Part 1: What is the SMCR?

The Senior Managers & Certification Regime (“SMCR”) will replace the FCA’s existing approved persons regime and represents a paradigm shift in the financial services industry in the UK.

The SMCR will apply to every FCA regulated firm and will apply personal accountability and obligations on almost all personnel working in the regulated financial services sector in the UK. 

Whilst the SMCR has been hovering in the background for some time, other more pressing developments have been attracting larger headlines and bandwidth. The principal effect of recent FCA statements has been to set a hard timeframe for the commencement of the SMCR. In an uncertain world, we expect that this will focus minds and allow firms to plan for the SMCR’s impact with a welcome degree of certainty.

In order to assess the impact of the SMCR on a firm and its personnel, the first task will be to identify whether the firm is a Core, Enhanced or Limited Scope firm. Most firms will be Core firms. The next task will be to identify staff’s current roles and responsibilities. With this information, a firm can then map their set up to the requirements of the SMCR. The final piece in the puzzle will be to address any gaps or issues that arise.

Overview

The FCA published comprehensive industry guidance¹ on the new regime, together with their final policy statements, “near final” rules and material on a handful of additional housekeeping SMCR issues on 4 July 2018. ²

The FCA also published proposals for a new “Directory” of financial services workers; an expanded and modified database to augment the existing FCA Register .

This series summarises key takeaways from the FCA’s publications, and gives some of our thoughts on them.

As with any new regulatory initiative, it is vital to learn the relevant “newspeak”. We have highlighted the new words and phrases we will all need to adopt in this series.

There is still a long way for all of us to travel in to the brave new world of the SMCR; so it’s a good time to settle down, buckle up and get ready for the ride. If you have not read the FCA’s guidance, there is time to do so, and we would recommend that every stakeholder does so in conjunction with this series. The guides are readable, pragmatic and can be tackled in bite-sized chunks.

The SMCR represents a paradigm shift in the financial services industry in the UK and has been designed and brought in to increase individual accountability and responsibility throughout the sector. It is important to remember this new view of the world when thinking about the SMCR, as this philosophy underpins the entire regime.

The FCA’s own view is that the SMCR is an integral part of their effort to improve “culture” within the financial services industry. The FCA considers that the collective behaviour of individuals creates a firm’s culture. Whilst the FCA is not looking to mandate what an individual firm’s culture should be; it is setting minimum standards of behaviour. As the FCA indicated at their SMCR Briefing on 11 July 2018, one of the aims of the SMCR is to try to get the industry as a whole to move from a compliance culture to a culture of seeking to “do the right thing”.

The logic behind this change is well known and has been much discussed since the last financial crisis. As a result, the SMCR demands all personnel in the financial services staff not only have a clear understanding of their role, function and place in their business but also that they conduct themselves responsibly since they will be held individually, personally and directly accountable.

The SMCR will replace the existing “Approved Persons” regime, however, the FCA has confirmed that the Appointed Representative regime will remain in place and unchanged by SMCR.

As expected, the FCA is staggering implementation of SMCR.

Implementation for all firms which are solely regulated by the FCA is Monday, 9 December 2019. The FCA refers to such firms as “Solo Regulated Firms”, but the key takeaway here is that ALL firms (no matter what the nature of their business) that are purely regulated by the FCA need to focus on the December 2019 implementation date. The firms in this category will constitute the bulk of the financial services industry (with the exception of banks, who are already subject to the existing senior managers regime (or SMR), and dual-regulated insurance providers, who will be brought in to the SMCR in December 2018, see below). Investment managers, product distributors, insurance brokers and consumer credit providers will generally be considered Solo Regulated Firms. This series primarily focuses on the impact of the SMCR on Solo Regulated Firms.

Insurers who are regulated by both the PRA and the FCA will be brought into the regime on Monday, 10 December 2018. For the purposes of the SMCR, the FCA is generally referring to such entities simply as “Insurers”, but the key point here is that ONLY dual regulated firms need to focus on the December 2018 implementation date. Analysis of the position for Insurers is beyond the scope of this series, especially given our understanding that Insurers are generally well prepared for the SMCR and in advanced stages of implementation.

Three types of firms under the SMCR: core, enhanced and limited scope

The Solo Regulated Firm universe is made up of three tiers:

• “Core” firms
• “Enhanced” firms, and
• “Limited Scope” firms.

The majority of firms will qualify as “Core”, which essentially represents the baseline expectation and requirements of the SMCR.

A small number of large and complex firms will be subject to additional “Enhanced” requirements, which are more onerous and closer to the regime already in operation and applied to banks. As the nomenclature suggests, the Enhanced regime is designed to recognise that larger more complex firms are more likely to require larger, more complex oversight.

The SMCR applies at legal entity level. As such, some groups will have firms subject to different levels of obligations under the SMCR. But in some circumstances the FCA may allow Core firms within such a group to be treated as Enhanced firms in line with other group firms.⁴

A small number of firms will have a reduced level of obligations under the SMCR. These “Limited Scope” firms will generally be ones that benefit from exemptions under the existing Approved Persons regime.

The FCA will contact all existing Solo Regulated Firms in advance of December 2019, with an assessment of their status under the SMCR (ie Core, Enhanced or Limited Scope). But, this assessment will merely be indicative; particularly given it will be based on information which each firm has provided to the FCA. As such, and in keeping with the culture of accountability that the SMCR engenders, each firm is responsible for determining their own status based on the relevant FCA rules.

In the next part we will ask what the SMCR is going to mean for you...

^{1. For FCA solo regulated firms, see here. For Insurers, see here.}

^{2. For the FCA’s policy statement on the implementation of SMCR for FCA solo regulated firms, see here. For the FCA’s policy statement on the implementation of SMCR for Insurers, see here. For FCA’s final guidance clarifying on the “Duty of Responsibility” under SMCR for FCA solo regulated firms and Insurers, see here.}

^{3. See here.}

^{4. The FCA will consider applications from any Core firms seeking to opt up to Enhanced status, but the FCA anticipate the only scenario where such an opt up will be sought is in the context of group seeking to align standards amongst all relevant entities.}