SM&CR Extension 2019
CP17/40 addresses the extension to all firms except banks (as they are already subject to the regime) and insurers (which are considered separately in CP17/41)1. It also considers the implementation for banks of the new Prescribed Responsibility for training staff on the Conduct Rules. In this bulletin, we highlight briefly some key issues arising from CP17/40, including the FCA’s indication that it has assumed the new rules will apply to solo-regulated firms in mid-to-late 2019. With MiFID II implementation imminent and Brexit preparations looming, this hint at delay will be welcomed by the industry.
We reported on the background of the SM&CR and the FCA’s earlier consultation on the extension to non-insurers2 in our briefing SM&CR: FCA proposes extension to all firms (July 2017). This explained the FCA’s proposal to apply the regime proportionately, depending on whether a firm is categorised as Core, Enhanced or Limited Scope. CP17/40 focuses on how the FCA will move firms and their senior staff over to the new regime.
Conversion of Approved Persons
Wherever possible, the FCA proposes to automatically convert most of the approved persons at Core and Limited Scope firms into the corresponding new Senior Management Functions; the FCA proposes a function mapping table for this purpose. This means the majority of firms will not need to submit anything to the FCA to make conversion happen. However, where a current non-executive Chair is approved under CF2 (non-executive director (NED) function), the firm will, exceptionally, need to submit a conversion notification (Form K) to convert the NED to the SMF9 Chair Function. This is because the FCA will not currently know whether the NED is carrying on a Chair Function.
In a process more aligned with the regime for banks, Enhanced firms will need to submit a conversion notification and accompanying documents (Statements of Responsibilities and Responsibilities Map) for all conversions.
By way of example, someone currently approved as a Director (CF1) will not need to reapply for approval to take on an Executive Director (SMF3) function, as long as they continue to perform the function; and, for Enhanced firms, the conversion notifications are made on time.
To maximise the transition period, the FCA proposes to keep open the deadline for conversion notices until one week before the start of the new regime. If conversion notices are not received by this time, the individual’s approval will lapse at the start of the new regime. In this event, re-application for approval would be necessary, involving the full SM&CR application process, including mandatory criminal reference checks and regulatory references. The firm may also be in breach of FCA rules by failing to have the required approved individuals for a period.
In CP17/40 the FCA gives detailed consideration of the relevant process firms should follow depending on whether or not there is a mapped function, a transfer to a new function or an additional function to be performed by the individual. The FCA also indicates its approach to applications for new approvals during the transitional period.
As a result of there being fewer individuals performing Senior Management Functions than current Approved Persons, there has been some concern expressed in feedback to the FCA about the reduced numbers of employees that will be recorded on the Financial Services Register on the extension of the SM&CR. While the FCA does not make any changes at this stage, it acknowledges the issue and indicates that it is considering its next steps in this regard.
Statements of Responsibilities (SoRs)
Although the FCA proposes to automatically convert most Approved Persons, every converted Senior Manager at a Core or Limited Scope firm must have a SoR ready at the time of conversion. This is the case even though the firm does not have to submit the SoR to the FCA on an automated conversion like Enhanced firms have to.
The Conduct Rules will apply to certified staff from the first day of the new regime applying. However, firms will have 12 months to complete their fitness and propriety assessment of certified staff and get the certification paperwork in place.
The FCA confirms that firms will not be required to obtain regulatory references for existing employees who will be performing the same role after the start of the new regime.
Other Conduct Rules staff
The FCA proposes to give firms 12 months from the start of the new regime to apply the Conduct Rules to their other Conduct Rules staff (that is, those not holding a Senior Manager Function or a Certification Function).
Extension of the duty of responsibility
In CP17/42 the FCA expands on its intention to extend the duty of responsibility which applies to Senior Managers of banks to insurers and FCA solo-regulated firms. As previously indicated in CP17/25, the FCA envisages applying the same criteria as it applies to banks (DEPP 6.2).
The FCA previously consulted on the introduction of a new Prescribed Responsibility for training staff on the Conduct Rules. This is a new Prescribed Responsibility to those firms already subject to the SM&CR. Therefore, the FCA proposes that this new Prescribed Responsibility should apply to banking firms earlier than the commencement of the extension of the regime (possibly Q4 2018). Banking firms will need to ensure that SoRs are amended where appropriate (using Form J for Significant Changes to an Approved Person’s responsibilities) and Responsibilities Maps are updated. This Prescribed Responsibility will apply to the remainder of firms when the SM&CR is extended to them.
When the new regime is implemented there will be a number of new and amended forms for use by firms which can be submitted through the FCA’s Connect system. The changes are highlighted in chapter 6 of CP17/40 and the FCA welcomes comments on its proposed changes.
The SM&CR does not apply to Appointed Representatives (ARs) (except for certain Limited Permission Consumer Credit firms that also act as ARs for other business). This is because the underlying legislation does not currently provide the FCA with the power to extend the regime to ARs.
The FCA asks for comments on its consultations by 21 February 2018. It aims to publish a Policy Statement in summer 2018. However, the date for the implementation of the new rules will be set by HM Treasury "in due course". For the purpose of the FCA draft rules that form part of the consultation papers, the FCA has assumed that the rules will apply to insurers in late 2018 and solo-regulated firms in mid-to-late 2019. This is the strongest indication yet that the implementation date is to be pushed into 2019 for most firms and gives implementation teams much needed breathing space in what is already a busy year to come.
1 CP17/40: Individual accountability: Transitioning FCA firms and individuals to the Senior Managers & Certification Regime and CP17/41: Individual accountability: Transitioning insurers and individuals to the Senior Managers & Certification Regime. The FCA has also published CP17/42: The Duty of Responsibility for insurers and FCA solo-regulated firms and the PRA has published CP28/17: Strengthening accountability: implementing the extension of the SM&CR to insurers and other amendments.
2 CP17/25: Individual Accountability: Extending the Senior Managers & Certification Regime to all FCA firms