RegulationJul 26 2017

FCA reveals how advisers will be hit by senior manager rules

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FCA reveals how advisers will be hit by senior manager rules

The Financial Conduct Authority has today (26 July) set out details of how the senior managers regime will apply to financial advisers.

The regulator has not yet set a date for when the rules will commence but it expects to publish final rules next year following a consultation which kicked off today (26 July).

Under the regime, anyone who holds a senior management function at an advice firm will need to be approved by the FCA and every senior manager will need to fill out a statement of responsibilities explaining what they are responsible for.

This will need to be approved by the FCA when it is first filled out and when there are changes to it.

The regime sets out a series of “prescribed responsibilities” which firms will need to give their senior managers, but these will not apply to some firms – including sole traders of firms – and larger firms will have more responsibilities.

Culture and governance in financial services and its impact on consumer outcomes is a priority for the FCA.Jonathan Davidson

Earlier this year FTAdviser reported on concerns about how appointed representatives would be affected by the regime, since they might not be listed if their network becomes their “senior manager” on the grounds that it handles members’ compliance.

The FCA has not addressed this issue in today’s consultation but has said it will confirm how it intends to approach the regime for appointed representatives in a follow-up consultation paper – though it has not indicated when this will be published.

Jonathan Davidson, executive director of supervision, retail and authorisations at the FCA, said: “Culture and governance in financial services and its impact on consumer outcomes is a priority for the FCA.

“The extension of the senior managers and certification regime is key to driving forward culture change in firms.

“This is about individuals, not just institutions. The new conduct rules will ensure that individuals in financial services are held to high standards, and that consumers know what is required of the individuals they deal with.”

The FCA has published five conduct rules which will apply to all financial services staff at FCA-authorised firms.

This set of rules means individuals must act with integrity, act with due care, skill and diligence, be open and cooperative with regulators, pay due regard to customer interests and treat them fairly, and observe proper standards of market conduct.

Under the certification regime, staff at firms which carry out some roles will have to be certified by the FCA, but firms will be responsible for this.

This includes those with a “significant management function”, those with “functions subject to qualification requirements” – including mortgage advisers, investment advisers and pension transfer specialists – and any person dealing with clients including those who advise on investments, deal and arrange deals in investments and who act in the capacity of an investment manager.

The regime sets out a number of senior management functions including chief executive, partner, compliance oversight and money laundering reporting officer.

Sole trader firms with no employees – which fall into a category called 'limited scope firms' – will only need to have the compliance oversight rules.

There are seven 'prescribed responsibilities' – which will not apply to limited scope firms – including making sure the firm carries out its senior managers regime obligations, making sure it complies with the conduct rules and making sure it complies with the certification regime.

The FCA has made clear that firms which outsource some operational functions will remain fully responsible for its obligations under this regime, adding that responsibility cannot be outsourced and firms will have to explain who this responsibility is allocated among its senior managers.

Emily Benson, partner and head of financial services regulation at law firm TLT, said: "The components of the existing and new regime are broadly the same, but the FCA has tailored the regime currently in place to reflect the differences between different financial sectors.

"Creating parity across a multi-faceted industry with sectors that present varying degrees of risk to the UK economy was never going to be a simple task.

"The FCA has been toiling with the intricate balancing act between the need, as an effective regulator, to hold individuals to account, with its responsibility as a proportionate regulator to not create an excessive burden on the industry.

"The proposals create a level of responsibility that many firms that are new to the regime will not be used to, placing the burden firmly on the management to be able to demonstrate that they have taken reasonable steps to prevent problems when something has gone wrong.

"It remains to be seen whether this balancing act will be endorsed by the industry or judged as a step too far.

"Regardless of what happens after the consultation period, which ends on 3 November, it is clear that firms need to prepare for some critical milestones and get ready for a step-change in their internal policies and procedures. 

"For the wider audience, I wouldn't be surprised to see a wholesale review of internal roles, policies and procedures in line with the FCA's requirements over the next few months."

damian.fantato@ft.com