The Senior Managers and Certification Regime is due to be implemented in less than three months’ time.
Although many have suggested the vast majority of the regime should be fairly straightforward for advice companies to deal with, there are some potential banana skins.
It is important, therefore, for advisers to pay close attention to what the SMCR is changing, and the resulting action that needs to be taken in order ensure its rules are adhered to.
But first it is best to provide a bit of background about the regime, and the reasons behind its introduction.
The new regime
As the name suggests, it introduces a new senior management function under the Financial Services and Markets Act 2000.
The regulator describes senior management as “the most senior people in a firm with the greatest potential to cause harm or impact upon market integrity”.
Key points
- Advisers will have to comply with SMCR
- Paraplanners may fall under the net as well
- SMCR is replacing the approved-persons regime
The regime, which will replace the current approved-persons regime – which applies to banks, building societies, credit unions and dual-regulated companies (defined as those regulated by both the Financial Conduct Authority and Prudential Regulation Authority) – was originally unveiled by the FCA in March 2016.
A year later, the regulator revealed plans for the SMCR to be extended to solo-regulated companies – most notably advice outfits – and would come into force on December 9 2019. Its purpose, according to the watchdog, is “to reduce harm to consumers and strengthen market integrity”.
“This presents a unique opportunity to set a new standard of personal conduct for everyone working in financial services,” the FCA added.
In short, the SMCR involves three parts:
- Conduct rules that set out minimum standards of behaviour.
- The senior managers’ regime, encompassing senior staff who perform key roles.
- The certification regime, requiring ‘fit and proper’ tests to be conducted on employees who are at risk of causing the greatest harm to a company.
All companies are captured by the SMCR, from one-man-bands up to advice giants with billions in assets under administration. They will, however, be placed into one of the following three categories based on their scale:
- Limited scope – those with fewer senior management functions.
- Core – will only need to comply with baseline requirements.
- Enhanced – will involve extra requirements for companies “whose size, complexity and potential impact on consumers or markets warrant more attention”.
The need for companies establishing whether they are categorised as either ‘limited’ or ‘core’ is an important aspect, according to Michael Pashley, training and knowledge manager at SimplyBiz Group.
But this is a straightforward procedure, he adds, as it can be done through the FCA’s online ‘firm checker’ tool.
He adds some further clarity. “[You could be tripped up by] believing your firm is ‘limited’ scope, when it is actually ‘core’, which means you’ll have more activity to undertake.
“Broadly speaking, if you’re a financial adviser or mortgage adviser, and you’re a limited company or partnership, including authorised professional firms, you will be ‘core’.
“If you’re an unincorporated sole trader or a limited permission consumer credit firm, you will be ‘limited’ scope.”
Mr Pashley outlines four other key points for advisers to be aware of to help them to prepare. These are:
- Training all staff on the conduct rules by the relevant deadlines; if you are a senior manager, Pashley suggests drawing up a schedule to ensure this happens in a timely manner.
- Writing a statement of responsibility, as per the FCA’s guidance in FG19/2.
- Starting to build bodies of evidence to justify fitness and propriety, ready to issue fit and proper certificates to certified staff by December 9 2020.
- Beginning to gather the information you need for the directory now, ready to upload by December 2020.
An 81-page paper published by the FCA, last updated in July 2019, guides solo-regulated companies through the regime’s requirements.
Much of the guide presents few concerns for intermediaries, but some parts require more consideration.
Neil Walkling, managing consultant, investments team, at consultancy firm Bovill, says the regime may capture members of an advice company that were exempt under previous rules.
He explains that the widening of the client-dealing function has extended requirements beyond the current CF30 population.
This means that those involved in either arranging transactions or speaking to clients during the advice process should be certified unless they are allowed to be opted-out, which includes particularly junior roles that require no particular skill or judgement.
“So if you’re following a script or automated process then you don’t need to be certified,” he says.
The role of paraplanners
This does, however, pose an interesting question: what about paraplanners?
“Having looked at the rule, and having looked at quite a few job descriptions of paraplanners and knowing what they tend to do in adviser firms, my view is that most paraplanners should be certified, which could be a big change as they may not currently be captured by training and competence regimes.”
Assessing paraplanners against the regime’s criteria could be tricky, though.
As Mr Walkling notes, measuring advisers against key performance indicators – such as complaints and client files – is familiar territory for companies, but not so much for paraplanners.
It is also important to note that paraplanners often play a pivotal role in the advice process from start to finish; advisers want to spend as much time as possible in front of clients, with the research, suitability report, cashflow modelling, being conducted by the paraplanner.
“This is quite skilled, technical stuff, so it’s not really credible to argue that it’s a junior admin role that requires no skill or judgement. If they mess that up, it would have a bad impact on the client outcome.
“Those people should be certified, but I’m not sure that penny’s dropped for a number of firms yet.”
Other aspects advisers need to wary of, according to Mr Pashley, include failing to train all relevant employees on the conduct rules by the relevant deadlines, or in the way the FCA has mandated.
“Specifically, these deadlines are December 9 2019 for certified staff and senior managers, and December 9 2020 for all other employees,” he says.
Mr Pashley also warns advisers not to leave directory uploads until the last minute.
“If submitted late, this may incur a £250 administration fee from the FCA and, if advisers don’t give themselves sufficient time, they are unlikely to have all the information to hand that they will need,” he explains.
There is help at hand for advisers, though. The SimplyBiz Group is running a programme for its members, including a number of workshops and tools to help advisers prepare and comply.
In addition to this, and on a more encouraging front, intermediaries may be ahead of other sectors when it comes to SMCR.
Mr Walkling says: “Advisers do have one advantage in that they already take training and competence more seriously than many other types of regulated business, in my experience.
“That helps because what the FCA is doing is taking CF30s off the register and pushing responsibility – very much putting the onus on firms to demonstrate annually through the certification process that those staff are both competent and fit and proper to do their roles.”
Craig Rickman is special projects editor of FinancialAdviser and FTAdviser.com
