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FCA and PRA consult on transitioning firms to SMCR

  • United Kingdom
  • Employment law
  • ES / Consulting
  • Financial services and markets regulation
  • Financial institutions

14-12-2017

The FCA and the PRA have published consultation papers on the following:

  • FCA CP17/40 – transitioning FCA firms and individuals to the senior managers and certification regime (SMCR)
  • FCA CP17/41 – transitioning insurers and individuals to the SMCR
  • FCA CP17/42 – the duty of responsibility for insurers and FCA solo-regulated firms
  • PRA CP28/17 – implementing the extension of the SMCR to insurers and other amendments

The consultation papers can be read here:

Consultation closes on 21 February 2018.

Read our briefing on the regulators’ consultation papers published in July 2017 on extending the SMCR.

Key points

  • The FCA is planning that insurers will need to transition to the SMCR regime in late 2018 and solo-regulated FCA firms in mid-late 2019 (actual commencement dates are not yet known).
  • Final policy rules are expected to be published in the summer of 2018.
  • The FCA proposes that approved persons whose controlled functions can be mapped to a senior manager function will be automatically converted.
  • Enhanced firms will also need to submit a statement of responsibilities and Form K conversion notification. Late submission will result in an application needing to be made through the new SMF regime including regulatory references and mandatory criminal records checks.
  • Conduct rules are proposed to apply to senior managers and certified staff from commencement of the new regime.
  • Firms will have 12 months to apply the conduct rules to ‘other conduct rules’ staff.
  • Details are set out of how the FCA plans to implement the new prescribed responsibility for training staff in firms already subject to the SMRC on the conduct rules.
  • The approved person regime will continue for appointed representatives.

Transitioning FCA firms to the SMCR: CP17/40

This consultation affects all FCA solo-regulated firms, as well as EEA and third-country branches. The equivalent proposed rules for insurers are set out in CP17/41.

The requirements for transitioning depend on whether a firm is classified as limited scope, core or enhanced (see our earlier briefing for details of these classifications).

The FCA sets out how it proposes to transition firms and individuals from the approved persons regime (APR) to the SMCR. Given the disparity in size and nature of affected firms, the FCA suggests a proportionate approach to conversion. Most approved persons at core and limited scope firms will automatically convert into the corresponding new senior management functions (SMFs).

The FCA has also reviewed feedback with regard to their proposal to only list individuals holding SMFs on the financial services register. Concerns were raised about the potential impact of excluding certified staff and the FCA is considering its next steps in this regard. This will also apply to insurance firms.

For the purpose of this consultation, the FCA assumes that the rules will apply to insurers in late 2018 and to solo-regulated firms in mid-to-late 2019. The Treasury will set the actual commencement dates in due course.

Approved persons

The FCA intends that approved persons should be able to convert to an equivalent SMF without the need for a firm to reapply. Firms should check the updated financial services register after the commencement of the new regime to ensure they hold the correct approvals after automatic conversion. If a controlled function does not map onto a corresponding SMF, regulatory approval is no longer required and existing approvals will lapse when the new regime begins. These individuals may become certified staff.

The APR continues right up until commencement of the SMCR and the FCA will be dealing with applications for approval up to that point.

Certified staff

The FCA plans to implement the rules for certification gradually. Some previously approved individuals will become certified staff under the new regime. The conduct rules will apply to all certified staff from commencement of the new regime so firms will need to know who their certified staff are by this stage.

The FCA proposes giving firms (enhanced, limited and core) 12 months from commencement to prepare to apply the conduct rules to ‘other conduct rules staff’.

Core and limited scope firms

As stated above, individuals at core and limited scope firms will be automatically converted wherever possible, with no action required by firms. This means that no additional checks (e.g. mandatory criminal records checks) will be required as these will already have been carried out. However the FCA suggests that firms consider whether any changes to approvals are required before commencement.

