Regulators publish plans for transitioning financial staff to senior managers' regime

Out-Law News | 14 Dec 2017 | 2:05 pm | 3 min. read

Plans for transitioning thousands of insurers and regulated financial firms and their staff to a new accountability regime have been published by the UK regulators.

Most staff at smaller, less risky 'core' and 'limited scope' firms will be transitioned automatically once the Senior Managers and Certification Regimes (SMCR) are extended across the financial services sector, according to consultation papers published by the Financial Conduct Authority (FCA). The transition process will be more onerous for 'enhanced' firms, which will be required to submit conversion notifications and 'responsibilities maps' setting out who is responsible for each function in the business to the FCA.

The conversion process will be slightly different for insurers, who are currently subject to the related Senior Insurance Managers Regime (SIMR). Firms subject to the Solvency II directive, large non-directive firms (NDFs) and insurance special purpose vehicles will transition automatically, while small NDFs and small run-off firms will be required to submit additional information to the FCA before they can transition, according to an insurance-specific consultation paper.

The extended SMCR will come into force at a date to be set by the UK Treasury, at which point the FCA and the Prudential Regulation Authority (PRA) will publish their final policies and rules. The FCA is working on the assumption that the regime will be extended to dual-regulated insurers in late 2018, and to solo-regulated investment, asset management and other firms in mid-to-late 2019.

The FCA and PRA consulted on how they would apply the extended regime to firms and individuals earlier this year.

The new rules, which will replace the older approved persons regime (APR) for these firms, will be a "significant change", both for the affected firms and for the oversight, management and work of senior individuals working in them, said financial services employment law expert Steven Cochrane of Pinsent Masons, the law firm behind Out-Law.com.

"Fewer individuals will require regulatory approval, but those who do will have clearer accountability – and, at the same time, more staff will fall within the FCA's conduct rules," he said. "Firms will also need to regularly assess and certify certain staff members' fitness and propriety."

"Some firms will be pleased that the FCA proposes an automatic transition for them, but 'enhanced' firms will need to submit an application to the SMCR, with supporting documentation," he said.

"Firms will need to understand the new requirements as they apply to that firm and how they differ from the firm's established practices, and then devise and work through a sensible programme of preparation to meet any likely commencement date for firms of the relevant type," said Graeme Standen, a remuneration and governance expert at Pinsent Masons.

"Some firms have probably been waiting for confirmation of details of the transition process to firm up and accelerate their preparations. They may now want to consider again whether they now know enough to proceed, and how comfortably they can realistically expect to be ready on the projected timetables sketched out in these consultations," he said.

The SMCR was introduced with the intention of making individuals at regulated firms more accountable for their conduct and compliance, and came into force for deposit-taking banks on 7 March 2016. The senior managers' regime requires firms to assign responsibility for certain areas of the business to named senior individuals, while the certification regime requires firms to annually assess the fitness and propriety of staff in certain roles. The regime also incorporates additional conduct rules, applicable to almost all staff.

The duty of firms to seek and provide regulatory references about potential recruits and former staff is also an important element of the SMCR, Standen said.

"Firms moving into the SMCR won’t need to seek any regulatory references for relevant staff who are already in post, even those 'enhanced' firms that actually need to send the FCA an application with supporting documentation in order to make the transition," he said. "But if an 'enhanced' firm fails to make that application before the SMCR starts to apply, it will subsequently need to submit an SMCR application as if it were a new firm, and for that purpose obtain all the necessary regulatory references."

"Once the SMCR is up and running, however, firms will need to obtain and provide regulatory references for new hires and former employees who move to work at other authorised firms," he said.

The FCA is also consulting on extending the 'duty of responsibility', which currently applies to senior managers at banks, to insurers and other solo-regulated firms. The duty of responsibility allows the FCA to take action against the senior manager for failures in their area of responsibility, unless the senior manager took reasonable steps to prevent that breach from occurring or continuing.

The regulator will also consider what the move to the new regime will mean for the financial services register, in response to concerns that this will only list senior managers rather than all regulated individuals once the new regime comes into force.

The consultations close on 21 February 2018.