EXTENSION OF SMCR (CP17/25) (THE CP )

Transcription

1 ETENSION OF SMCR (CP17/25) (THE CP ) At long last, the FCA has published its proposals to extend the SMCR beyond deposit-taking banks and insurers to virtually all UK regulated firms. This document provides a high level summary of some of the key points of interest; and takes the form of Q&A. The reader is assumed to have a basic working knowledge of the key features of the current SMCR applicable to banking institutions. QUESTIONS 1. Does CP17/25 represent the FCA s final stance on this subject and are its proposals essentially now set in stone? No. CP17/25 contains a set of proposals which may of course change (to some degree at least) as a result of the consultation process 1. It might however prudently be assumed that the final rules are not likely to differ radically from these proposals. 2. Is there any point in responding to the consultation? That is a matter of individual choice. Some firms may wish to submit an individual response; others may prefer to rely upon industry bodies, such as the Investment Association, to make any salient points to the FCA, or elect not to respond in any way. 3. When does the extended SMCR go live? While the CP is silent on this point, it does give some clues. The subsequent FCA policy statement containing the finalised rules - is scheduled to be published in summer The FCA will separately consult on the operational aspects of the new regime, including transitional provisions. No date has been specified as yet ( later this year ); and presumably this will also be followed by a policy statement. 4. Will the SMCR apply on a functional or legal entity basis? It will apply on a legal entity basis. 5. Will the SMCR replace the current Approved Persons Regime in its entirely? Yes. 6. The FCA had previously stated that the extension of SMCR would be proportionate. What does proportionality mean in practice? In essence, firms will be split into one of three categories: (i) limited scope; (ii) core; and (iii) enhanced. (i) (ii) Limited scope firms will be subject to fewer requirements than core firms. This classification will apply to all firms that currently have a limited application of the Approved Persons Regime, including (amongst others): sole traders; internally-managed AIFs; limited permission consumer credit firms. A significant proportion of firms will be classified as core firms which will be subject to a baseline of SMCR requirements ( Core Requirements ). 1 Which closes on 3 November 2017.

2 (iii) Around 350 (of the largest, most complex or riskiest) firms will be classified as enhanced ; and will be subject to some additional rules. 7. Which firms will fall within the enhanced category? Significant IFPRU firms 2 CASS Large firms 3 Asset managers with AUM 4 of 50 billion or more (at any time in the last three years) Firms with total intermediary regulated business revenue of 35 million or more per annum Firms with annual regulated revenue generated by consumer credit lending of 100 million or more per annum Mortgage lenders (that is not a bank) with 10,000 or more regulated mortgages outstanding See ANNE A Firm Checker Flow Chart. 8. Can a firm be classified as enhanced even if it does not fall within any of the above categories? According to the FCA, there may be some firms that are large and complex, but do not meet the criteria above. In these instances, we may require a firm to comply with the enhanced regime; if we think these extra rules will help mitigate the risks posed by the firm. However, this will be done on a case-by-case basis and we don t anticipate that many firms will be required to do this. 9. Can the FCA exempt a firm from enhanced status even though it meets the criteria? Yes. A firm can apply for a waiver if it does not consider that the enhanced regime should apply to it. In practice, the firm would be expected to have strong grounds for obtaining exempt status. 10. Does the 50 billion or more AUM requirement apply on a legal entity or an aggregated basis? The draft rules stipulate that calculations must be made on a solo basis 5. While this is not entirely free from doubt, on one interpretation, this means that the requirement is to be assessed on an entity-by-entity basis. If this interpretation is indeed correct (and FCA clarification would certainly be welcomed), it may well result in an outcome whereby certain entities within a group are classified as enhanced, whereas others would be merely core notwithstanding that all (UK-managed) assets within the group are managed on a functional management basis. As a practical matter, some such firms may consider that adopting the higher enhanced standard across all of their UK regulated entities is the only feasible approach. 2 As defined in IFPRU 1,2. 3 As defined in CASS 1A.2.7R. 4 Assets under management are calculated in accordance with the method that must be used to calculate the amount to be recorded in data element 1A (total funds under management) in data item FSA038 (volumes and type of business). 5 Section 6.5R of the Annex to SYSC 23.

