The Government has confirmed that it will be pushing forward with extending the Senior Managers and Certification Regime to all financial services firms (including investment firms and fund managers), following the Fair and Effective Markets Review (FEMR) report’s recommendation (and Mark Carney’s Mansion House speech indication) of the extension of the SMR to fixed income, commodity and currency markets. The new regime (for insurers, the Senior Insurance Managers and Certification Regime, or SIMR) will come into force for banking and insurance sector firms from March 2016, leaving the discredited Approved Persons Regime (APR) in place for other financial sector firms.
The Government intends that implementation of the newly extended regime should come into operation during 2018, so there is much still to be finalised as the legislative and consultation process unfolds in the coming months. A key area will be the detail in the Government’s plans for how the ‘principle of proportionality’ will operate to take into account the diversity of firms in the sector – this will be a key area of interest for smaller financial services firms. As the shape of any universal senior managers regime is likely to follow the SMR and SIMR very closely, we would expect to also see similar grandfathering provisions to ease the transition.
We could see some senior individuals being allocated a significant number of prescribed responsibilities, requiring a restatement of roles and responsibilities, especially in smaller firms. Individuals will need to consider whether they have the information, systems, support and remuneration desired to meet any new regulatory demands made of them. Each firm is likely to be required to compile ‘responsibilities maps’, which will require them to formalise responsibilities and reporting structures. An unintended consequence of this formalisation could be that individuals become reluctant to take decisions without receiving appropriate sign-off. This could harm precious innovation and development in the financial sector, something that the FCA has been trying hard to foster and support through its Project Innovate initiative
Firms will take over the regulator’s current assessment role for individuals under the APR. However, this new ‘certification regime’ for those posing “significant harm” is likely to capture more individuals within its scope than those currently performing significant influence functions. Firms will need to consider whether (and what) additional resourcing will be required to bring such assessments in house. The impact here is likely to be felt the greatest in smaller firms. Although the FCA will continue to maintain a register of individuals subject to prohibitions, it is likely that firms will be required to notify the regulators of actual or suspected breaches of conduct rules and of any disciplinary action. We would expect to see firms reviewing their compliance toolkit (including management information and staff training) to ensure that these are fit for a more robust purpose. Firms will also need to consider their capabilities to investigate individual applicants using the regulatory reference system. Responsibility for making the correct decisions will rest with senior management.
The Government intends to introduce, as the FEMR recommended, enforceable conduct rules applicable to all non-ancillary staff in a firm, thereby adding the regulatory ‘bite’ to voluntary codes of market conduct. The FEMR also recommended guidance on minimum training and qualifications requirements, although flexibility here was envisaged (perhaps on proportionality grounds). We would be surprised if any future framework is more prescriptive than that for retail activities, but firms will likely need to review and possibly adapt their training programmes in light of any new guidance.
This blog is adapted from an article written by the team and recently published in Wealth and Finance International. Please contact Jacqui Hatfield on 0203 1162971 or email@example.com if you would like to discuss the issues raised in further detail.