Shearman & Sterling LLP | Financial Regulatory Developments Focus | UK Conduct Regulator Issues Near-Final Rules on Extension of Individual Accountability Regime to All Financial Services Firms
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  • UK Conduct Regulator Issues Near-Final Rules on Extension of Individual Accountability Regime to All Financial Services Firms
    07/04/2018
    The U.K. Financial Authority has published Policy Statements confirming the rule changes it will apply to extend the application of the Senior Managers & Certification Regimes to all FCA solo-regulated firms (that is, firms for which the FCA is both conduct and prudential regulator). At this stage, the rules are near-final as they are subject to commencement regulations that will be made by HM Treasury and they may also be amended by subsequent changes related to, for example, Brexit or SM&CR optimizations. The FCA also plans to consult separately on rules for benchmark-related activities.

    The extended SM&CR will apply to all firms authorized under the Financial Services and Markets Act 2000 and regulated by the FCA, as well as EEA and third country (non-EEA) branches. SM&CR will be extended to FCA solo-regulated firms from December 9, 2019.

    While insurance intermediaries, which are solo-regulated by the FCA, will fall within the FCA's new rules, the FCA and the Prudential Regulation Authority have separately published policy statements on the extension of the SM&CR to insurers.

    The SM&CR was introduced in 2016 to strengthen individual accountability in the U.K. banking sector. The SM&CR currently applies to U.K. banks, building societies, credit unions, PRA-designated investment firms and branches of EEA banks and third-country banks operating in the U.K. HM Treasury issued a policy paper in October 2015 announcing the intention to reform and extend the SM&CR to all sectors of the U.K. financial services industry.The U.K. Parliament legislated in May 2016 to extend the SM&CR to all firms authorized under FSMA, replacing the existing Approved Persons Regime.

    The FCA's July and December 2017 consultations

    In July 2017, the FCA published a consultation entitled "Individual accountability: extending the SM&CR to all FCA firms." The consultation closed on 3 November 2017. In December 2017, the FCA set out proposals for applying the regime to employees of the firms that would be brought into the SM&CR, in a consultation entitled "Individual accountability: transitioning FCA firms and individuals to the SM&CR" and a consultation entitled "The duty of responsibility for insurers and FCA solo-regulated firms." Those consultations closed on 21 February 2018.

    Extending the SM&CR to all FSMA-authorized firms

    In its July 2017 consultation, the FCA had proposed rules designed to accommodate the wide variety of FCA-authorized firm types. The FCA proposed implementing:
    1. a "core regime" consisting of a standard set of requirements that will apply to all FCA solo-regulated firms;
    2. an "enhanced regime" which will apply extra requirements to the very small number of solo-regulated firms whose size, complexity and potential impact on consumers warrant more attention; and
    3. a reduced set of requirements which will apply to firms the FCA has categorized as "limited scope" firms.

    The FCA proposed that the core regime, the enhanced regime and the regime for limited scope firms would all contain tailored versions of the individual components of SM&CR that currently applies to banks, namely:
    • the Senior Managers Regime, comprising FCA pre-approval of senior managers, statements of responsibility and a duty of responsibility that will hold senior managers accountable for failures to take "reasonable steps" to avoid a breach;
    • the Certification Regime, which will require employers to conduct at least annual fitness and propriety assessments of employees that are captured by the regime; and
    • Conduct Rules, which consist of high level standards to be complied with by almost all employees.

    In Part 1 of its Policy Statement, the FCA explains that respondents to that consultation largely supported the proposed approach but that there were some suggestions for changes to the proposed rules and requests for clarification. The FCA will therefore be implementing its proposals largely as consulted on, subject to the following changes:
    • The rules relating to core firms included a prescribed responsibility to inform the governing body of their legal and regulatory obligations. Following feedback, this has been deleted;
    • The rules now set out a process for firms use to inform the FCA that they wish to apply voluntarily a higher regime tier;
    • The FCA has amended three of the enhanced criteria to smooth single year anomalies; and
    • The FCA has extended by six months (to 12 months) the time period for a firm meeting relevant criteria to implement the requirements for enhanced tier.

    Transitioning FCA firms and individuals to the SM&CR

    The FCA consulted in December 2017 on proposals for transitioning FCA solo-regulated firms and their staff to SM&CR. The FCA proposed a so-called "conversion process". For firms falling within the "core" regime and "limited scope" firms, the FCA proposed that conversion would be automatic. The result of automatic conversion would be that pre-existing approvals under the current Approved Persons Regime would automatically be converted to Senior Management Functions. For larger and/or more complex firms in the "enhanced" regime, the FCA proposed that the conversion process would require submission of a conversion notification, a statement of responsibilities and a responsibilities map. The consultation paper contained a tool for firms to check whether they fell into the core, enhanced or limited scope categories.

    In Part 2 of its Policy Statement, the FCA confirms that, following feedback, it proposes to implement the conversion process proposals largely as consulted on. However, it has made the following two changes:
    • the reporting period (REP008) for limited permission consumer credit firms will be aligned with their annual return; and
    • a number of regulatory forms have been amended.

    Duty of responsibility for FCA solo-regulated firms.

    The duty of responsibility is a component of the SM&CR that allows the FCA to take enforcement action against a Senior Manager where there has been a contravention of a relevant requirement by the Senior Manager's firm, in circumstances where the Senior Manager did not take such steps as a person in their position could reasonably have been expected to take to avoid the contravention occurring or continuing. The FCA updated its Decision Procedure and Penalties manual (DEPP) in May 2017 to set out guidance on how it on how it enforces the duty of responsibility.

    The FCA consulted in December 2017 on how it proposed to apply the duty of responsibility to senior managers of FCA solo-regulated firms. In that consultation, the FCA summarized some of the factors it took into account, in its earlier consultation in July 2017, when proposing only definitional changes and new guidance in its DEPP manual to reflect the extension of the duty to FCA solo-regulated firms.

    The FCA sought feedback on whether any further changes might be required. In its Policy Statement on guidance on the duty of responsibility, the FCA confirms that, following responses to that consultation, it remains of the view that that no further amendments to DEPP or its other rules are necessary for implementing the duty of responsibility, other than the definitional amendments and guidance consulted on.

    The transition process

    The FCA has separately published a Guide for FCA solo-regulated firms that will move to the new regime from December 9, 2019. Among other things, the Guide explains how the SM&CR applies to different types of firm and sets out implementation timescales. The FCA will contact firms ahead of the conversion window with its indicative assessment of their status based on the information that it holds. Firms must assess for themselves which level of the regime applies to them and, to ensure that they are allocated within the correct tier, must inform the FCA if they believe the FCA's indicative assessment is wrong.

    The rules include two transitional provisions to help firms move to the new regime:
    1. Firms must identify their Certification Staff at the start of the new regime, but have a further 12 months to complete the initial certification process.
    2. Senior Managers and Certification Staff will need to have been identified and trained and abide by the Conduct Rules from the start of the new regime, but firms will have 12 months to train their other staff on the Conduct Rules.

    View the FCA Policy Statement on extending the SM&CR to FCA solo-regulated firms FCA PS 18/14).

    View the FCA Policy Statement on guidance on the duty of responsibility for insurance and reinsurance firms regulated by the FCA, and FCA solo-regulated firms (FCA PS 18/16).

    View the FCA's SM&CR guide for FCA solo-regulated firms.

    View the updated Cost Benefit Analysis.

    View our summary of the July 2017 consultations.

    View our summary of the December 2017 consultations.

    View HM Treasury's 2015 Policy Paper on extension of SM&CR.

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