The Senior Managers & Certification Regime for financial services firms

The Senior Managers and Certification Regime (SM&CR) applies to all Financial Services Markets Act 2000 (FSMA) authorised businesses including investment, asset management, mortgage broker and consumer credit companies.

What is the Senior Managers & Certification Regime?

The Senior Managers & Certification Regime is an accountability system focused on senior managers and individual responsibility.

SM&CR was developed by the Financial Conduct Authority (FCA), the regulator for 58,000 financial services firms and UK financial markets, following the 2007/08 financial crisis. It is part of an FCA drive to improve culture, governance and accountability within financial services firms.

The SM&CR applies to all Financial Services Act 2000 authorised business

The UK Parliament has amended legislation so that, since Monday 09 December 2019, SM&CR applies to all Financial Services Markets Act 2000 (FSMA) authorised businesses.

The amendment aims to improve conduct at all business levels, see that employees take greater personal responsibility for their actions, and to ensure that firms and employees understand and can show where responsibilities lie.

If your company provides almost any kind of financial service, for example, investment, asset management, mortgage brokerage or consumer credit, it is likely that you will need to comply with the Senior Managers & Certification Regime; bringing new responsibilities for HR services and processes.

How might your company be affected by SM&CR changes?

There will be three types of firm affected by the new regime changes:

• Core firms (most firms solo-regulated by the FCA are in this category);
• Enhanced firms (subject to the most requirements); and
• Limited scope firms (subject to the fewest requirements).

As with the previous Approved Persons Regime that requires FCA approval before senior and customer-facing employees can perform particular functions in a firm, certain types of company are subject to fewer requirements.

However, the FCA now expect all affected companies to apply some basic requirements, referred to as the ‘core regime’, which consists of three main parts:

1. Senior Managers Regime (SMR): focusing on a firm’s most senior people, all senior managers need to be FCA approved. Their FCA application must be accompanied by a statement of responsibilities, expressing what responsibilities and accountabilities the senior manager has. All senior managers are subject to a “duty of responsibility”.
2. Certification Regime: covering employees who are not senior managers, but whose roles can still have a significant impact on customers, markets or the company itself. Firms need to certify that such employees are fit and proper to perform their role on at least an annual basis.
3. Conduct Rules: these are high-level standards that apply to almost every person working in the financial services industry.

Employment law and HR considerations for SM&CR compliance

Review employment contracts

Employment contracts should seek to accurately reflect employees’ areas of responsibility and, where appropriate, set out contractual requirements for individuals as part of the SM&CR. This will give certainty to the parties and will give the firm the ability to manage the employee effectively.

A well-drafted employment contract will help to demonstrate to the relevant regulator that the firm complies with SM&CR. If you are seeking to amend existing contracts, you also need to consider consultation obligations.

Update compliance manuals

You must ensure that your compliance manuals and other internal documents (for example, board and committee structures) are updated to reflect the individual accountability regime.

Educate employees

Ensure that you train all employees impacted by the SM&CR on the conduct rules so that they fully understand their responsibilities.

Implement systems to use in a breach

You should have systems and controls in place to notify the FCA of a breach of the conduct rules, as well as to set out the appropriate disciplinary action.

Allocate prescribed responsibility

Ensure that you allocate prescribed responsibility for the firm’s conduct rules obligations.

Please note, although the SM&CR changes came into effect on 09 December 2019, the FCA has warned that these could still be amended by subsequent handbook changes; for example, relating to Brexit.