SM&CR – Less than a year to go: What is it and why does it matter?

Following the parliamentary review of the financial services sector resulting from the 2008 financial crisis, the UK government looked to replace the existing UK Approved Persons Regime with one more focused on senior managers and individual responsibility. The result was the creation of the Senior Managers and Certification Regime (SM&CR) which, for banks, building societies, credit unions and PRA (Prudential Regulation Authority) -designated investment firms, has been in force since March 2016. From 9th December 2019, this Regime will be extended to cover all FCA (Financial Conduct Authority) solo-regulated financial services firms. It will also affect international firms where those firms have UK operations.

For the avoidance of doubt, H M Treasury has estimated that 17,200 Investment Firms (including stockbrokers, securities and futures firms, asset managers, family offices and financial advisers) will be affected.  This will impact on 106,000 Approved Persons, 43,900 future Senior Managers and 62,000 certified persons, many of whom will be our members. That’s a lot of people and ranks this alongside MiFID II and PRIIPs as one of the more comprehensive new regulations to land in our sector in recent times.

The main aim of this regime is the reduction of harm to investors and the strengthening of market integrity by raising the standards of conduct for everyone who works in financial services, and by making senior people in firms more responsible and accountable for their conduct, actions and competence. The regime shifts the responsibility of activities within a firm onto senior managers and brings into scope Non-Executive Directors.

Several recent research studies, not least PIMFA’s own Millennial Forum, now renamed as the Under 40 Forum, have revealed that trust in our sector is still very low across the board, particularly amongst the young. SM&CR seeks, at least in part, to address this by raising the standards of governance, increasing individual accountability, particularly at senior management level, ensuring that firms and their internal teams clearly understand and can demonstrate where their responsibility lies, thus evoking a cultural change within firms whereby internal teams take personal responsibility for their actions.

In widening the scope of their in-situ regime for Relevant Authorised Persons, the FCA intend to create a level playing field across the financial services sector by tailoring the existing principles to reflect the different risk profiles, impacts and complexities of the firms newly subject to the extension. These firms will be categorised, depending upon size and profile, into three separate groups – Core, Enhanced and Limited Scope. The regime will apply differently to each group.

In describing the effect of SM&CR the FCA, in their Guide for FCA Solo-regulated Firms, state that “A key feature of the SM&CR is to reinforce that firms need to take responsibility for their staff being fit and proper to do their jobs. Our Handbook requires firms to make sure anyone performing a SMF or a Certification Function is fit and proper for their role. This requirement also applies to NEDs who are not Senior Managers, except in Limited Scope firms. Once someone is in such a role, firms must assess them on an ongoing basis, and at least once a year.”

PIMFA has published our Guide to SM&CR, which is designed to help firms navigate through and implement the enhanced requirements. This works in tandem with the existing Training and Competence briefing which is currently available here.

SM&CR will be a major project for all firms, large and small, and will impact in some form on the majority of staff working within investment firms. Despite the fact that the implementation date is not until the end of 2019, there is a significant amount of work required to achieve full and timely compliance and planning for the transition should ideally begin now. However, once this has been achieved, there is every reason to believe that this regime will ultimately enhance trust in our sector and provide better outcomes for the nation’s savers and investors.

Originally published by Money Marketing, March 2019