UK: Transitional Proposals For The Extension Of The Senior Managers And Certification Regime

On 13 December 2017, the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) issued a suite of Consultation Papers providing further guidance on how they plan to transition firms and individuals to the Senior Managers and Certification Regime (SMCR). The FCA's CP 17/40 also provides further information on the implementation of the new Prescribed Responsibility regarding Conduct Rules.

These latest publications follow the publication on 26 July 2017 of FCA Consultation Papers CP 17/25 and 17/26 containing proposed rules for extending the SMCR to all Financial Services and Markets Act (FSMA) authorised firms, including asset managers, investment firms, insurers and consumer credit firms.

Implementation of the extension of the Senior Managers Regime (SMR)

The FCA and PRA have confirmed in their latest CPs that, as with the approach to Banking firms, firms in the SMCR extension will not have to apply for re-approval of their existing approved individuals whose roles map across into the SMCR (with one exception – see below). To ensure that the move to the new regime is as smooth as possible, Firms should consider whether any changes to their existing approvals are required ahead of commencement.

There is one exception to this; Core firms with a non-executive Chair must submit a Form K (Conversion Notification), notifying the FCA that they wish to convert an approved Non-Executive Director to the SMF9 – Chair function. If a Form K is not submitted for the Chair, the individual's approval will lapse at the start of the new regime.

Solvency II firms, large Non-Directive firms (NDFs) and Enhanced firms will need to submit Statements of Responsibilities (SoRs) and a Management Responsibilities Map (MRM) alongside completed Forms K to convert existing approved individuals to new Senior Management Functions. In instances where the information originally submitted changes, Firms should submit an updated Form K.

Every converted Senior Manager at a small NDF, a small run-off firms, a Core or Limited Scope firm must have a SoR, though they are not required to be submitted to the FCA at conversion. Firms must be prepared to provide a Senior Manager's SoR to the FCA on request.

A number of existing approved roles in insurers, Core and Limited Scope firms will not be automatically converted at commencement of the new regime and existing approvals will lapse. This is because these roles will no longer require approval by the FCA, however, some of these roles will fall into the Certification Regime (see below).

Implementation of the Certification Regime

The FCA has confirmed its plan to implement the rules for Certification gradually, so that Firms can become used to applying the new regime. Whilst firms will have to identify Certified staff from day one under the SMCR they will have a year to complete fitness and propriety assessments.

The application of the Conduct Rules

The FCA has confirmed that the Conduct Rules in COCON will apply to Senior Managers and Certified staff from the date of the commencement of the SMR at all firms. This means that firms will need to identify all of their Certified staff from on day one of the regime. These staff must meet the Conduct Rules straight away, but firms will have 12 months to complete their fitness and propriety assessments and to ensure all appropriate certification paperwork is in place.

Recognising that arranging training for 'Other Conduct Rules staff' may take longer, the FCA proposes to give Core, Enhanced and Limited Scope firms 12 months from commencement to apply the Conduct Rules to these staff. 'Other Conduct Rules staff' are those who are subject to the Conduct Rules in COCON but who do not hold a Senior Management Function or a Certification Function. 

New prescribed Responsibility for Conduct Rules

In CP 17/25 the FCA proposed to create a new Prescribed Responsibility for 'performance by the firm of its obligations in respect of notifications and training of the Conduct Rules.' Firms have to allocate this responsibility to a SMF, who must ensure that the firm meets its obligations relating to the Conduct Rules.

This Prescribed Responsibility applies to all firms under the proposed extension of the SMCR, however the FCA has confirmed in CP 17/40 that it proposes to also implement this new requirement for banking firms before the commencement of the extended SMCR. The allocation of this new Prescribed Responsibility will require those firms to amend their existing SORs, Management Responsibilities Maps and to submit a Form J –'Significant changes to an approved person's responsibilities', through the existing channels.

Timing and next steps

Firms have until 21 February 2018 to respond to the latest Consultation Papers.

Both the FCA and PRA have reiterated that the extended SMCR will not come into effect until a commencement date has been set by HM Treasury. However for the purpose of their latest publications, both regulators have assumed that the rules will apply to insurers in late 2018 and solo-regulated firms in mid-to-late 2019.

The PRA proposes to publish the final policy and rules once the Treasury has confirmed a commencement date. The FCA has confirmed that it will publish its rules, and final approach to transition and conversion, in a Policy Statement in summer 2018.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.