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Extension of the Senior Managers and Certification Regime: Part 1

Extension of the Senior Managers and Certification Regime: Part 1

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The impact on onboarding and exit procedures of Senior Managers

This briefing is part of a series in which we explore some of the practical […]

This briefing is part of a series in which we explore some of the practical considerations and realities for solo-regulated firms in light of the incoming Senior Managers and Certification Regime.

With the introduction of the Senior Managers and Certification Regime (SMCR) on 9 December 2019 for Financial Conduct Authority (FCA) solo-regulated firms, firms will need to consider additional requirements both when onboarding a new individual who holds a Senior Management Function (a Senior Manager) and when a Senior Manager departs the business.

The proportional application of SMCR means that some firms will be subject to fewer prescribed requirements, while others will be subject to all the necessary requirements. This briefing is written from the perspective of a firm subject to the Enhanced Scope of SMCR, however firms subject to the Limited Scope and Core Scope application may nevertheless consider all the points covered as examples of good practice, even if they are not strictly required. Some of the requirements will also apply in relation to employees carrying out a Certification Function.

The FCA’s comprehensive Guide for FCA solo-regulated firms sets out further detail. Many of the sections in that guidance contain helpful “Things to consider” bullet points. Firms should also consult the FCA’s dedicated webpage for solo-regulated firms.

Onboarding process

While the appointment of a Senior Manager will likely be led at committee or board level, the practicalities around onboarding the prospective Senior Manager will likely rest with the Human Resources department.

The recruitment and onboarding process for Senior Managers should look different to the process for recruiting and onboarding the rest of the employees in the firm. The process itself will be considerably more protracted given the need to undertake appropriate due diligence on the fitness and propriety of a prospective Senior Manager, carry out a criminal record check and apply for FCA approval (including a Statement of Responsibilities document clearly setting out the Senior Manager’s role and responsibilities).

A firm hiring a new Senior Manager will be required to request regulatory references of the individual from their previous employer going back six years. Regulatory references must be provided in a prescribed form. Firms should ensure that their systems and processes have been updated to complete and provide regulatory references when requested in the prescribed manner.

A Human Resources department should have a defined induction process for any new Senior Manager. It is vital that the induction considers the implications of the departure of the outgoing Senior Manager on the incoming Senior Manager, including the facilitation of a handover meeting as described below. For Senior Managers who have not been Senior Managers previously, an induction on the expectations and responsibilities under SMCR and the Conduct Rules should be provided.

Outgoing process

Change is inevitable and, where a Senior Manager has made the decision to move on, a defined framework should be in place to ensure an orderly transition.

Firms subject to the Enhanced Scope of SMCR are required to take all reasonable steps to ensure that a person taking a Senior Manager role has all the information and materials they could reasonably expect to have to do their job effectively. This handover procedure will often be done through a formal document, the form of which should be agreed between the outgoing Senior Manager and the appropriate governance committee, including the board of directors if necessary. The temptation may be for the outgoing Senior Manager to draft this document as part of their exit process, however far better practice is to mandate that Senior Managers treat this document as a “living will” document which is updated on an ongoing basis throughout the Senior Manager’s time at the firm. This allows for a more complete and accurate record of the risks and issues relevant to their business area. It can also act as a contingency plan should the Senior Manager leave the firm unexpectedly.

A good handover document may include the following:

a judgement of the risks in the business area
the level of resourcing and capabilities within the team
how the Senior Manager discharges their duties
any regulator interaction or scrutiny that has occurred within the business area (or the business as a whole if relevant)
any concerns the Senior Manager has about a particular part of the business area or the business as a whole
the reporting lines, both for the Senior Manager themselves and the employees working within the business area.

Many incoming Senior Managers will benefit from supplementing this handover document with a meeting to discuss pertinent issues with the outgoing Senior Manager. Where possible, the firm should attempt to facilitate a handover meeting to ensure that the incoming Senior Manager is fully aware of and understands the risks relevant to their area of the business.

Firms should clearly document the requirements of handover procedures in their suite of policies to ensure that all Senior Managers are aware of the steps they will need to take.

As already discussed, if an outgoing Senior Manager leaves to join another firm subject to SMCR, firms will be required to provide a regulatory reference going back six years. One practical consideration to note is the need to update regulatory references if new information comes to light about the former Senior Manager. For example if it is discovered that serious misconduct occurred while the Senior Manager was at the firm, the regulatory reference that was provided to the Senior Manager’s new firm may now need to be updated. Firms should establish a process to ensure the timely and accurate reporting of changes to regulatory references to other regulated firms.

Notifying the FCA of changes to Senior Managers

SMCR maintains the requirement that prospective Senior Managers must be approved by the FCA. Similarly a firm should attach the same level of care in respect of outgoing Senior Managers and ensuring the appropriate notification is made to the FCA.

Diligence around the notification process prevents issues in the future, such as where it is discovered that a former Senior Manager was not removed at the time of their departure and the current Senior Manager has been performing their duties for a number of years without the requisite FCA approval.

Note that Statements of Responsibilities must be kept up to date and resubmitted to the FCA whenever there is a significant change to a Senior Manager’s responsibilities. A list of this and other relevant notification forms can be found at Annex 3 of the FCA’s Guide.

