In late 2015, the Treasury announced the Government’s proposal to extend the Senior Managers and Certification Regime (SM&CR), which came into effect for the banking sector on 7 March 2016, to all sectors of the financial services industry during 2018.

This will affect some additional 60,000 firms including insurers, investment firms, asset managers, insurance and mortgage brokers and consumer credit firms.

The key features of the SM&CR are:

  • A Senior Mangers Regime – an approval regime focused on senior management with requirements on firms to submit robust documentation on the scope of these individuals’ responsibilities. This replaces the discredited Approved Persons Regime.
  • A statutory duty of responsibility – a requirement for senior managers to take reasonable steps to prevent regulatory breaches in their areas of responsibility. This will be applied consistently to all senior managers. It will be for the regulators to prove the senior manager has failed to take such steps and as a result is guilty of misconduct.
  • A Certification Regime – a requirement on firms to certify as fit and proper any individual who performs a function that could cause significant harm to the firm or its customers. Certification occurs both on recruitment and annually thereafter. Unlike with the Senior Managers Regime, these appointments are not subject to prior regulatory approval but are subject to certification as fit and proper on an ongoing basis.
  • Rules of conduct – a power for the regulators to apply enforceable rules of conduct which reflect the standards to be expected of senior managers and certified persons and other relevant employees. Action will be taken where these rules are not complied with.

The new regulatory framework introduced by the SM&CR is intended to improve individual accountability for senior managers as well as providing a more effective and proportionate means to raise standards of conduct of key staff more broadly. It will create a more rigorous, comprehensive and consistent approach which will subsequently be applied across the regulated industry as a whole.

Proportionality will be key as the SM&CR is extended to the broader range of firms operating in the financial services industry. The regulators intend the extended regime to appropriately reflect the diverse business models operating in the UK market and to be proportionate to the size and complexity of the firms. Their proposals will be subject to consultation in due course.

It is expected that the expanded regime will entail:

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  • A reduction in the number of senior appointments that are subject to prior regulatory approval;
  • Most current Approved Persons below senior management level becoming certified persons;
  • Some additional costs being incurred by firms in implementing the new processes including in training employees in the conduct rules that will apply to them.

Comment

Once consultation on the extended regime is complete, firms will need to consider whether to take legal advice to ensure compliance as and when the new regime comes into force.

Senior managers will also want to carry out their own due diligence on the responsibilities they are given, or inherit, and again possibly take independent legal advice, before becoming subject to the regime.

Greg Standing is a partner at Gowling WLG