CLIENT MEMORANDUM Extensin f the Senir Managers and Certificatin Regime by the UK s FCA Des the SM&CR apply t my firm and what des it entail? August 2, 2017 AUTHORS Jseph D. Ferrar Nichlas Bugler Andrew Trmans Henrietta de Salis Summary On July 26, 2017, the Financial Cnduct Authrity (FCA) published a press release tgether with cnsultatins which include its prpsals t extend the Senir Managers and Certificatin Regime (SM&CR) t practically all regulated firms. In essence, the FCA intends that the SM&CR will apply t all firms ffering financial services in the UK, including firms authrised in the UK and incming branches f nn-uk-authrised financial services firms, and will replace the current Apprved Persns Regime. The SM&CR has applied t banks, building scieties, credit unins and Prudential Regulatin Authrity (PRA)-designated investment firms since March 2016, and the FCA nw intends t extend its applicatin t (re)insurers, ther investment firms, asset managers and insurance intermediaries, amng thers. The regime will have a particular significance t the senir managers f the firms whse respnsibilities fall within the SM&CR (Senir Managers). Senir Managers will be expected t take persnal respnsibility fr their actins and shuld therefre take careful nte f what the regime entails. 1
Extensin f the Senir Managers and Certificatin Regime by the UK s FCA Cntinued Des the SM&CR apply t my firm? The FCA cnsultatin dcument prvides a useful diagram fr firms t use t determine whether and t what extent the SM&CR will apply. We have replicated this diagram belw fr reference. T ensure that the regime is prprtinate t all firms t which it will apply, a cre regime f specific requirements will apply t mst firms (Cre Firms). In additin, fr larger and mre cmplex firms, an enhanced regime will apply with extra requirements; hwever, these extra requirements will apply t fewer than 1% f firms (Enhanced Firms). In respect f firms wh have limited permissins and are currently subject t a limited applicatin f the Apprved Persns Regime, the SM&CR will als apply but n a mre streamlined basis (Limited Scpe Firms). The SM&CR will nt apply t Appinted Representatives. The FCA ntes that it will cnfirm hw it will apprach the SM&CR fr Appinted Representatives in a fllw-up cnsultatin paper. Hwever, principals f such Appinted Representatives, including the Senir Managers f such principal firms, shall remain fully respnsible fr ensuring that their Appinted Representatives cmply with the FCA s rules. 2
Extensin f the Senir Managers and Certificatin Regime by the UK s FCA Cntinued Scpe f the SM&CR The SM&CR applicable t the remainder f financial services firms will nt be identical t that which currently applies t banks, building scieties, credit unins and PRA-designated investment firms. Whilst the same tls and principles will be emplyed, the new regime is intended t be flexible and prprtinate t the different size and type f firms t which it will apply, since these firms will inevitably have different business mdels and gvernance structures. There will be three main parts t the SM&CR which will apply t every firm: 1. Five cnduct rules. These cnduct rules will apply t all financial services staff within the firm, requiring individuals t: act with integrity; act with due care, skill and diligence; be pen and cperative with the regulatr; pay due regard t custmer interests and treat custmers fairly; and bserve prper standards f market cnduct. 2. Respnsibility f Senir Managers. The respnsibilities f the Senir Managers will be clearly set ut and, in the event that smething ges wrng that is within a certain Senir Manager s purview, that persn will be held persnally t accunt. As with the current Apprved Persns Regime, all Senir Managers will be apprved by the FCA and appear n the Financial Services Register. Further details regarding the Senir Managers regime are set ut belw. 3. Certificatin regime. In additin t the regime fr Senir Managers, under the certificatin regime at least nce per year firms will assess and cnfirm the fitness, skill and prpriety f thse individuals wh are nt Senir Managers but whse jbs significantly impact custmers r firms. Fcus n individual respnsibility f Senir Managers The FCA makes it very clear in its press release that the new regime is abut individuals, nt just institutins. Jnathan Davidsn, Executive Directr f Supervisin Retail and Authrisatins at the FCA, has stated that the regime will ensure that individuals in financial services are held t high standards and that Senir Managers are accuntable bth fr their wn actins, and fr the actins f staff in the business areas that they lead. This clearly represents the shift in perspective f the regulatr frm the firm t the individuals that wrk within it and the Senir Managers in particular. In preparatin fr the intrductin f these rules, firms will have t cnsider their management and gvernance structures t ensure that they are ready fr the full impact f the SM&CR. The FCA rules will establish certain rles within a firm as Senir Management Functins. All persns wh perfrm Senir Management Functins will need t be apprved by the FCA, as under the current Apprved Persns Regime. Firms will als need t ensure that they satisfy themselves internally that Senir Managers are suitable t cnduct their respective rles. The fllwing Senir Management Functins will apply t all firms: 3