3 11. Is it possible for a firm to flip-flop between categories? Yes. The CP provides for such eventualities see sections (inclusive). 12. What are the key features of the Core Requirements? These are listed in full on pages 16 and 17 of the CP. Unsurprisingly, there are many conceptual similarities between the Core Requirements and the existing banking variant of SMCR for example: Senior Manager; Certification employee; and Conduct Rule staff tiers (a) (b) (c) Senior Manager: in relation to the carrying on of a regulated activity by a firm, a function which will require the person performing it to be responsible for managing one or more aspects of the firm s affairs, so far as relating to that regulated activity, and those aspects involve or might involve a risk of serious consequences for the firm, or for business or other UK interests Certified employee 6 : a certification function is one that requires the person performing it to be involved in one or more aspects of the firm s affairs, so far as relating to a regulated activity, and those aspects involve or might involve a risk of significant harm to the firm or any of its customers Conduct rule staff: all other employees, save for purely administrative staff (such as cleaners, receptionists and security guards) Statements of Responsibility for designated Senior Managers Designated Senior Management Functions ( SMFs ) 7 chief executive; executive director; partner (but not purely silent partners); chair; compliance oversight; MLRO Prescribed Responsibilities 8 - see ANNE B PRESCRIBED RESPONSIBILITIES Certification tier and process 9 Fitness and propriety 10 Conduct rules (which are identical to those applicable to banks) 11 see ANNE C Conduct Rules in Core Firms Duty of Responsibility for Senior Managers: (broadly) a duty on Senior Managers to take reasonable steps to prevent a regulatory contravention 6 This category includes: Material Risk Takers; anyone who supervises a Certified Function holder, but who is not a Senior Manager; the client dealing function (i.e. the current CF 30 function); and existing CF 29 (significant management). 7 Section 4.12 of the CP. 8 Section 4.37 of the CP. 9 Chapter 5 of the CP. 10 Chapter 6 of the CP. 11 Chapter 7 of the CP.

4 Senior Manager conduct rules (again, identical to those applicable to the banks) 12 Regulatory references What additional requirements apply under the enhanced category? Again, these are detailed on pages 16 and 17 of the CP. In summary, enhanced firms are subject to the following additional requirements 14 (on top of the Core Requirements): Handover procedures 15 Responsibilities Maps 16 Overall responsibility function (an additional SMF) 17 Additional set of SMFs 18 - chief finance function; chief risk function; senior independent director; chairs of the remuneration, risk, audit and (if there is one) nominations committees; group entity senior manager; chief operations function; other overall responsibility Additional set of Prescribed Responsibilities 19 - see ANNE B PRESCRIBED RESPONSIBILITIES See FCA schematic at ANNE D Senior Managers & Certification Regime Summary Diagram. 14. Where can I find the Conduct Rules and Senior Manager Conduct rules? In section 7.9 of the CP or ANNE C Conduct Rules in Core Firms. 15. Is the full set of Prescribed Responsibilities applicable to enhanced firms the same as that applying to Senior Managers of banks? No. There are some notable differences including the absence of the two culture-related Prescribed Responsibilities applicable in the context of banks. The table at ANNE B PRESCRIBED RESPONSIBILITIES summarises these differences. 16. Must certain Prescribed Responsibilities be allocated to certain types of Senior Manager, depending upon their executive or non-executive status? Yes. See, for example, sections 8.21 and 8.22, in relation to the enhanced regime. 12 Chapter 7 of the CP. 13 Section 6.12 of the CP. 14 Each of which also features in the current banking variant of SMCR. 15 Section 8.36 of the CP. 16 Section 8.33 of the CP. 17 Section 8.23 of the CP. 18 Section 8.16 of the CP. 19 Section 8.19 of the CP.

