Extension of the Senior Managers and Certification Regime: Part 2


Preparing for post-implementation
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.
From 9 December 2019, Financial Conduct Authority (FCA) solo-regulated firms will be subject to the Senior Managers and Certification Regime (SMCR). For many firms, much time and energy has been spent in preparing for the ‘day 1’ requirements of SMCR. But what should firms be doing to ensure they stay on top of their SMCR obligations?
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.
Embedding the certification process
The annual certification process of staff performing Certification Functions (Certified Persons) may not be an immediate action for firms but they should consider at an early stage defining the framework in which the certification assessment sits.
For many, the most straightforward approach will be to incorporate the assessment into the existing appraisal cycle. This will likely mean co-ordinating with the firm’s Human Resources department to determine how it will sit within the performance management framework and existing processes. Legal and Compliance teams should have input into the shaping of these assessments, paying particular regard to the interpretation of ‘fit and proper’.
Tweaking reporting procedures
Ad-hoc notifications will need to be made to the FCA where disciplinary action has been taken against Senior Managers for breaching the Conduct Rules. The FCA must be notified within seven business days of the conclusion of the action. Firms will, however, also be required to report on disciplinary action for breaches committed by other staff (except those in an ancillary role who are outside the scope of the Conduct Rules) on an annual basis. Legal and Compliance teams should therefore ensure that they have made the necessary changes to their regulatory reporting procedures and processes to capture this new requirement. It is important to remember that there is still a requirement to notify even where there has been no breach of the Conduct Rules during the reportable period.
For individuals other than Senior Managers, the data is reported via Gabriel (the FCA’s online reporting system) using the REP008 notification. Firms will be required to provide details as to the nature of the breaches and the disciplinary action that was taken. The majority of firms will be required to report in October, covering the period 1 September to 31 August. Limited Permission Consumer Credit firms will report in line with their reporting year, alongside their annual return. There are particular forms for use in relation to reporting on Senior Managers.
Onboarding and induction
It goes without saying that all relevant staff should be aware of their obligations under SMCR. Firms are required to train relevant staff on how the Conduct Rules apply to their role. Senior Managers and Certified Persons will need to have been trained on the Conduct Rules from the start, but firms will have 12 months in which to train other staff.
While existing employees will have been subject to training and awareness campaigns, this should not mean that the focus on SMCR becomes neglected over time, particularly as individuals come and go within the business.
Developing an appropriate onboarding and induction process with Human Resources will be vital in ensuring that new employees are made aware of the SMCR requirements, in particular the Conduct Rules, given their wide-ranging impact on all members of staff, not just those in the most senior positions.
Reviewing governance arrangements over time
The FCA has been clear that SMCR does not necessarily mean far-reaching and extensive revisions to firms’ existing governance arrangements. It is of course natural that as time goes on and a business grows, a firm’s governance framework will become increasingly more sophisticated. Reporting lines will change and new committee structures will form. SMCR should not necessarily dictate these changes but it is clear that how the firm is governed will be intrinsically linked to the operation of SMCR.
With the need to demonstrate reasonable steps and ensure appropriate oversight of delegated tasks, Senior Managers will be increasingly alive to the governance framework in which they operate and how it can best work for them. For many firms this will mean tweaking their governance arrangements to better document reporting lines, clearly distinguish the scope of committees within their terms of reference and review escalation procedures to ensure that what flows up to board level is appropriate and proportional.
It may be prudent to review at the six month and one year milestones of SMCR whether the governance framework is still fit for purpose within the context of SMCR. Any substantive changes made to a firm’s governance structure may mean that documents such as a Senior Manager’s Statement of Responsibilities or the Responsibilities Map require updating to maintain their accuracy.
Don’t forget about culture
In the urgency to ensure compliance with SMCR, it can be easy to forget one of the key drivers behind its implementation: achieving a healthy culture.
Firms should take stock at certain milestones to consider how SMCR has helped to improve culture. Creating and embedding a healthy culture is ultimately about doing the right thing, even when nobody is watching, regardless of what rules and requirements say. Firms should reinforce the message that SMCR is not necessarily a mechanism to create a healthy culture, but is there to enhance and complement.