The FCA sets out in the CP how certain controlled functions will map onto equivalent SMFs.

Enhanced firms

Enhanced firms will need to submit statements of responsibilities and a responsibilities map to convert existing approved persons to new SMFs, together with a form K conversion notification. If a firm fails to submit a Form K it will be in breach of regulatory requirements, APR approvals will lapse and the firm will not have any SMR approvals. Firms in this situation would need to re-apply for approval of individuals through the full SMCR application process, including mandatory criminal records checks and regulatory references.

Where a firm wants a person to perform a SMF after commencement and they do not hold a mapped APR function they must submit the new SMCR Form A.

Firms should note that an application submitted to take effect on or after commencement will be subject to the majority of SMCR requirements, including criminal records checks but not regulatory references since these will only come into force on commencement.

Fitness and propriety

The FCA and the PRA have worked together to revise the fitness and propriety questions. These include adding a new question asking whether the candidate has ever participated in arbitration proceedings.

Banking firms: training staff

A separate chapter in the CP affects banks, building societies, credit unions and PRA-designated investment firms and sets out how the FCA will implement the new prescribed responsibility for training staff on the conduct rules.

This new prescribed responsibility means firms have to allocate responsibility to a senior manager, who must ensure that the firm meets its obligations (including the requirement to train relevant staff) under the conduct rules.

This prescribed responsibility applies to all firms under the extended SMCR but the FCA proposes to implement this new requirement for banking firms before commencement of the extended SMCR.

Additional matters

The FCA sets out changes to forms and notifications and introducing gender-neutral language.

Transitioning insurers to the SMCR: CPs 17/41, 28/17

The FCA and PRA consultation papers include proposals on rationalising and streamlining forms; implementing the extension of the SMCR to insurers (Solvency II firms, non-Directive firms (NDFs) and small run off firms); the process for transferring from a SMF from an insurance firm to a banking firm; the removal of gendered language from the SMCR.

The FCA’s proposed approach to converting approved individuals from the APR to the SMCR differs according to the type of firm and the extent to which the SMCR applies to that firm. The FCA consultation sets out full details of the process.

If the FCA currently approves a person for their role and the equivalent role exists under the SMCR, it will not be necessary to apply for re-approval.

The regulators propose that the requirement on insurers to certify employees performing certification functions as fit and proper would come into effect 12 months after the commencement of the SMCR for insurers. This means that firms would not need to obtain regulatory references for certified staff until the time they decide whether to issue a certificate to those employees.

The FCA proposes giving firms 12 months from commencement to prepare to apply the conduct rules to ‘other conduct rules staff’.

The FCA states that it will publish its final rules in a policy statement in summer 2018.

Duty of responsibility for insurers and FCA solo-regulated firms: CP17/42

This consultation relates to guidance on the duty of responsibility to insurance and reinsurance firms regulated by the FCA (insurers) and FCA solo-regulated firms.

The statutory duty of responsibility will be extended to senior managers of insurers and FCA solo-regulated firms on extension of the SMCR. The guidance set out in the Decision Procedure and Penalties Manual in the FCA’s Handbook (DEPP 6.2) will be extended to senior managers of insurers and FCA solo-regulated firms. The FCA does not believe that the guidance needs to be amended.

The FCA points out that when it is considering whether a senior manager has complied with the duty, it will look at whether they acted in accordance with their statutory, common law and other legal obligations including, but not limited to, the conduct rules and other Handbook rules.

The FCA also highlights the following:

  • It will decide whether to take action based on the duty of responsibility by applying its published criteria in DEPP
  • The FCA will not apply standards retrospectively or with the benefit of hindsight
  • Senior managers may be responsible for the management of activities at their firm that fall outside their prescribed responsibilities – the duty of responsibility will apply to this
  • All the considerations in DEPP 6.2.9 E-G are potentially relevant to an assessment of the steps reasonably expected of all senior managers whatever their role and responsibilities

For more information contact

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