Background to the Senior Managers Regime

The Senior Managers Regime (SMR), which is focusing currently on large deposit takers, came into force on 7 March this year, with several aspects of it being brought into play incrementally.

The FCA intends to roll out the SMR, which focuses on the most senior individuals in financial services firms who hold key roles or who have overall responsibility for entire parts of relevant firms, to the entire financial services industry by 2018.

As the FCA continues its work to embed a culture of greater personal responsibility and accountability it is inevitable the advisory profession will come under greater regulatory scrutiny.  Linda Todd

According to the FCA, the SMR means all regulated firms must:

■ Ensure each senior manager has a statement of responsibilities setting out the areas for which they are personally accountable.

■ Produce a firm responsibilities map that knits these together.

■ Ensure all senior managers are pre-approved by the regulators before carrying out their roles.

Within the SMR, the government has introduced a duty of responsibility. According to the FCA: “This means senior managers will be required to take the steps that it is reasonable for a person in that position to take to prevent a regulatory breach from occurring.”

The SMR forms part of the Bank of England and Financial Services Act 2016, which made provisions for the regulation of financial services on matters as disparate as pensions guidance and annuity payments, banknotes in Northern Ireland.

Part two of the Act covers both regulated firms and those who are regulating them. The Act makes particular provisions on the conduct of persons working in the financial services sector, covering:

■ Extension of relevant authorised persons regime to all authorised persons.

■ Rules about controlled functions: power to make transitional provision.

■ Administration of senior managers regime.

■ Rules of conduct.

■ Misconduct.

■ Decisions causing a financial institution to fail: meaning of insolvency.

Firms will, in addition to improving senior managers’ responsibilities, have to make sure there are proper certification procedures in place to assess the fitness and proprietary levels of individuals performing material risk-taking or customer harm roles.

There are also new conduct rules, under which all staff and firms must report suspected breaches to the regulator.

In a nutshell, Alexandra Roberts, senior policy adviser for the Association of Professional Financial Advisers, comments: “The new rules are designed to promote effective corporate governance and ensure those at the top of financial organisations are accountable for their actions.

“It increases personal accountability by shifting responsibility from the regulator to the firm for vetting and certifying most of the customer-facing staff.”

While the FCA’s former head of enforcement Tracey McDermott said in an interview with The Guardian in March 2016, the new regime was not about “trying to get heads on sticks”, the SMR will usher in a new wave of accountability and reporting of breaches.

According to Arpita Dutt, partner at Brahams Dutt Badrick French: “In a comment lifted straight from the pages of Game of Thrones, the FCA says the new regime is not designed to achieve ‘heads on sticks’.

“However, if processes are not implemented properly, the buck stops with the senior managers who have been appointed by the firms, with the 300-odd words each have agreed as their statement of responsibilities being the principles to which they will be held if things go wrong.”

How does this affect advisers?

While the majority of changes will currently affect only those money-holding firms with £250m or more in assets, including banks, credit unions and insurance companies, the FCA will make sure the principles apply across the whole industry.

Ms Dutt says: “Even if the SMR does not apply directly to your firm, it indicates the good practice principles the FCA wants the financial services industry to live by.”

It increases personal accountability by shifting responsibility from the regulator to the firm for vetting and certifying most of the customer-facing staff.  Alexandra Roberts

Moreover, the FCA has indicated that, from 2018, it expects to implement the SMR across the whole financial services industry, although the details on this are at best sketchy.

Linda Todd, head of operations for Bankhall, comments: “The SMR has initially focused on the banking sector.

“However as the FCA continues its work to embed a culture of greater personal responsibility and accountability throughout the whole financial services industry, it is inevitable the advisory profession will come under greater regulatory scrutiny.

“While the intention is to extend the regime to the entire industry during 2018, we are currently waiting for precise details regarding the shape this will take, as the government is keen for the FCA to consult with all affected stakeholders and consider the lessons learned through the implementation for banking sector firms.”

For Gill Davison, group regulatory director for Tenet, while the FCA has confirmed the SMR will be implemented across all regulated entities in two years’ time, as it is still to consult on the proposals, this is not something that advisory firms need to implement now.

However, she says: "It will emerge as an area for focus and review in coming months.”

Apfa’s Ms Roberts adds: “A date for consultation has not yet been announced but is likely to take place some time in 2017.

“While the detail of how these rules will apply to financial advisers is therefore not yet clear, given it is certain they will all move to the SMR regime, it is probably wise to start planning for the transition.

“Advisers will have to take on more regulatory responsibility and accountability, which means they will be burdened with greater compliance requirements and additional associated costs.”