Culture underpins the entirety of a firm’s business, from customer service agents right up to the board. The FCA is keen to stress that good boards and Senior Managers will set a positive tone from the top which will flow down to all other parts of the business. Senior Managers and other key personnel should assess whether they are taking into account culture when undertaking their day-to-day role, making key decisions and reviewing their areas of the business.
How Walker Morris can help
We are uniquely positioned to be able to help firms not only implement but continue to satisfy their SMCR obligations on an ongoing basis. We have extensive experience of working with regulated firms to review their corporate governance arrangements and assisting in relation to large-scale regulatory change projects. Should you have any queries arising from this briefing, or require any assistance, please contact Jeanette, who will be very happy to help.

The Conduct Rules and your staff
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 extension of the Senior Managers and Certification Regime (SMCR) on 9 December 2019 to Financial Conduct Authority (FCA) solo-regulated firms will mean that the majority of employees within financial services businesses will be subject to a set of new conduct rules (the Conduct Rules). It will not just be those in the most senior of positions whose actions and conduct will be measured against the Conduct Rules, as Jeanette Burgess explains.
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.
What are the Conduct Rules?
The Conduct Rules are split into two different tiers. Senior Managers, given the level of authority and responsibility they hold, are subject to both tiers whereas all remaining employees and directors (other than ancillary staff) are subject to the first tier only. Senior Manager rule SC4 applies to all non-executive and executive directors.
While the actions of individuals, and whether they amount to a breach of the Conduct Rules, will depend on a range of factors, outlined below is a non-exhaustive list of types of conduct which are likely to be susceptible:
Tier 1 – Individual Conduct Rules |
Examples of Poor Practice |
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Tier 2 – Senior Manager Conduct Rules |
Examples of Poor Practice |
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Training
While Senior Managers and staff carrying out Certification Functions are required to have undertaken training on the Conduct Rules in advance of SMCR implementation, all remaining staff must be trained on them by December 2020. It is therefore essential that firms begin to plan how to provide training to remaining staff ahead of this date.
The practical reality is that these remaining staff will almost certainly benefit from gaining an understanding of the Conduct Rules sooner rather than later. This will help to mitigate the risk of them inadvertently breaching a Conduct Rule simply because they did not understand it or were unaware of it.
Conduct outside of regulated activities
The application of the Conduct Rules is deliberately far-reaching and it is arguable that the FCA will look at how an individual conducts him- or herself in parts of the business that may be unregulated. This is an important consideration for some firms where the FCA-regulated element of the business is an ancillary service. For example, a Senior Manager who fails to pay due regard to a customer and treat them fairly in a completely separate unregulated side of the business may still be found to be in breach.
The challenge for firms will be in ensuring appropriate monitoring is undertaken to be able to readily identify breaches of the Conduct Rules in unregulated areas of the business. This may be achieved through specialised learning and development courses with Human Resources and relevant line managers so that they can make the link between disciplinary action and the Conduct Rules.
Reporting Conduct Rule breaches
Firms are required to report any disciplinary action taken against an individual for a breach of the Conduct Rules. The timing of these notifications will differ depending on the role of the individual concerned. For Senior Managers, notification must be made within seven business days of conclusion of the disciplinary action. This is done using Form D (if the individual will continue to act as a Senior Manager) or Form C (if the individual will be removed as a Senior Manager). In relation to all other staff, including those who perform Certification Functions, disciplinary action is reported annually using REP008 via the FCA’s Gabriel online reporting system.
Note that an annual notification about the Conduct Rules needs to be made even where there have been no breaches.
Embedding the Conduct Rules into the business
It would be sensible for firms to take proactive steps to help ensure that their employees follow the Conduct Rules in practice. Examples include updating code of conduct policies to specifically reference the Conduct Rules under SMCR and specifically drawing attention to the changes, incorporating clauses within employment contracts around adhering to the Conduct Rules (and indeed any other regulatory expectations), and incorporating employee compliance with the Conduct Rules into the appraisal cycle.
How Walker Morris can help
Should you have any queries arising from this or any of the other briefings in this SMCR series, please do not hesitate to contact Jeanette, who will be very happy to help. We are ready to assist firms with all aspects of SMCR compliance.