Assessing vulnerability: How can firms help mitigate risks of DIY SIPPs?
You may already be familiar with the Senior Managers and Certification Regime (SMCR), which came
You may already be familiar with the Senior Managers and Certification Regime (SMCR), which came into force in March 2016, bringing a number of policy changes focused on increasing individual accountability in the banking sector. In May of the same year, Parliament also amended the Financial Services and Markets Act (FSMA), to extend SMCR to all firms authorised to provide financial services under FSMA. Now, the FCA has released a Consultation Paper (CP17/25), consulting on how it will apply the rules across the industry.
The SMCR regime will replace the current Approved Persons Regime and is further evidence of the regulator’s increased focus on culture and conduct as a tool to regulate a large swath of the industry with finite resources. The proposed Conduct Rules, applicable to all within the financial services industry, also reflect the increasing requirement for firms to ‘do more with less’.
The SMCR is aimed at reducing harm to consumers, strengthening market integrity by improving conduct at all levels within financial services firms and by making senior managers more responsible and accountable for their actions. The proposed introduction of the new approved ‘Senior Manager’ and certified ‘Significant Harm’ functions, along with the new powers under FSMA to write a set of enforceable basic conduct standards rules that apply to almost all employees, is expected to influence and drive the behaviours of everyone in the organisation
Given the significant increase in the number of firms that will be covered and the diversity and risks impact of the firms involved, the FCA is proposing a proportionate and flexible approach based on size and complexity thresholds as well as key factors such as firm type, structure and governance arrangements. However, firms should expect to see the same tools and principles that are applied to the banking sector as the FCA endeavours to bring greater consistency across the whole of financial services.
The FCA is planning to apply a standard set of requirements, known as the ‘core regime’ to all solo-regulated firms. Whilst most firms will only need to apply these core requirements, for a small number of solo-regulated firms whose size, complexity and potential impact on consumers requires greater attention from the FCA, additional requirements will be applied via an enhanced regime. Firms which the FCA describes as having ‘Limited Scope’ should expect a reduced set of requirements. However, this layering of core and prescribed responsibilities may effectively discourage firms from developing certain areas of the business because the costs of complying with these requirements will be a determining factor. There’s also a proportionately larger burden on smaller firms due to economies of scale.
To reinforce personal accountability, firms will have to submit a Statement of Responsibility to the FCA when a firm first applies for Senior Manager approval or when there has been significant change to a Senior Manager’s responsibilities. The FCA is also proposing to introduce Responsibility Maps to provide a collective view of the allocation of responsibilities across a firm, and to ensure that there are no gaps in the Statements of Responsibility. For all firms that fall under the ‘enhanced regime’, the FCA is proposing to introduce a position of ‘Overall Responsibility’, ensuring that every business activity has clear and defined allocation of responsibility and to prevent anything ‘falling through the cracks’. The impact of this is that Senior Managers could be held personally accountable, and may face enforcement, should there be a breach of the requirements, although the burden of proof will remain with the FCA. The recruitment market is likely to react to reflect the greater responsibilities and liabilities allocated to Significant Function and the Certification Regime by driving costs up and there may also be the potential for future litigation if a firm fails to consider how it balances its own liabilities with those imposed on key individuals.
Although the allocation of ‘Significant Harm’ functions will not require FCA approval, firms will be required to assess anyone carrying out a certified function, ensuring that the individual is fit and proper to perform the role. Fitness and propriety will be required to be evidenced and recorded and reviewed at least annually.
Whilst the FCA is consulting with various firms and industry bodies in the development of its final proposals, it is worthwhile doing something now to ensure that your firm is ahead of the curve. Below are some steps that you can take now to ensure a smooth transition:
As always, early intervention and a proactive approach will help you transition to the new regime.