Senior Managers and Certification Regime


Increased responsibilities for asset managers

• In October 2015, the government announced that its Senior Managers and Certification Regime (SM&CR) would be extended to Investment Managers, Insurers and Consumer Credit firms. This regulation is expected to be introduced in 2018
The Senior Managers Regime will replace the Approved Persons Regime (APR) regulating those who perform senior roles in a firm, known as Senior Management Functions (SMFs)
The Certification Regime will apply to individuals who are not carrying out SMFs but whose roles have been deemed capable of causing ‘significant harm’ to the firm or its customers. The regime requires firms to assess the fitness and propriety of persons performing other key roles, and to certify this annually. These roles (‘Significant Harm Functions’) are also specified by the regulators in rules but the appointments are not subject to prior regulatory approval
• Under the expanded regulation the regulators will have the ability to create Rules of Conduct which will apply to senior managers, certified persons and other employees. For senior managers (and other approved persons), these rules will replace the ‘statements of principle’ made under the APR

Why is it important for our clients?

• The FCA estimate that the proposed extension of the will see over 43,000 Senior Managers and over 60,000 Certified persons from investment firms will fall under the umbrella of this regulatory extension1
• The regulators will now have the power to make Rules of Conduct that also apply to Non-Executive Directors (NEDs)
• To prepare our clients will need to:

  • Create a ‘Responsibilities Map’
  • Document a ‘Statement of Responsibilities’
  • Introduce of formal handover arrangements
  • Certify employees in Significant Harm Functions as fit and proper

1) The FCA includes stockbrokers, securities and futures firms, asset managers and financial advisers in this definition of ‘Investment Firms’
“Senior managers will be held individually accountable if the areas they are responsible for fail to meet our requirements…
The simple principle that you can delegate tasks and work, but you cannot delegate responsibility for the safety and soundness and conduct of your firm must become embedded at all levels”

Andrew Bailey, speaking as CEO of the PRA (currently Chief Executive of the FCA)

Key considerations

  • Much of the focus across the industry has been on the Senior Manager Regime, with less focus to date on the Certification element of the incoming regulation. Firms need to ensure they consider all of the requirements the regulation is placing on them; the majority of employees impacted by the regulation are certified Persons and defining ‘fit and proper’ for each of these roles (and aligning it to their performance assessments) will prove a significant task
  • Senior Managers and Certified persons are going to need confidence that they are receiving accurate MI at the correct frequency for them to discharge their responsibilities
  • The government have clarified the issue of where the burden of proof lies. If there is any breach in regulations and it will be for the FCA to prove that the Senior Manager failed to take steps as a person in their position could ‘reasonably’ be expected to take to avoid the breach. In practice this will mean the Upper Tribunal will require the FCA to explain why the Senior Manager fell short rather than requiring the Senior Manager to tell it why their conduct was reasonable. However, Senior Managers will still need to record the reasons why they took particular key decisions
  • The government recognises that implementation of the expanded regulation for the c.60,000 firms that are included in the new regime will be challenging and has therefore intends implementation to occur in 2018 (for Banks and Building Societies the deadline was 2016). Furthermore, the government has committed to engaging with stakeholders to ensure that lessons are learned from the implementation of the SM&CR in the banking sector and that these lessons are applied to investment managers

How can Alpha help?

There are a number of key ways in which Alpha can support its clients in meeting the new SMCR requirements:

  • Assess the impact: Firms need to quickly understand what the regulation will mean for them and their business areas. Alpha can help clients’ compliance and COO functions understand the areas where the requirements on our clients are changing (compared to the previous APR regime) and how complex the changes required will be by business area
  • Clarify and document responsibilities: Many firms will find it challenging to map all of their responsibilities across their business and gain agreement at a senior level as to who is responsible for what. Furthermore, to provide Senior managers a record of the decisions they have taken effective governance and record keeping needs to be put in place. Alpha can support our clients by mapping the responsibilities across a client’s Operating Model and reviewing their governance structures
  • Ensure the correct level of reporting in place: The accuracy of existing reporting will need to be tested and Senior Managers may feel they need to consider additional or more frequent reporting once they understand the activities of the business that they are individually responsible for. Alpha can support our clients by testing their current reporting and MI infrastructure, highlighting any gaps and putting an agreed remediation roadmap in place
  • Manage the implementation: The implementation of SM&CR regulation will have a significant HR and legal overlay but also requires strong project management to ensure key milestones are hit and our clients are in the required position before the 2018 implementation. Alpha can support our clients by providing project managers who are experienced in the asset management industry to ensure HR and legal is delivered on time and to the required standard
  • Dovetail with MiFID II: There is scope to combine some of the work required under MiFID II with the SM&RC requirements, performing the required work both regulations require only once (such as the responsibilities enshrined in the Job descriptions requirements). Alpha can help clients ensure their regulatory change programmes are as efficient as possible