If they haven’t already, regulated SMEs should start preparing for the FCA's accountability rules.
In 2019 small and medium-sized enterprises (SMEs) that are FCA-regulated will be subjected to the regulator's accountability rules.
The rules require a small number of senior managers to have personal accountability for failings around their prescribed responsibilities. Failure to meet the standards expected may result in fines and sanctions, including being barred from the industry.
Failure to meet the standards expected may result in fines and sanctions, including being barred from the industry.
The Senior Manager and Certification Regime (SMCR) has applied to banks, building societies and credit unions, as well as the eight investment firms authorised by the PRA, since March 2016. But from December 2019, approximately another 47,000 firms – including many asset managers, wealth managers, stock brokers and financial advisors – will be shifted from the older “tick-box” regulation to now being expected to comply with the spirit as well as the letter of the rules.
The SMCR means the affected firms will have to review their senior managers and ensure they are ‘suitable’. They will then have to provide a 'statement of responsibility' mapping what they do, as well as a written 'duty of responsibility' and a list of 'prescribed responsibilities'. This way, if anything goes wrong a senior manager can be held accountable.
Firms will also be subject to rules of conduct (full details can be found here). There will also be a new category of employees who are in 'significant harm functions' (anyone who could impact customers, markets or the firm – particularly applicable to employees who have access to large amounts of money). These employees will have similar rules of conduct applied to them, but will not be approved by the FCA. Instead, they will be approved by their own firm, who will have to “certify” they are suitable (fit and proper) to carry out their job (with a review taking place at least once a year).
The SMCR will therefore impose a greater degree of self-regulation on many firms. This could manifest itself in the event of a senior manager being suspected of wrong-doing: in such a scenario, the firm would be required to not only notify the FCA but also, in the first instance, to conduct an internal investigation itself.
The SMCR will impose a greater degree of self-regulation on many firms.
As with any legislation, the SMCR may have some unintended consequences. As a result of the rules, senior managers will often have a stronger regard for their personal position in a company. However, such individual ownership could undermine collective responsibility and generate some conflict.
For many staff, it will be their employer that decides if they are “fit and proper” to perform their role. Decisions can be finely balanced, and, in the absence of defined criteria, there can be a lack of consistency on what might be deemed a breach of conduct rules.
There is also a risk that the SMCR could unintentionally hurt recruitment efforts. It is possible that some people, particularly non-executive directors, may not be willing to take on the personal responsibility that being a senior manager will require.
During a transitional role – from 9 December 2019 to 8 December 2020 – firms must: train all other conduct rules staff in preparation for when it applies to them at the end of the transitional period; assess existing certification staff; identify new in-period certification staff; assess certification staff hired during transitional period.
These firms should also check whether their directors' and officers' liability (D&O) insurance is still fit for purpose. The FCA has widened its net substantially, meaning that an investigation, suit or action could be brought against a much wider range of individuals. It’s vital for affected companies to ensure that their D&O policy could cover these additional individuals.