How to continue meeting FCA governance requirements

  • Explain what governance means in the context of regulation
  • Explain what has happened with SM&CR so far
  • Identify ways in which to assess a firm and individual's competency

While the regulator has not yet provided, and may not provide, a definition of how a firm might have been ‘significantly affected’ by Covid-19, we would suggest that firms thoroughly consider whether the impact on their firm could be categorised as significant before extending this deadline.

The SM&CR introduced new rules and guidance which firms must follow for fit and proper assessments, but it was based on three familiar concepts – 

  • Honesty, Integrity and Reputation - Firms are expected to be aware of relevant matters in determining the honesty, integrity and reputation of their Senior Managers and Certified Persons.
  • Financial soundness – Firms should be aware of the financial soundness of existing Senior Managers and Certified Persons and keep this under review. Financial stress presents one of the greatest risks in terms of misconduct.
  • Competence and capability - In assessing competence and capability of an existing Senior Manager or Certified Person, a firm is expected to check that the individual satisfies the FCA training and competence requirements, has the required experience and training.  Firms are expected to collate a body of evidence to record this process.

Checking competency

When we look at competence and capability, an important area for advisers would be file reviews / advice reviews. 

We would always recommend as good practice for firms to have regular or ad hoc checks on the quality of their advice.

We would advocate that at least 10 per cent of business written should be sampled by way of an advice check over each business year.

We would recommend that the selection of cases be sampled in such a way so as to broadly represent a spread of business and take account of different levels of risk.

The advice reviews above relate to an investment adviser but what about an investment manager? 

Ultimately, an investment manager’s role is to competently manage the firm’s investment strategy, construct asset allocation models and identify investment instruments and funds that provide consistent returns above a pre-agreed benchmark.

When we look at some of the more specific responsibilities of the investment manager role these would include -   

  • Reviewing the appropriateness of all financial instruments for retail investors.
  • Analysing information gathered and undertake sufficient research and due diligence before including specific financial instruments into the firm’s investment portfolios.
  • Developing a range of risk/volatility target portfolios for income and growth and establish benchmarks for each.
  • Identifying when portfolios require de-risking or full off risk of the assets or where ‘hedging’ should be applied.

As well as maintaining performance standards in accordance with all aspects of the role, and providing regular KPI/MI to the investment committee, an investment manager must maintain Fit and Proper (FIT) status and evidence competent status as defined by FCA and the firm.

Firm's governance

We have looked at individuals so far, but what about governance requirements at firm level? 

A key process for discretionary management firms is the Internal Capital Adequacy Assessment Process (ICAAP).

A firm must, among other things, regularly assess the amount of internal capital it considers adequate to cover all the risks to which it is exposed within the context of its overall risk management framework.

It is this process that is known as the Internal Capital Adequacy Assessment Process (ICAAP).

Firms do not actually have to submit their ICAAP to the FCA, but they must regularly report that it is being undertaken.

One of the main platforms for demonstrating Governance is the Investment Management Committee (IMC) whose importance should not be under-estimated.

The investment committee’s role is to provide scrutiny.