5 17. Is it possible for an overseas-based individual to be a Senior Manager? Yes. The Senior Managers Regime will apply to anyone who performs a Senior Manager role in respect of a UK-regulated entity whether they are based in the UK or overseas. 18. How are NEDs treated under the SMCR extension? All NEDs are subject to: (i) Conduct Rules 1-5 (inclusive) and Senior Manager Conduct Rule 4 (ii) (iii) Fitness and propriety requirements Regulatory references A NED who is a Senior Manager will also be subject to Senior Manager Conduct Rules 1-3 (inclusive) and the Duty of Responsibility. 19. Which NEDs will be Senior Managers? Under the Core regime, only the chair. Under the enhanced regime, the chair; senior independent director; chairs of the remuneration, risk, audit and (if there is one) nominations committees. 20. Is it possible for a Senior Manager to hold more than one SMF? Yes. 21. Can a Prescribed Responsibility be divided or shared? Only exceptionally and where appropriate and justified. 22. Who must be pre-approved by the FCA? Only Senior Managers. Certified employees must be assessed and certified as fit and proper by the firm on at least an annual basis. This requirement does not apply to NEDs (who will not be employees). 23. What is the territorial scope of the Certification Regime? For UK firms, the Certification Regime is limited to people performing a Certification Function who are either based in the UK or if based outside the UK are dealing (i.e. have contact) with UK clients. The only exception is in relation to Material Risk Takers under the Remuneration Code for these persons, there is no territorial limit. Incidentally, the FCA acknowledges that in complex global businesses such as asset managers drawing these lines can sometimes be difficult. We welcome specific feedback on this. See further the schematic at section 5.21 of the CP. 24. Are there any evidence requirements upon firms when assessing candidates for Senior Manager, Certification Functions or NEDs? Yes - see sections of the CP.

6 25. To what activities do the Conduct Rules and Senior Manager Conduct Rules apply? They apply to a firm s regulated and unregulated financial services activities (including any related ancillary activities). Incidentally, this is narrower than the requirements under the banking regime (where the Conduct Rules and Senior Manager Conduct Rules apply to everything someone does on behalf of a bank whether or not regulated, or linked to financial services. 26. What are the breach notification requirements under the extended SMCR? Firms must notify the FCA when disciplinary action has been taken against a person where this involved a breach of the Conduct Rules or Senior Manager Conduct Rules. For Senior Managers, this notification must be within 7 days of the firm becoming aware of the matter. For others, annually. 27. What is this new handover procedures requirement? Enhanced firms must 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 do their job effectively. One way of doing this use could be for the predecessor to prepare a handover note. Additionally, an enhanced firm must have a policy explaining how it complies with this requirement; and maintain adequate records of the steps it has taken. 28. Are there any training requirements? Unsurprisingly, yes. Firms must make individuals who are subject to the Conduct Rules aware that this is the case; and take all reasonable steps (through tailored training) to ensure that they understand how the rules apply to them. This is identical to the requirements under the bank regime. 29. Are EEA and Non-EEA branches affected by the SMCR extension? Yes albeit to different degrees. EEA branches will be subject to the least changes see sections (inclusive) of the CP. The proposed changes impacting upon EEA branches are set out at sections (inclusive) of the CP. See also ANNE E Senior Management Functions in EEA and non-eea Branches and ANNE F Prescribed Responsibilities for Non-EEA branches, which detail the applicable SMFs and Prescribed Responsibilities, respectively.

7 ANNE A FIRM CHECKER FLOW CHART

8 ANNE B PRESCRIBED RESPONSIBILITIES PRs under existing regime 1. Responsibility for the firm s performance of its obligations under the SMR 2. Responsibility for the firm s performance of its obligations under the employee certification regime 3. Responsibility for compliance with the requirements of the regulatory system about the management responsibilities map 4. Overall responsibility for the firm s policies and procedures for countering the risk that the firm might be used to further financial crime PRs under SMCR PR 1 Core PR 2 Core PR 8 Enhanced PR 4 - Core 5. Responsibility for the allocation of all prescribed responsibilities 6. Responsibility for: (a) leading the development of; and (b) monitoring the effective implementation of; policies and procedures for the induction, training and professional development of all members of the firm's governing body 7. Responsibility for monitoring the effective implementation of policies and procedures for the induction, training and professional development of all persons performing designated senior management functions on behalf of the firm other than members of the governing body 8. Responsibility for overseeing the adoption of the firm's culture in the day-to-day management of the firm 9. Responsibility for leading the development of the firm's culture by the governing body as a whole 10. Responsibility for: (a) safeguarding the independence of; and (b) oversight of the performance of; the internal audit function, in accordance with SYSC Responsibility for: (a) safeguarding the independence of; and (b) oversight of the performance of; the compliance function, in accordance with SYSC Responsibility for: (a) safeguarding the independence of; and (b) oversight of the performance of, the risk function, in accordance with SYSC R and SYSC 77.22R 13. Responsibility for overseeing the development, and implementation, of the firm's remuneration policies and practices, in accordance with SYSC 19D 14. Responsibility for the independence, autonomy and effectiveness of the firm's policies and procedures on whistleblowing, including the procedures for protection of staff who raise concerns from detrimental PR 9 Enhanced PR 10 Enhanced PR 11 Enhanced

