UK: Reform of the Senior Managers & Certification Regime

The Senior Management Function (SMF) assessment process

The FCA proposes to simplify the SMF assessment process by making changes to Form A (which firms must use to apply for an individual to perform SMF roles). The amended form will set out that some of the information requested can be reduced or consolidated where appropriate.

The PRA proposes to make it easier for firms to navigate and understand its requirements by creating an SMCR Policy Index on its website.

The 12-week rule

The 12-week rule allows firms to appoint an individual to cover for an absent SMF holder without being approved by the regulators, where the absence is temporary or unforeseen and the appointment is for less than 12 consecutive weeks.

The 12-week rule does not always give firms sufficient flexibility to manage changes in SMF holders. To address this, the regulators propose to change the rule to give firms 12 weeks to submit an application for an SMF, rather than 12 weeks to get a decision on an application. A person performing an SMF role under the amended 12-week rule would also be subject to the Senior Manager Conduct Rules (currently, the Individual Conduct Rules apply to someone in this position but the Senior Manager Conduct Rules do not).

The regulators also propose to update their guidance to clarify when the new 12-week rule can be used.

Criminal record checks

The FCA and PRA are proposing to increase the validity period of criminal record checks obtained for SMF candidates from three to six months.

The FCA also proposes to remove the requirement for firms to undertake criminal record checks where an existing SMF holder is applying for an SMF in the same firm or group.

Statements of Responsibilities (SoRs)

Currently, firms must submit updated SoRs to the regulators as and when they are updated to reflect significant changes in a senior manager’s responsibilities.

The FCA and PRA propose that instead, updated SoRs would need to be submitted within six months of a significant change in responsibilities. Solo-regulated firms would have the option to submit only the latest version of a SoR, while dual-regulated firms would need to submit all updated versions (i.e. if a SoR had been updated more than once within the six-month period).

Firms will still need to update SoRs as soon as significant changes are made to senior manager responsibilities.

Management Responsibilities Maps (MRMs)

To address concerns about having multiple versions of MRMs when making linked SMF applications, the FCA proposes to introduce guidance to clarify that firms can, in these circumstances, submit one MRM showing the future state that would apply assuming all the changes are approved.

The FCA is not proposing to change the scope of what should be included in MRMs at this stage. The FCA will consider further changes to simplify MRMs in phase 2.

The PRA proposes that firms should submit an updated MRM no later than six months following a significant change in the set of management responsibilities.

Certification Regime

The regulators’ proposed changes to the Certification Regime may only apply for a short time, in light of HMT’s consultation and the potential replacement of the regime (which are described below).

Clarifying expectations

The FCA and PRA are proposing to introduce guidance to clarify their expectations around certification and re-certification processes.

The FCA also proposes to introduce guidance to clarify that senior managers may need to be certified to perform certification roles, if the role is distinct and separate from their SMF role.

Removing overlap

The FCA acknowledges that there is overlap between certain categories of Certified Person. To address this, the FCA proposes to remove the requirement for separate certification as:

• an FCA Material Risk Taker where an individual at a dual-regulated firm is also certified by the PRA in one of its certification functions (Material Risk Taker, Significant Risk Taker, or Key Function Holder) at the same firm;
• an SMF holder where the individual is also certified as an FCA Material Risk Taker at the same firm;
• the manager of a certification employee where the individual is also certified as a Material Risk Taker at the same firm.

Directory of certified and assessed persons (Directory)

The FCA proposes to give firms 20 business days for most updates to the Directory. This would not apply to updates on staff departures, where the current seven business day notification period would continue to apply.

Regulatory references

The FCA is proposing to amend its guidance to reduce the recommended timeframe for providing a regulatory reference from six to four weeks. This would be guidance rather than a rule. The FCA’s expectation is that firms provide references on request as soon as possible. The PRA is not proposing to introduce a recommended time period for the provision of regulatory references.

The FCA also proposes to introduce guidance on what may need to be included in a regulatory reference if an employee leaves the firm before an investigation into potential misconduct was concluded.

The PRA proposes to introduce guidance to clarify that where an internal investigation into misconduct was commenced but disciplinary procedures were not concluded because the individual left the firm, firms should consider whether to include details of this in the regulatory reference.

SMF7 (Group entity senior manager) function

The SMF7 function applies to individuals who have significant influence over the management or conduct of the affairs of an entity in the group. Whether the SMF7 function is applicable depends on the specific situation at the particular firm and group.

In light of feedback about perceived inconsistency around its applicability, the FCA and PRA propose to introduce further guidance on the scope of the SMF7 function.

The PRA also proposes to extend the SMF7 definition to include controllers and representatives who apply significant influence over the day-to-day management or conduct of a firm’s affairs in relation to its regulated activities, regardless of the legal structure of the group. This change is expected to capture only a small number of individuals. The FCA is not proposing an equivalent change.

SMF18 (Other overall responsibility) function

The FCA proposes to amend its guidance to emphasise the considerations a firm should apply when determining if the SMF18 function applies. This change is expected to reduce the number of SMF18 applications. The FCA states that, as part of its SMF assessment process, it may challenge applications that do not appear to meet the SMF18 definition.

Prescribed Responsibilities (PRs)

The FCA proposes to introduce further guidance on splitting PRs between senior managers. The FCA expects that splitting a PR is more likely to be appropriate in larger firms with complex arrangements.

The FCA also proposes to introduce guidance on the allocation of FCA-designated PRs (including, for dual-regulated firms, PRs shared with the PRA), to provide transparency on what the FCA generally considers appropriate. The FCA does not expect firms to reconsider their existing PR allocations to align with the new guidance.

The FCA proposes to remove the restriction preventing solo-regulated firms from allocating PRs to SMF18s, as there may be cases in which it is appropriate to do so. The FCA is not proposing to apply this change to dual-regulated firms, which would need to apply for a waiver from both regulators to allocate PRs to SMF18s.

The FCA and PRA do not propose to remove or consolidate existing PRs at this stage, although this may be considered in phase 2.

Thresholds for becoming an Enhanced SMCR firm

The vast majority of firms are core firms, rather than enhanced firms, but there is a sense that inflationary rises have led to more core firms becoming enhanced firms, as three of the six criteria for becoming an enhanced SMCR firm are linked to financial criteria. To reflect inflation, the FCA proposes to:

• increase the existing three thresholds by 30%; and
• introduce a mechanism to update these thresholds every five years.

Conduct Rules

The FCA is aware of confusion among firms about the relationship between the Conduct Rules and disciplinary processes, and misunderstandings about when breaches need to be reported. To address these issues, the FCA proposes to introduce further guidance to:

• reiterate that firms only need to report Conduct Rule breaches where they have taken specified disciplinary action;
• highlight that the breach notification requirements in SUP 15.11 are separate to any other reporting requirements;
• outline matters that the regulator might expect notification about under Senior Manager Conduct Rule 4 (the requirement to disclose appropriately any information of which the FCA or PRA would reasonably expect notice);
• clarify the impact of legal privilege on Senior Manager Conduct Rule 4;
• clarify when cases in which a firm has suspended an individual, or reduced or recovered their remuneration, need to be notified; and
• clarify regulatory reference expectations where an individual has breached a Conduct Rule and disciplinary action was not taken.

The FCA also proposes to introduce guidance on:

• reporting Conduct Rule breaches and consideration of breaches;
• suspension of individuals and recovery or reduction of remuneration defined as ‘disciplinary action’;
• the impact of a Conduct Rule breach on the assessment of fitness and propriety and on regulatory references.

In phase 2, the FCA will consider further changes to streamline the process of reporting Conduct Rule breaches.