Senior Managers And Certification Regime

Question 1

The Financial Services (Banking Reform) Act 2013 implemented the SM&CR which replaced the Approved Persons Regime for UK banks, building societies, credit unions and PRA designated investment firms from March 2016. It was also extended to cover all solo FCA regulated firms from December 2019.

What does this new regime consist of?

Answer 1

SM&CR consists of:

1. Senior Managers Regime (SMR)
2. Certification Regime
3. Conduct Rules

Question 2

What is the Senior Managers Regime under the SM&CR?

Answer 2

1. It’s for individuals who are subject to regulatory, which requires firms to allocate a range of responsibilities to these individuals and to regularly assess their fitness and propriety
2. Assign clear responsibilities, check if they’re suitable/ fit and ensure they’re accountable for their actions.

Question 3

What is the Certification Regime under the SM&CR?

Answer 3

1. Requires relevant firms to assess the fitness and the propriety of certain employees who could pose a risk of significant time to the firm or any of its customers
2. Applicable to employees that hold significant responsibility in the firm e.g. financial advisors, traders, risk managers etc

Question 4

What are Conduct Rules under the SM&CR?

Answer 4

Replacing the statement of principle and approved person code, which are applicable to all staff, except for a few specific roles such as security, catering and cleaning staff (these roles are not directly involved in financial services)

Question 5

Under the Senior Managers Regime within the SM&CR - what are the three main types of responsibility that they have?

Answer 5

1. Senior Management Functions (SMFs) - key leadership roles e.g Chairman or CFO. They must be approved by the regulators (like the FCA or PRA).
   Once approved, they are subject to the Senior Managers Regime (are held accountable for their actions and decisions in these roles) .
2. Prescribed Responsibilities -
   Important tasks or duties that aren’t necessarily a Senior Management Function (like being the CFO) but are still really important for the firm.
   These responsibilities must be assigned to one of the senior managers (SMFs).
3. Key Functions -
   Important roles that don’t fall under SMFs or prescribed responsibilities but are still significant for the firm’s success or regulation.
   These also need to be allocated to a senior manager (someone with a Senior Management Function) who will take responsibility for them.

Question 6

What are Senior management functions under the SMR?

Refer to table on page 114 for PRA and FCA SMFs

Answer 6

1. SMFs are functions that “involve, or might involve, a risk of serious consequences for an authorised person or for business or other interests in the UK”
2. This includes non-executive directors or directors that make important decisions for the firm.
3. Regulators have designated the following functions as SMFs - Regardless of the specific SMF a senior manager holds, regulators (like the FCA or PRA) can take action against them if they fail in their duties or cause harm
4. Senior managers are subject to approval by the regulators before they carry out in SMF.
5. Each SMF will require a separate approval but, can be combined in a single application

Question 7

Briefly describe what Prescribed Responsibilities are under the SMR?

Answer 7

1. Each prescribed responsibility is assigned to one of the existing SMFs (except significant responsibility SMFs)
2. PRA may also require firms to allocate other responsibilities to a specific senior manager.

Question 8

What is a “significant responsibility SMF”?

Answer 8

1. Responsible for carrying out one or more key functions where these are applicable.
2. It applies to individuals to whom the board has delegated overall responsibility for a key function or identified risk which doesn’t fall under another SMF
3. They are responsible for reporting to the board about that function or risk.
4. Key functions must also be allocated between the significant responsibility SMFs

Question 9

When applying for an individual to be approved for an SMF (FCA or PRA) or whenever there is a significant change in a senior manager’s responsibilities -

what should the firm submit?

Answer 9

1. Statement of responsibility -
   A. State the responsibilities that the senior manager is to perform as part of the controlled function
   B. How they fit in within the firm’s overall governance and management arrangements
2. Responsibilities map -
   How the various responsibilities have been allocated
   Ensure no gaps in accountability
3. Other information -
   CV , job description, organisational charts and development plans

Question 10

A regulator can take individual enforcement action against any senior manager. If a firm reaches a regulatory requirement, the senior manager responsible for the area of the bridge can be held individually accountable.

Enforcement actions come from three different directions.

What are these?

Answer 10

1. Individual breach of the conduct rules - the senior manager personally breaks the rules about how they should behave
2. Being “knowingly concerned” in a contravention by the firm -
   senior manager is aware (or should have known) that the firm is breaking the rules but doesn’t do anything about it
3. A contravention of the rules in the area the senior manager is responsible for -
   If something goes wrong in the area that the senior manager is in charge of, and the firm breaks the rules, the senior manager can be held accountable for that failure.

Question 11

Briefly explain what the Certification Regime is under the SM&CR?

Answer 11

1. Applies to those individuals carrying out specific certification functions for a firm that have significant impact.
2. These functions are NOT Senior Management Functions
3. A firm needs ensure that employees DO NOT perform a Certification Function unless they have a valid certificate issued by the firm
4. Employee performing these functions should have a certificate that confirms that they are fit and proper to carry it out.
5. The certificate must be confirmed/ certified at least once a year.
6. Employees carrying out these functions will not be approved by the FCA.
7. Employee performing multiple certification functions - they must be assessed as fit and proper for all of them BUT, can be covered under a single certificate

Question 12

The Certification Regime applies to a wide range of individuals than the former APER regime.

The FCA Certification Regime applies to:

Answer 12

1. CASS oversight.
   - safeguard client assets
2. Proprietary trader.
   - buy/sell financial products
3. Significant management
   - responsibilities in key business areas
4. Functions requiring qualifications.
   - ensure proper training to provide advice
5. Anyone managing a certified person
   - understand rules/ responsibilities
6. Material risk takers.
   - affect firm’s finances significantly
7. Client dealing.
   - consider client’s best interest
8. Algorithmic trading.
   - design/ manage trading algorithms

Question 13

Briefly explain what the Conduct Rules are under the SM&CR?

Answer 13

1. These apply to all firms, and all staff within a firm except ancillary staff (cleaners/ receptionist)
2. They apply to both regulated and unregulated financial activities.
3. They apply to almost all FCA authorised farms from December 2019.

Question 14

The Conduct Rules under SM&CR are split into two tiers.

What are these?

Answer 14

1. First Tier - 6 rules that apply to everyone
2. Second Tier- 4 rules that apply to only senior managers

The Senior Manager Regime rule 4 also applies to all non-executive and executive directors.

Question 15

The First Tier of the Conduct Rules within SM&CR contains six rules that apply to everyone.

List what these rules are

Answer 15

1. Act with integrity.
2. Act with due care, skill and diligence
3. Be open and cooperative with the FCA, the PRA and other regulators
4. Pay due regard to the interests of customers and treat them fairly.
5. Observed proper standards of market conduct.
6. Act to deliver good outcomes for retail customers’ where the activities of the firm fall within the scope of the customer duty (good outcomes for retail customers)

Question 16

The Second Tier of the Conduct Rules within SM&CR contains four rules that apply to only senior managers.

List what these rules are

Answer 16

SC 1: Make sure the part of the business you are responsible for is controlled effectively

SC 2: ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system

SC 3: ensure that any delegation of your responsibilities is to an appropriate person that you oversee the discharge of the delegated responsibility effectively

SC 4: disclose appropriately any information of which the FCA or PRA would reasonably expect notice