Extensin f the Senir Managers and Certificatin Regime by the UK s FCA Cntinued Gverning functins SMF 9 Chair SMF 1 Chief Executive SMF 3 Executive Directr SMF 27 Partner Required functins SMF 16 Cmpliance Oversight SMF 17 Mney Laundering Reprting Officer SMF 29 Limited Scpe Functin (relevant t sme Limited Scpe Firms nly) Hwever, a number f firms will nt need t apply all f the Senir Management Functins utlined abve. Fr example, a sle trader will nt need t have any f the gverning functins. Similarly, fr limited permissin cnsumer credit firms, if they are currently nly required t have an individual carrying ut the Apprtinment and Oversight Functin under the Apprved Persns Regime, ging frward they will nly be required t appint a Senir Manager t perfrm the analgus Limited Scpe Functin under the SM&CR. In this way, the regime shuld be cmmensurate t the size and cmplexity f each specific firm. Each Senir Manager will have a dcument which sets ut the matters fr which they are persnally respnsible and accuntable. There are certain specific respnsibilities that a firm will need t give t its Senir Managers (referred t as the Prescribed Respnsibilities), which are applicable t all firms (except Limited Scpe Firms). Where smething ges wrng in respect f a matter fr which that Senir Manager is respnsible, the FCA will lk at whether the Senir Manager tk reasnable steps t stp that errr frm ccurring. As such, Senir Managers will need t ensure that there are rbust lines f reprting within their business areas, such that they can infrm themselves f all actins taking place that fall within the scpe f their regulatry respnsibilities. Withut this, Senir Managers will find themselves persnally accuntable fr matters f which they are nt aware and culd be subject t penalties. Fr Enhanced Firms, there will be an Overall Respnsibility requirement, whereby the firm must ensure that every activity, business area and management functin has a Senir Manager respnsible fr it. This will include additinal Senir Management Functins such as a Chief Finance Functin, a Chief Risk Functin and a Chief Operatins Functin, amng thers. Each Senir Manager will als be respnsible fr additinal Prescribed Respnsibilities. Such firms will need t have a map which sets ut the firm s management and gvernance arrangements t shw hw they meet these criteria. 4
Extensin f the Senir Managers and Certificatin Regime by the UK s FCA Cntinued Next steps All firms which are regulated by the FCA will need t pay clse attentin t the details f the FCA s cnsultatin paper in rder t establish if and t what extent the SM&CR will apply t the firm, its Senir Managers and its ther emplyees. In particular, firms will need t review their current management and gvernance structures t ensure that they are ready fr the full impact f the SM&CR. The Willkie team wuld be happy t address any questins that clients and friends may have n the new regime and hw it will apply t yur firm. In additin, respnses t the FCA s cnsultatin n the extended applicatin f the SM&CR are due by Nvember 3, 2017. The Willkie team intends t prvide input and we wuld be happy t cnsider and reflect any cmments that clients and friends may wish t make n the prpsals. If yu have any questins regarding this memrandum, please cntact Jseph D. Ferrar (+44 20 3580 4707, jferrar@willkie.cm), Nichlas Bugler (+44 20 3580 4704, nbugler@willkie.cm), Andrew Trmans (+44 20 3580 4715, atrmans@willkie.cm), Henrietta de Salis (+44 20 3580 4710, hdesalis@willkie.cm), r the Willkie attrney with whm yu regularly wrk. Willkie Farr & Gallagher LLP is an internatinal law firm with ffices in New Yrk, Washingtn, Hustn, Paris, Lndn, Frankfurt, Brussels, Milan and Rme. The firm is headquartered at 787 Seventh Avenue, New Yrk, NY 10019-6099. Our telephne number is (212) 728-8000 and ur fax number is (212) 728-8111. Our website is lcated at www.willkie.cm. August 2, 2017 Cpyright 2017 Willkie Farr & Gallagher LLP. This memrandum is prvided by Willkie Farr & Gallagher LLP and its affiliates fr educatinal and infrmatinal purpses nly and is nt intended and shuld nt be cnstrued as legal advice. This memrandum may be cnsidered advertising under applicable state laws. 5