules and guidance, here.

Tapestry comment

For those firms that are already caught by the SM&CR, the extension will not have an impact. The extension will, however, impact approximately 47,000 firms, including investment firms, asset managers, mortgage brokers and consumer credit firms. This extension is unlikely to be a surprise development for these firms and we expect that many of the impacted firms will already be working through the implementation process.

The extension of the SM&CR is indicative of the increasing interest and focus on individual accountability and responsibility by the FCA and the UK Prudential Regulation Authority (PRA). Both regulators have identified in their 2019/20 business plans that they will review and evaluate the effectiveness of the SM&CR over the next year.

This focus has already influenced the approach taken by the FCA and the PRA to the regulation of remuneration. For example, there is already an expectation that malus and clawback provisions (and similar remuneration adjustment mechanisms) are applied not only to individuals who are directly responsible for issues impacting the firm, but also to those individuals who have overarching responsibility. We expect that regulatory supervision and expectations in relation to remuneration will continue to focus on ensuring that individuals are held accountable, including through the remuneration that they receive.  

The extension of the SM&CR will see a new standard of conduct which the FCA hopes will strengthen market integrity by forcing individuals to take responsibility. It will be interesting to see how these changes impact risk-taking within firms and how this will be reflected in the remuneration policies and practices within those firms.

Tapestry has significant experience advising financial services firms on their remuneration compliance. If you would like to discuss your remuneration compliance with us, please do contact us.

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