Following the CP86 regulation in Ireland the UK now look to adopt best practice 2019 brings with it another raft of regulatory changes for the UK Funds industry as well the wider Financial Services industry. Not that we have had that many in recent years, I hear you say!! Only this time the UK seems to
Following the CP86 regulation in Ireland the UK now look to adopt best practice
2019 brings with it another raft of regulatory changes for the UK Funds industry as well the wider Financial Services industry. Not that we have had that many in recent years, I hear you say!! Only this time the UK seems to be listening to Europe, which may come as surprise to many Brexiteers. This time we are looking at a raft of legislation, the Senior Management & Certification Regime (SM&CR), that basically tells all of us in senior management positions in Financial Services to behave and to act professionally at all times with integrity and responsibility not just for ourselves but for that of the people who report into us. A tad insulting to many who have done exactly that for many years however what I find interesting is the accountability and the evidencing that is required. In essence, this is replacing the Approved Persons Regime that many of us have dealt with for years.
For those of us in the Funds business who straddle the UK and Ireland, there is a certain amount of double-take/déjà vu with this as for the last 9 months we have been working under the rules of CP86 that went live in June 2018, albeit many of us started it in 2016. Under CP86 Fund Boards have to assign responsibility to designated persons with functions such as Distribution, Financial, Compliance and Investment Management etc. The accountability of these Designated Persons and subsequent Functions gives the Funds industry an edge over many areas as the role means there is no hiding for a senior manager who fails in their job. Ultimately the outcome is the same, i.e. to protect the shareholders in the Funds they have invested in.
So, what does the SM&CR mean for investors or purveyors of Financial Services products? Assurance ultimately that the firm who they have invested in is conducting itself in a manner fit and proper and that there is an individual(s) they can point the finger at if things go wrong.
As Martin Wheatley, then CEO at the FCA said in 2015 “… for senior managers, most of the steps you’d expect them to take appear common-sense, frankly. Behave with integrity; delegate appropriately; make sure you understand your business area; and comply with common law, existing rules and legal obligations.”
In essence just do your job properly and who would disagree with that. However, Tracey McDermott in December 2015, as Acting CEO of the FCA, threw her rattle out of the pram by challenging the industry “…the SMR was created against the backdrop of a clear – and shared – understanding that culture needed to change, and a culture of personal responsibility had to be embedded.” So, don’t hide behind the collective responsibility regime and instead take a personal approach to the responsibilities as dictated by your role. Again, sensible for many but some may find that a little bit micro-management but we are talking protecting investors interests after all so we should step up to the plate on this.
The SM&CR isn’t that difficult really once you appreciate the requirements. Ultimately it is trying to do the following:
- To reduce harm to consumers and strengthen market integrity by creating a system that: encourages staff to take personal responsibility for their actions.
- Improve conduct at all levels.
- Ensure firms and staff clearly understand, and can demonstrate, who does what;
- Focus regulatory approval on fewer senior individuals in a firm than under the current Approved Persons Regime (APR).
- Requirement to assess the fitness and propriety of specific individuals who could harm your organisation, its customers or the market.
So simple really as long as you know what you have to do differently from the current APR. Therefore, what are the differences:
- The current Approved Persons Regime will disappear and be replaced by the Senior Managers Regime for the highest- ranking management, but for the most part by the Certification Regime (which will apply to at least as many people as the Approved Persons regime, and probably more);
- Senior Managers will be identified, and they will have clearer individual responsibilities and accountability than previously;
- Firms will take on the responsibility for the certification (and assessing suitability, fitness and propriety) of certain individuals from the FCA;
- There will be a new Duty of Responsibility for Senior Managers, making them more accountable for regulatory contraventions in the part of the business for which they are responsible; and
- New ‘simple’ code of conduct rules will apply to almost everyone in the firm.
Senior Managers Regime
The most senior people in a firm will be approved by the FCA, with firms also having a responsibility to ensure they are suitable (fit and proper) for their role (with a review at least once a year).
|It will require a firm’s senior managers to be allocated senior management functions (SMF) and to clearly allocate their roles and responsibilities through a document called a ‘Statement of Responsibilities’ (also known as a SOR).
As an SMF, an individual will need to ensure they take reasonable steps to prevent regulatory breaches for the areas which they are responsible for.
