November 2018 Issue
Following the publication of the Financial Conduct Authority’s (FCA’s) near-final rules for insurers and other FCA-regulated firms, the Senior Managers & Certification Regime (SM&CR) will finally apply to all FCA-regulated firms from December 2019 onward.
The FCA has confirmed the timetable for implementation: insurers must be compliant from 10 December 2018 and all other FCA-regulated firms from 19 December 2019, although that date is subject to confirmation by HM Treasury. The SM&CR will replace the Approved Persons Regime and the Senior Insurance Manager’s Regime.
Given the duration of the lead time and the extent of enforcement action available to the FCA to punish individuals, those financial institutions subject to the SM&CR should prioritise compliance. Though the regime offers the FCA no new powers for it to take enforcement action against individuals, it does clarify which senior management members are responsible for what. Statements of Responsibilities and Management Responsibilities Maps are being used by the FCA and the Prudential Regulatory Authority (PRA) to pinpoint who was responsible for what within a financial institution at any given time, including when things have gone wrong.
The regime’s focus
The SM&CR was first applied to banks and building societies in March 2016, in the wake of numerous high-profile financial scandals, most notably the global financial crisis. As such, the SM&CR was designed to extend regulatory accountability to senior managers within banks to corruption and to create a new culture of compliance in the UK’s financial sector. There was a focus on making it easier to hold individuals to account for their actions. SM&CR will also change hiring and HR practices, with amendments to existing appraisal processes, the introduction of regulatory references and conduct rules for virtually all employees, short of administrative staff.
Though the ‘Presumption of Responsibility’, which would have reversed the burden of proof in enforcement cases against senior managers, was removed from the SM&CR, the regime does introduce the ‘Duty of Responsibility’ which leaves the burden of proof with the FCA. As the regime draws nearer, firms should consider their current divisions of responsibility and identify potential gaps in accountability. The additional burden placed on senior managers, particularly with regard to ensuring that internal audit processes are adequate and compliant with the SM&CR, will also have a knock-on effect on directors & officers insurance and may ultimately impact remuneration packages. Furthermore, some senior managers may seek other protections and reassurances about their role. Institutions should be mindful of such issues, as well as attempts by some senior managers to try to contractually limit some of their responsibilities, thus unburdening themselves of the pressure of heightened regulatory scrutiny.
As a result of the initial successes of the regime, through the Bank of England and the Financial Services Act, the FCA has extended the SM&CR beyond banks, building societies, credit unions, investment firms and insurance firms to include all FCA-approved financial firms operating within the UK.
With the implementation date drawing closer, firms must continue to plan and prepare for the significant operational challenges of defining responsibilities, establishing processes around regulatory references and, potentially, interacting with the new ‘Directory’ set out by the FCA.
However, many firms remain surprisingly underprepared. According to Ecclesiastical Insurance, only 36 percent of brokers are aware of the changes brought about by the regime.
Until now, the FCA has taken a reasonably measured approach to enforcement. The number of open investigations is currently quite low, with the FCA being selective about the cases it pursues. But once the regime is expanded, this approach may change.
The potential impact of Brexit on the SM&CR must also be considered. Brexit has plunged both the UK and EU financial services markets into confusion. The original implementation date of the regime was 2018, however this has been slowly pushed back to the end of 2019. It is not out of the realms of possibility that the regime may be delayed again, given the uncertainty of the Brexit process. Indeed, the regime will require international firms with UK offices to adhere to the newly expanded laws. UK-based financial institutions that choose to relocate to the EU following Brexit will also create difficulties for the FCA and other regulatory bodies. What will happen if a senior manager is found to have breached the SM&CR then left the UK post-Brexit? Though the European Securities and Markets Authority (ESMA) is due to release guidance concerning the future relationship between the UK and the EU as it pertains to the SM&CR, there are still many questions to be answered.
Despite the uncertainty, firms should be well prepared. The new obligations set out within the SM&CR are largely in line with expectations, though the regime will impose significant operational requirements on implementation and ongoing business activities.
Last-minute preparations could become difficult and expensive, so early engagement with the regime will be key to achieving compliance.
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