How Walker Morris can help

We have extensive experience of assisting firms with their implementation of SMCR requirements and providing advice on the governance and other arrangements firms and Senior Managers can make to ensure compliance with the FCA’s rules and expectations. Should you have any queries arising from any of the points covered in this briefing, or require any assistance, please do not hesitate to contact Jeanette, who will be very happy to help.

Fitness and propriety of Senior Managers and Certified Persons

This briefing is part of a series in which we explore some of the practical […]

This briefing is part of a series in which we explore some of the practical considerations and realities for solo-regulated firms in light of the incoming Senior Managers and Certification Regime.

Fitness and propriety will not be an entirely new concept for firms or for those individuals holding Senior Management Functions (Senior Managers) when the Senior Managers and Certification Regime (SMCR) comes into force on 9 December 2019 for Financial Conduct Authority (FCA) solo-regulated firms.

Individuals are required under the current Approved Persons Regime (APR) to be fit and proper but as we enter a new era promoting individual accountability and responsibility, firms should consider revisiting how they approach fitness and propriety in both their Senior Managers and those employees who fall within the Certification Regime (Certified Persons).

Fitness and propriety

Firms are required to ensure that anyone performing a Senior Management or Certification Function is fit and proper for their role. The requirement also applies to Non-Executive Directors who are not Senior Managers, except in Limited Scope firms. Firms must assess these individuals on an ongoing basis, at least once a year. The FCA’s expectations around fitness and propriety can be found within the FIT (Fit and Proper test for Employees and Senior Personnel sourcebook) part of the FCA Handbook. Considerations include:

honesty, integrity and reputation;
competence and capability (including whether the individual satisfies any relevant FCA training and competence requirements); and
financial soundness.

These expectations are largely the same as they were under the APR but the onus now lies with the firm to determine whether an individual is fit and proper. This inevitably leads to questions as to how these expectations should be interpreted.

Many firms will already have a code of conduct for employees, likely to be found within the employee handbook, however Human Resources departments may wish to consider adopting a standalone fitness and propriety policy to better enshrine the FCA’s expectations.

Certified Persons

Firms will be required to conduct an annual assessment of Certified Persons to confirm that they continue to meet the fitness and propriety requirements. As discussed above, the burden in determining whether an individual is fit and proper will rest with the firm. For many firms it may be suitable to factor the annual certification process into the employee appraisal cycle to ensure minimal disruption. Firms should establish a series of key tests to help measure fitness and propriety. Documenting the rationale behind these tests is highly recommended should the firm be subject to regulatory scrutiny at any point.

Honesty, integrity and reputation

Arguably it will be the interpretation of ‘honesty, integrity and reputation’ that firms may struggle with the most when determining whether a Senior Manager or Certified Person meets the fitness and propriety requirements.

The majority of enforcement action taken by the FCA in the context of fitness and propriety relates to individual’s criminal convictions which tend to be more clear-cut when a firm is determining whether that individual is fit and proper. The FCA has, however, in recent years begun to expand the scope of fitness and propriety to capture the actions of individuals outside of their employment. The example of Jonathan Paul Burrows in 2014 is a good illustration. Mr Burrows was employed by Blackrock Asset Management Investor Services Limited as a Managing Director and was an Approved Person under the APR. It was discovered that he had evaded train fares and ultimately reached an out of court settlement of £43,000 with Southeastern trains. The FCA subsequently issued a Final Notice against him, banning him as an Approved Person on the basis that his actions demonstrated a “lack of honesty and integrity and, as such, he has failed to meet the FCA’s Fit and Proper Test for Approved Persons”.

The FCA’s decision has far-reaching consequences for firms when determining whether an individual is fit and proper. The challenge for both existing and prospective personnel is the potential for their lives outside of work to come under scrutiny as firms look to satisfy themselves that they are a fit and proper person.

How Walker Morris can help

We have extensive experience of advising financial services firms on the consequences of poor conduct and fitness and propriety matters in relation to both incoming and existing personnel. Please contact Jeanette if you require any assistance with navigating the regulatory expectations around the fit and proper requirements and/or in developing your policies, processes and procedures.

The Duty of Responsibility and demonstrating reasonable steps

This briefing is part of a series in which we explore some of the practical […]

This briefing is part of a series in which we explore some of the practical considerations and realities for solo-regulated firms in light of the incoming Senior Managers and Certification Regime.

The introduction of the Senior Managers and Certification Regime (SMCR) on 9 December 2019 for Financial Conduct Authority (FCA) solo-regulated firms will bring with it the Duty of Responsibility and, by extension, the need for individuals holding a Senior Management Function (Senior Managers) to take reasonable steps.

The Duty of Responsibility

Every Senior Manager has a Duty of Responsibility under the Financial Services and Markets Act 2000, which means that if a firm breaches one of the FCA’s requirements, the Senior Manager responsible for that area could be held accountable if they failed to take reasonable steps to prevent or stop the breach. The Duty of Responsibility is designed to enshrine the shift to individual accountability.