9 PRs under existing regime PRs under SMCR treatment 15. Management of the allocation and maintenance of capital, funding and liquidity 16. The firm's treasury management functions 17. The production and integrity of the firm's financial information and its regulatory reporting in respect of its regulated activities 18. The firm's recovery plan and resolution pack and overseeing the internal processes regarding their governance 19. Responsibility for managing the firm's internal stress-tests and ensuring the accuracy and timeliness of information provided to the PRA and other regulatory bodies for the purposes of stress-testing 20. Responsibility for the development and maintenance of the firm's business model by the governing body 21. Responsibility for the firm's performance of its obligations under Fitness and Propriety in respect of its Notified NEDs PR 14 Enhanced PR 13 Enhanced 22. If the firm carries out proprietary trading, responsibility for the firm's proprietary trading activities 23. If the firm does not have an individual performing the Chief Risk function, overseeing and demonstrating that the risk management policies and procedures which the firm has adopted in accordance with SYSC 7.1.2R to SYSC 7.1.5R satisfy the requirements of those rules and are consistently effective in accordance with SYSC 4.11R 24. If the firm outsources its internal audit function, taking reasonable steps to ensure that every person involved in the performance of the service is independent from the persons who perform external audit, including: (a) supervision and management of the work of outsourced internal auditors; and (b) management of potential conflicts of interest between the provision of external audit and internal audit services 25. If the firm is a ring-fenced body, responsibility for ensuring that those aspects of the firm's affairs for which the person is responsible for managing are in compliance with the ringfencing requirements PR 12 Enhanced 26. Overall responsibility for the firm's compliance with CASS PR 5 - Core 27. Responsibility for implementing and management of the firm's risk management policies and procedures

10 PRs under existing regime PRs under SMCR 28. Responsibility for managing the systems and controls of the firm 29. Responsibility for managing the firm's financial resources 30. Responsibility for ensuring the governing body is informed of its legal and regulatory obligations PR 6 Core Enhanced firms not required to assign this PR as it is superseded by the additional PRs set out for enhanced firms on page 46 of the Consultation Paper

11 ANNE C CONDUCT RULES IN CORE FIRMS First Tier Individual Conduct Rules 1 You must act with integrity 2 You must act with due care, skill and diligence 3 You must be open and cooperative with the FCA, the PRA and other regulators 4 You must pay due regard to the interest of customers and treat them fairly 5 You must observe proper standards of market conduct SC1. SC2. SC3. SC4. Second Tier Senior Manager Conduct Rules You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice

12 ANNE D SENIOR MANAGERS & CERTIFICATION REGIME SUMMARY DIAGRAM

13 ANNE E SENIOR MANAGEMENT FUNCTIONS IN EEA AND NON-EEA BRANCHES Senior Management Functions in EEA branches SMF21 EEA Branch Senior Manager SMF17 Money Laundering Reporting Officer (MLRO) Senior Management Functions in non-eea branches SMF19 Head of Third Country Branch SMF3 Executive Director SMF27 Partner SMF16 Compliance Oversight SMF17 Money Laundering Reporting Officer

14 ANNE F PRESCRIBED RESPONSIBILITIES FOR NON-EEA BRANCHES 1 Performance by the firm of its obligations under the Senior Managements Regime, including implementation and oversight 2 Performance by the firm of its obligations under the Certification Regime 3 Performance by the firm of its obligations in respect of notifications and training of the Conduct Rules 4 Responsibility for the firm s policies and procedures for countering the risk that the firm might be used to further financial crime 5 Responsibility for the firm s compliance with CASS 6 Responsibility for management of the firm s risk management processes in the UK 7 Responsibility for the firm s compliance with the UK regulatory system applicable to the firm 8 Responsibility for the escalation of correspondence from the PRA, FCA and other regulators in respect of the firm to the governing body and/or the management body of the firm or, where appropriate, of the parent undertaking or holding company of the firm s group. 9 Responsibility for an AFM s value for money assessments, independent director representation and acting in investors best interests This PR only applies to AFMs. For further detail please refer to CP17/18 and MS15/2.3 Asset Management Market Study: Final Report.