SM&CR extension - five top implementation tips for solo-regulated firms

The FCA has set out how it proposes to replace the Approved Persons Regime by extending the SM&CR to the whole financial services sector by 9 December 2019.

Almost every FCA regulated firm is affected, in particular any firm currently subject to the Approved Persons Regime.

The new SM&CR is similar to the existing regime applicable to the banking sector. It aims to reduce harm to consumers and strengthen market integrity by raising the standards of conduct for everyone who works in financial services. Under the regime, firms must be able to clearly understand and demonstrate where responsibility lies; however, senior individuals themselves will be more responsible and accountable for their own conduct and competence. The regime is also casting the net wider by ensuring staff at all levels (except ancillary staff) conform to a new set of high-level conduct rules. The SM&CR is one of the biggest regulatory changes to take place since the financial crisis in 2008. It's not just about a new set of rules; it's about a cultural revolution in the UK financial markets. 

Experts from our Regulatory and Employment teams have been advising on the SM&CR as it applies to the banking sector since its implementation in March 2016. 

Five top implementation tips

Embrace the SM&CR

Welcome the SM&CR in December as an opportunity to review your management and governance structures and get the right people, documentation and culture in place. Aside from the fact that the FCA will undoubtedly come calling on a number of firms to ensure its objectives are being met, take advantage of the SM&CR to help grow your business in the right way. 

Firms should by now have identified its senior managers and certified staff.  Given the focus on individual competence and accountability, firms will need to know which individuals fall within which part of the regime, how the changes will affect the day-to-day roles of those individuals and what the FCA will expect from firms and their staff.

Finalise your implementation documentation now

Look to finalising your implementation documentation sooner rather than later. This should include HR policies & procedures, statements of responsibility, responsibilities maps, fit & proper assessments, certified person certificates, regulatory references, training manuals, contract and offer letters and appraisal and performance reviews. You should also work with your IT providers to ensure processes are in place to update your documentation when required, such as ensuring fit and proper assessments take place every year.

Carefully scrutinise your Statements of Responsibilities

Many firms are making the mistake of drafting 'job descriptions', describing the competences and skills required for the role and how the responsibilities will be discharged. In fact, the purpose of a statement of responsibility is to make clear what the senior manager is accountable for. Statements should be self-contained documents and any regulator or other person within the firm reading it should be able to clearly understand what is the role of the senior manager, what their responsibilities are and how their function fits within the overall governance and arrangements. It should be succinct, with no unnecessary detail and not cross-refer to other documents. Furthermore, if a business or prescribed responsibility is shared, it should be shared appropriately and the distinction made clear. Ask yourself – could someone who understands the type of business that you do, but doesn't know how your firm is organised, understand what the senior manager is accountable for by reading the statement of responsibility?

Re-design your Fit & Proper Assessments

The FCA will be paying closer attention to the suitability and competence of senior managers, certified persons and non-executive directors. It's up to firms how they produce their own assessment criteria of these characteristics, but you should be consulting industry practice and the FCA's guidance on their expectations when assessing the fitness and propriety of an individual to ensure your assessment criteria stands up to scrutiny. In addition, start thinking about who are the right people to conduct assessments as they will be acting as a mini-regulator. The outcome of a Fit & Proper assessment will be very important to the individual as it could affect their employment status, result in a notification to the FCA and/or affect their future career given the new regulatory reference requirements. We think it's best to 'double-up' so that an individual is assessed by both their supervisor and, say, HR who are specifically up-skilled to carry out appropriate assessments.

Bring the conduct rules to life!

Firms are required to train their staff on the conduct rules and how they apply to their specific role.

In August, the FCA published its findings of its review into the embedding of the SM&CR in the banking sector.  Whilst it was not a full post implementation review, the FCA wanted to better understand how the banking sector had implemented the regime 3 years since it was introduced.  One of the key findings was that firms had not always tailored their conduct rules training to staff's job roles.  It is therefore vital for firms to know what a conduct breach looks like for their business and be able to explain this to their staff.

Firms should remember there will be an obligation to notify the FCA when disciplinary action has been taken against an individual for a breach of the conduct rules. It is therefore imperative that staff know what their duties are. Whilst on-line training modules are useful (so long as they are tailored), they are more suitable for refresher sessions and testing on the conduct rules on a periodic basis. In the first instance, current staff and new hires should, ideally and costs permitting, receive face-to-face bespoke training given the potential consequences for them, and the firm, if things go wrong. 

What next?

Following a consultation in 2017, in July 2018 the FCA published its near-final rules on extending the SM&CR along with a guide for implementation before its commencement on 9 December 2019. The rules are complex and timescales are tight. Therefore engaging with your senior managers, analysing your governance structure, up-skilling your HR and Compliance team, getting the right documentation in place and training all staff is essential to ensure that your firm is confident at the start of the regime.

How TLT can help you  

The adoption of the SM&CR will be a large undertaking for many firms, but working with experienced legal practitioners in this area will mean a better chance of getting it right and will help with a smooth transition. We can help with:

  • Documentation
  • Employment disputes
  • Ad-Hoc legal support
  • Training on Conduct Rules
  • Ancillary services

We're your 'one stop shop' for all aspects of implementing and complying with the SM&CR. To find out more, get in touch. 

Contributor: Davinia Collins

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2019. Specific advice should be sought for specific cases. For more information see our terms and conditions

Date published

07 November 2019


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