Each Senior Manager must clearly understand the remit of the business area that they are responsible for. This will, in part, be achieved through clear Statements of Responsibilities and, if required, Responsibilities Maps. The onus, however, should be on the Senior Manager to satisfy his or herself that they have sufficient seniority throughout their area of responsibility should the need arise for action to be taken.

What are reasonable steps?

Inaction, just as much as action, can lead to culpability and it is therefore sensible that Senior Managers not only take reasonable steps but also that they are able to effectively demonstrate how and why they acted in a particular way should the need arise. The then Chief Executive of the FCA, Martin Wheatley, commented in a March 2015 speech that “for senior managers, most of the steps you’d expect them to take appear common-sense, frankly. Behave with integrity; delegate appropriately; make sure you understand your business area; and comply with common law, existing rules and legal obligations” when discussing the FCA’s initiatives in enhancing individual accountability.

While Martin Wheatley’s comments provide some insight as to regulator expectations, unsurprisingly the FCA does not provide exact clarification on what may constitute reasonable steps. The term is left deliberately flexible and non-prescriptive. What is reasonable will depend on the context and will vary according to the facts of each individual case. Clearly every scenario will be different depending on the size of firm and type of business, the particular responsibilities of that Senior Manager and the nature of the issue, or potential issue, at hand. As the FCA explained in its July 2018 policy statement Final Guidance: the Duty of Responsibility for insurers and FCA solo-regulated firms, the guidance at 6.2.9-E of DEPP (the Decision Procedure and Penalties Manual) provides a lengthy and expressly non-exhaustive list of considerations that the FCA will take into account in assessing whether a Senior Manager’s actions were reasonable in all the circumstances.

Regulatory action

The Duty of Responsibility permits the FCA to take enforcement action against a Senior Manager where it can demonstrate that:

misconduct occurred within the Senior Manager’s firm
at the time of the misconduct (or during any part of it), the Senior Manager was responsible for the management of any of the firm’s activities in relation to which the misconduct occurred
the Senior Manager did not take reasonable steps to avoid the misconduct occurring or continuing.

Where the FCA wishes to take enforcement action against a Senior Manager, the burden of proof in respect of each of these elements rests with the FCA. Regulatory action can range from suspensions to monetary penalties depending on the severity of the breach. In certain circumstances the FCA will take action against both the relevant Senior Manager(s) and the firm itself.

Demonstrating reasonable steps as a Senior Manager

Despite the breadth of reasonable steps and the multitude of decisions that could be taken, a Senior Manager’s initial consideration should be proportionality. A Senior Manager in a relatively small financial services firm will not be able to, and arguably will not be expected to, take certain actions by virtue of the resources available to them. A Senior Manager should therefore take stock of the resources, capacity and capabilities at hand as soon as possible to assist them in understanding the confines within which they are working.

Following this assessment a Senior Manager can then begin to take steps, where needed, that are not only reasonable but appropriate and proportional to the area of the business for which they hold responsibility. A Senior Manager may wish to consider, depending on specific circumstances, taking some of the following measures:

For incoming Senior Managers, reading the outgoing Senior Manager’s handover note can be a quick way of getting an early impression of the challenges and potential issues pertinent to the business area.
Effectively challenging and scrutinising key decisions made by the Senior Manager’s team will help to show that the business area is not run unthinkingly. Offering a considered opinion on matters is an important step in showing that the decision-making process has been thoroughly thought through.
The abundance of Management Information (MI) can be unhelpful, but understanding which parts are relevant to the business area can be an effective way of capturing potential issues before they crystallise into something far worse. Senior Managers should be proactively reviewing relevant MI to help inform decision-making.
SMCR and the concept of individual accountability does not do away with the need to delegate but it equally does not absolve a Senior Manager when the delegated task creates issues. Where delegation occurs, the Senior Manager should maintain oversight of the task(s). This can include periodically set meetings, daily updates or reports. Any delegation should be done in a clear manner so that there is no ambiguity as to which members of the team hold certain actions, tasks and deliverables and where the reporting lines exist.
Visibility of other business areas, which the Senior Manager may not necessarily be responsible for, can be a useful way of understanding pertinent risks to the business as a whole. Working in a collaborative manner with other departments and Senior Managers can help identify issues (before they escalate) and potential solutions. A second pair of eyes can offer an objective view on matters and assist in deciding what further steps should be taken.
A Senior Manager should be prepared to escalate issues to other business areas, the relevant governance committees and, if the severity of the issue warrants, to board level.
Senior Managers should be proactive in managing and escalating resource and capability issues within their business area. If the lack of employees or gaps in knowledge is hindering the Senior Manager’s ability to effectively manage and mitigate risk, this will often prevent the individual from taking reasonable steps.

How Walker Morris can help

We have extensive experience of assisting both firms and individuals to effectively navigate the requirements of SMCR and, previously, the Approved Persons Regime. Please contact Jeanette if you require any assistance in developing your policies, processes and procedures, or you require any insight or guidance on how your Senior Manager population can best take reasonable steps so that they, and you, can stay on the right side of the FCA.

Contacts

Jeanette Burgess, Partner, Regulatory & Compliance

Jeanette Burgess
Partner
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