The FCA has now published its long-awaited consultation paper on the extension of the Senior Managers and Certification Regime ("SMCR") to all FSMA authorised firms (CP17/25). The proposals will apply to almost every firm regulated by the FCA and come after the SMCR was introduced for banks, building societies, credit unions and PRA-designated investment firms, insurance firms and UK branches of foreign banks, last year.

Since then the FCA has published feedback on how these firms have been implementing the regime, and guidance on the duty of responsibility and regulatory references, on which we have previously reported - Part 1 and Part 2. 

The FCA recognises it would not be appropriate to make all firms subject to the same rules as banks. So while all firms will be subject to the same principles, the rules are designed to be sufficiently proportionate and flexible to take account of the different business models and governance structures of firms.

Structure of the regime applying to all firms

The FCA is proposing that firms will fall into one of 3 categories for the purposes of the SMCR:

• A standard set of requirements will apply to all firms regulated only by the FCA, known as the 'Core Regime'
• A small number of firms (which the FCA estimates will be around 350) regulated only by the FCA whose size, complexity and potential impact on consumers warrant more attention will have extra requirements, known as the 'Enhanced Regime'; and
• A reduced set of requirements will apply to a group of firms, referred to as 'Limited Scope'

All core requirements will apply to all firms regulated by the FCA, except for Limited Scope Firms. Firms that are also regulated by the PRA must comply with both regulators' rules.

The core regime

This consists of the same 3 parts as the existing SMC:

Senior Managers Regime

The FCA Handbook will define which roles are Senior Management Functions ("SMF") (the current proposal is for Chair, Chief Executive, Executive Director, Partner, Compliance Oversight and MLRO) for which individuals must be approved by the FCA before taking up their role. Every Senior Manager must have a Statement of Responsibilities and they will have a duty of responsibility. The CP recognises that many firms in the Core Regime won't need to apply all of the Senior Management Function and so only those that are appropriate will need to be allocated.

Firms will also have to allocate each of the 7 Prescribed Responsibilities to the Senior Manager who is the most senior person responsible for that issue.

The Senior Managers regime will apply to anyone who performs a SMF role irrespective of whether they are based in the UK or overseas.

Certification Regime

Employees who are not Senior Managers but whose role means it is possible for them to cause significant harm to the firm or its customers are part of the Certification Regime. These individuals will not be pre-approved by the FCA but firms must certify that they are fit and proper to perform their role at least once a year. The guidance in the FIT Handbook in respect of the Approved Persons Regime will be extended to SMFs and Staff in the Certification Regime.

There will be 8 Certification Functions, including proprietary traders, CASS oversight function, client dealing function and material risk takers. The FCA recognises that in very small firms there will be no one in the Certification Regime if there are only a handful of senior individuals (who will be SMFs) and some administrative staff.

The Senior Management Certification Function will apply to someone with significant responsibility for a significant business unit. It is for firms to decide whether a business unit is significant, although there are some factors in the Handbook to assist in determining this.

The Certification Regime applies to individuals performing a Certification Function who are based in the UK or based outside the UK but dealing with UK clients, with the exception of material risk takers under one of the Remuneration Codes (to whom the regime always applies).

Firms will need to request a reference from all previous employers in the past 6 years for those applying for SMFs, Certification Functions and non-approved Non-Executive Director roles. They will also have to disclose certain information going back 6 years including details of disciplinary action taken due to breaches of Conduct Rules, retain records of disciplinary and fit and proper findings for 6 years and share information with other firms in a standard template.

Conduct Rules 

The same high-level standards of behaviour that are drawn from existing principles under APER and the Principles for Business that apply to banks and insurers will apply to individuals in all firms. Some Conduct Rules apply to all employees (other than a prescribed list of ancillary staff to whom the rules do not apply) while others only apply to Senior Managers.

Firms are required under FSMA to train their staff so that they know how the Conduct Rules apply to them.

The Enhanced Regime

Extra requirements will apply to firms that are 'significant investment (IFPRU) firms', CASS Large firms, those with Assets Under Management of £50 billion or more, those with total intermediary regulated business revenue of £35million or more per annum, firms with annual regulated revenue generated by consumer credit lending of £100million or more per annum, and mortgage lenders that are not banks with 10,000 or more regulated mortgages outstanding.

Enhanced Regime firms will need to apply all of the requirements under the Core Regime, plus:

• Additional SMFs to be pre-approved, e.g. chief operations function, chief risk function, chair of remuneration committee, risk committee and audit committee
• Additional Prescribed Responsibilities
• A Senior Manager must have overall responsibility for every area, business activity and management function of the firm
• A Responsibilities Map setting out the firm's governance arrangements; and
• Handover arrangements for incoming Senior Managers so that they have all the information and material they could reasonably expect in order to do their job, including the adoption of a policy explaining how the firm complies with this requirement

Limited Scope firms

Firms that are currently subject to a limited application of the Approved Persons Regime will be a Limited Scope Firm for the purpose of the SMCR.

Fewer SMFs will apply to Limited Scope Firms. The current Apportionment and Oversight Function under the Approved Persons Regime will be renamed the Limited Scope Function. If firms currently only need to have some controlled functions approved by the FCA, this will continue under the new regime.

Prescribed Responsibilities will not apply to Limited Scope Firms.

Changes for banks, building societies and PRA-designated investment firms

A new Prescribed Responsibility will be introduced so that all firms, including those already subject to the SMCR, will need to allocate responsibility for ensuring the firm trains its staff in the Conduct Rules and complies with the FCA notification requirements.

The new Partner SMF will also apply to banking firms.

Comment and next steps

Many firms will breathe a sigh of relief that the requirements of the SMCR will be less extensive than those that apply to banks. Most firms will have fewer SMFs and Certification Functions and will not need to prepare a Responsibilities Map. There is still a lot of work to be done before the rules come into force next year.

Firms will need to review management responsibilities and job descriptions to ensure that Senior Managers know exactly where their responsibilities lie. They should also consider whether they have appropriate training in place to ensure staff understand what is expected of them under the Conduct Rules and appoint a Senior Manager to be responsible for this.

The FCA has invited responses to its consultation paper to be submitted by 3 November, with the regime expected to commence 'from 2018'. Firms should familiarise themselves with the proposals now if they wish to comment on the rules before they are finalised.

We have already been advising clients on how they can prepare for the extension of the SMCR and would be happy to discuss any aspect of the proposals and the regime more generally.