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29th September 2016

New Rules & Guidance for SM&CR: Improving Culture & Governance

We announced yesterday that the FCA looked set to propose new rules and measures to further strengthen and improve the culture and governance within firms under the Senior Managers and Certification Regimes (SM&CR). (See Regulator puts Culture in the Spotlight)

The FCA have now published various policy statements, discussion and consultation papers that look to improve and enhance various aspects of the Senior Manager’s and Certification Regimes and Conduct Rules that were introduced for the Banking sector in March 2016.

Here’s a quick overview of the papers that have now been published by the regulator along with their relevant deadlines.

Regulatory Reference Rules

Following consultation, the FCA have now published their final rules on regulatory references in PS16/22.

As the FCA inform, references are a ‘key tool in allowing firms to share relevant information on individuals to support their assessment of potential new recruits as fit and proper’.

The finalised rules that have now been published will form a part of the new Senior Managers and Certification Regimes that were introduced earlier on in the year for the banking sector.

Generally the changes that are detailed within the Policy Statement look to try and improve the culture and governance of banks and insurers and whilst the changes set out in Section 2 of the Policy Statement will interest all those to whom the SMR currently applies, Section 3 will be of interest to all authorised firms.

The implementation date of these new Regulatory Reference Rules is the 7th March 2017.

Guidance on Duty of Responsibility

The FCA has started a consultation process (CP16/26) relating to proposed amendments to the Decision Procedure and Penalties Manual (DEPP)  with the aim that it will give firms guidance on how the regulator will enforce the ‘duty of responsibility’. 

The ‘duty of responsiblity’ came into effect on 10 May 2016 and applies to all those that perform senior management functions at firms within the Senior Manager’s Regime. The FCA’s new proposals for DEPP will also form a part of the SM&CR and Conduct Rules for the banking sector.

The Duty of Responsibility allows the UK Regulators (FCA & PRA) to take enforcement action against Senior Managers if they are responsible for the management of any activities in their firm that relate any contravention of their firm’s regulatory requirements in circumstances when they have not taken reasonable steps to avoid its occurrence.

Comments on the FCA’s Duty of Responsibility Guidance should be submitted to the FCA before 9th January 2017, after which the regulator will consider any feedback and publish their final rules during the first quarter of next year.

Conduct Rules for all Non-Executive Directors

The FCA have entered a new consultation that relates to extending the Code of Conduct sourcebook (COCON) to standard non-executive directors (NEDs) within firms to which the SMR currently applies.

The FCA believes that applying the COCON standards to NEDs will ‘help raise standards of conduct for these individuals and, by placing additional duties on them, aims to reduce the risk of future misconduct and mis-selling’.

Comments on Conduct Rules for all Non-Executive Directors should be returned to the FCA by 9th January 2017.

SMR: Overall Responsibility and the legal function

A new paper published by the FCA looks set to discuss and clarify how and why the legal function is currently captured under the SM&CR and to contemplate whether this function should continue to be a part of the regime.

The regulator is seeking comments from the industry on how Senior Management Function 18 – Other Overall Responsibilities (SMF18) applies to the legal function. The deadline for comments is the 9th January 2017.

Whistleblowing in Foreign Branches

The FCA is now consulting upon a proposed approach to apply the new whistleblowing requirements to UK branches of overseas banks – that they must tell their UK-based employees about the FCA and PRA whistleblowing services.

The FCA know that individuals working for financial institutions ‘may be reluctant to speak out about bad practice for fear of suffering personally as a result’ and thus there needs to be mechanisms within firms to encourage people to voice their concerns and speak up.

Again, comments on the Whistleblower’s requirements for UK branches of overseas banks should be directed to the FCA by the 9th January 2017. Once all feedback has been received and reviewed by the regulator, they will then look to publish a Policy Statement and final rules.

Feedback on Supervisory Review: Quality Checks

The FCA have now issued feedback on their findings on an in-depth supervisory review of the responsibilities maps and Statements of Responsibilities (SoRs) supplied by those firms that submitted grandfathering notifications for the SM&CR earlier in the year.

It was clear that most firms had engaged with the challenges of implementing the SM&CR and had invested a considerable amount of effort in preparing for it.

Whilst the FCA advise that in most of cases firms had considered how the new regimes applied to their firms - and had identified Senior Managers and allocated Senior Management Functions and responsibilities – there were others that did not meet the rules or guidance.

The FCA now advises that firms ‘should review their SoRs and management responsibilities maps in light of this feedback and, where necessary, revise them using the rules and guidance from the Handbook’.

Should any revisions need to be made by firms, particularly with regard to significant changes to the responsibilities of a Senior Manager, then these should be submitted to the regulator using the FCA’s Form J.


SM&CR: Next Steps to Improving Culture

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