The Senior Managers will be required to have:
- a Statement of Responsibilities – mapping what they are responsible and accountable for;
- a Duty of Responsibility – meaning that if something goes wrong in an area they are responsible for, the FCA will consider if they took “reasonable steps” to stop it from occurring; and
Prescribed Responsibilities – responsibilities that the FCA will require firms to allocate to their Senior Managers.
This covers people who are not Senior Managers, but anyone who may have a significant impact on customers, markets, or the firm (‘significant harm functions’). The roles include proprietary traders, the CASS oversight function, functions subject to qualification requirements, client dealing functions, algorithmic traders, material risk takers, and any supervisor or manager of someone who is a certified person.
These individuals will not be approved by the FCA but will be approved by their own firm. The firm will have to certify they are suitable (fit and proper) to carry out their job (with a review taking place at least once a year).
These rules will apply to almost all people working in financial services and will be:
- you must act with integrity;
- you must act with due skill, care and diligence;
- you must be open and cooperative with the FCA, the PRA and other regulators;
- you must pay due regard to the interests of customers and treat them fairly;
- you must observe proper standards of market conduct.
There are additional conduct rules applying to Senior Managers:
- you must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively;
- you must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system;
- you must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee this effectively;
- you must disclose appropriately any information of which the FCA or PRA would reasonably expect notice.
Senior Managers and Certification Staff must be identified and trained by 9 December 2019. The Conduct Rules will apply to them from that date. However, firms have a 12-month transitional period in which to complete the certification process for existing Certified Staff and to train other staff on the Conduct Rules. This process must be completed by 9 December 2020 from when the Conduct Rules will apply to other Conduct Rules staff.
As many suspected, the implementation date for solo-regulated firms is 9 December 2019, subject to commencement regulations to be made by HM Treasury. The FCA also confirms a one-year transitional period for some aspects of the regime. However, the arrangements for Senior Managers and Certification Staff (except for the certification process) must be in place by 9 December 2019, and the Conduct Rules will apply from then to all Senior Managers and Certified Staff.
The FCA has also launched a consultation (CP18/19) on a new Directory to help consumers and firms check the status and history of individuals working in financial services. The proposed Directory will include:
- those who hold Senior Manager positions requiring FCA approval;
- those whose roles require firms to certify that they are fit and proper under the Certification Regime;
- non-Senior Manager Function (SMF) Directors; and
- sole traders and appointed representatives where they are undertaking business requiring qualification in their capacity as an individual.
Many of these individuals do not currently appear in the FCA’s Financial Services Register (FS Register) and, particularly in light of the extension of the SM&CR to all firms, this has been a cause for concern by both the financial services industry and consumer groups; the Directory will plug this gap. In addition, the FCA plans to make changes to the FS Register (which will continue) to provide better access to the full record of information on authorised firms and the individuals it has approved. In particular, the FCA intends to make it clearer when requirements, including suspensions, apply to an entry, improve the search facility and present more simply some common search information.
The following is a non-exhaustive set of practical considerations that may help Senior Managers to evidence their reasonable steps on an on-going basis.
- Minutes from Board and Board Committees
- Statements of Responsibilities and Management Responsibilities Maps
- Organisation charts
- Handover material
- Management Information (MI) and Reports
- CV, Role Profile and Job Description
- Email records
- Meeting invites and standing agendas
- Departmental action logs
We don’t have long to get our act together, but I am optimistic for those firms that have applied the rules of CP86 with Designated Persons and Functions as in Ireland then the SM&CR will be a walk in the park. A doddle and something to be welcomed by those who take overall Corporate Governance seriously enough.
So why is this relevant for Fin Tech companies, well there is a strong possibility that some of the Digital Assets we are seeing launched and certainly any regulated firms offering Crypto exchanges or custody etc could well be caught by SM&CR .In the same way that Cryptos will be impacted by the 5thAnti Money laundering directive, but as they say …..That is another story!!
Stuart Alexander CEO of Gemini Investment Management Ltd
Gemini Investment Management Limited (GIML) was founded in 2009 Initially as a distribution business raising assets on behalf of Third-Party Investment Managers to the Professional Adviser community and is now also established as one of the leading innovators in Fund Hosting in the UCITs arena via its Management Company, Gemini Capital Management (Ireland) Ltd (GemCap), in Dublin .Currently it has approximately Euro 2Billion it hosts. Further information can be seen at www.gemini-im.com