Senior Managers & Certification Regime

The senior managers and certification regime (SM&CR), which comes into force for fund managers on 9 December 2019, is the individual accountability regime that applies to banks, building societies, credit unions, PRA-designated investment firms and insurers. It will replace the current controlled functions specified by the FCA.

The aims of the SM&CR are to: (i) encourage a culture of employees at all levels taking personal responsibility for their actions, with “culture of accountability” at all levels; (ii) improve conduct at all levels; and (iii) ensure firms and employees clearly understand and can demonstrate where responsibility lies.

Senior Management Functions

As the SM&CR comes into force, all senior managers in SM&CR firms will be responsible for performing “senior management functions” (SMFs), which consist of specified prescribed responsibilities in order to help ensure that someone is accountable for the fundamental responsibility for each SMF.

Section 59ZA of the Financial Services and Markets Act 2000 (FSMA) states:

“A function is a “senior management function”, in relation to the carrying on of a regulated activity by an authorised person, if (a) the function will require the person performing it to be responsible for managing one or more aspects of the authorised person’s affairs, so far as relating to the activity, and (b) those aspects involve, or might involve, a risk of serious consequences for the authorised person, or for business or other interests in the UK.”

In conjunction with SMFs, are prescribed responsibilities which are assigned to the individuals who hold SMFs to ensure that someone is actually responsible for a particular function.

Persons holding SMFs must be pre-approved by the regulators. With the exception of SMF18 (Other overall responsibility function), separate applications must be made for each SMF being performed. In addition, The SMR has no territorial limitation and thus applies to all activities, business areas and management functions of the whole firm, including those carried out from a branch overseas and also includes all transactions that take place, either in part or in full, overseas.

The FCA’s Key rules and guidance relating to the SMFs, and accompanying prescribed responsibilities, are set out in:

  • Chapter 10C (FCA senior management regime for approved persons in relevant authorised persons) of the Supervision manual (SUP); and
  • Chapter 24 (Senior managers and certification regime: Allocation of prescribed responsibilities) of the Senior Management Arrangements, Systems and Controls sourcebook (SYSC).

The table below outlines some of the SMFs designated by the FCA for relevant authorised persons:

Part One: (FCA-designated senior management functions for relevant authorised persons)

Type

SMF

Description of FCA controlled function

FCA governing functions

SMF 3

Executive director function

 

SMF 13

Chair of the nomination committee function

FCA required functions

SMF 16

Compliance oversight function

 

SMF 17

Money laundering reporting function

 

SMF 18

Other overall responsibility function

Part Two: (FCA-designated senior management functions for EEA relevant authorised persons)

Type

SMF

Description of FCA controlled function

FCA required functions

SMF 17

Money laundering reporting function

 

SMF 21

EEA branch senior manager function

Part Three: (FCA-designated senior management functions for third-country relevant authorised persons)

Type

SMF

Description of FCA controlled function

FCA governing function

SMF3

Executive director function

FCA required functions

SMF16

Compliance oversight function

 

SMF17

Money laundering reporting function

 

SMF22

Other local responsibility function

Prescribed Responsibilities

In addition to the responsibilities inherent in the definition of each SMF, there are prescribed responsibilities which must be assigned to the individuals who hold SMFs to ensure that someone is accountable for the fundamental responsibility inherent in a particular function. Note that not all of the prescribed responsibilities are relevant to all firms.

The table below sets out the FCA-prescribed senior management responsibilities

FCA-prescribed senior management responsibility

Explanation

(1) Responsibility for the firm’s performance of its obligations under the senior managers regime

The senior managers regime means the requirements of the regulatory system applying to SMCR firms insofar as they relate to SMF managers performing designated senior management functions, including SUP 10C (FCA senior managers regime for approved persons).

This responsibility includes:

(1) compliance with conditions and time limits on approval;

(2) compliance with the requirements about the statements of responsibilities (but not the allocation of responsibilities recorded in them);

(3) compliance by the firm with its obligations under section 60A of the Act (Vetting of candidates by authorised persons); and

(4) compliance by the firm with the requirements in SYSC 22 (Regulatory references) so far as they relate to the senior managers regime, including the giving of references to another firm about an SMF manager or former SMF manager.

(2) Responsibility for the firm’s performance of its obligations under the employee certification regime

The employee certification regime means the requirements of sections 63E and 63F of the Act (Certification of employees) and all other requirements of the regulatory system about the matters dealt with in those sections, including:

(1) SYSC 27 (Senior managers and certification regime: Certification Regime);

(2) the requirements in SYSC 22 (Regulatory references) so far as they relate to the employee certification regime, including the giving of references to another firm about a certification employee or former certification employee; and

(3) the corresponding PRA requirements.

(3) Responsibility for the firm’s policies and procedures for countering the risk that the firm might be used to further financial crime

(1) This includes:

(a) responsibility for the firm’s policies and procedures in relation to the matters in SYSC 3.2.6R (Systems and controls in relation to compliance, financial crime and money laundering);

(b) the functions in SYSC 3.2.6HR or SYSC 6.3.8R (firm must allocate to a director or senior manager overall responsibility within the firm for the establishment and maintenance of effective anti-money laundering systems and controls);

if any of those rules apply to the firm.

(2) The firm may allocate this FCA-prescribed senior management responsibility to the MLRO but does not have to.

(3) If the firm does not allocate this FCA-prescribed senior management responsibility to the MLRO, this FCA-prescribed senior management responsibility includes responsibility for supervision of the MLRO.

(4) Responsibility for the firm’s obligations for:

(a) conduct rules training; and

(b) conduct rules reporting.

(1) The firm’s obligations for conduct rules training means its obligations under section 64B of the Act (Rules of conduct: responsibilities of authorised persons).

(2) The firm’s obligations for conduct rules reporting means its obligations under section 64C of the Act (Requirement for authorised persons to notify regulator of disciplinary action).

(5) Responsibility for:

(a) leading the development of; and

(b) monitoring the effective implementation of;

policies and procedures for the induction, training and professional development of all members of the firm’s governing body.

 

(6) Responsibility for monitoring the effective implementation of policies and procedures for the induction, training and professional development of all the firm’s:

(a) SMF managers; and

(b) key function holders;

other than members of the firm’s governing body.

(1) Key function holder has the same meaning as it does in the Glossary Part of the PRA Rulebook.

(2) Paragraph (b) of column (1) of this row (6) only applies to a firm if and to the extent that the PRA’s requirements about key function holders apply to it.

(7) Responsibility for:

(a) safeguarding the independence of; and

(b) oversight of the performance of;

the internal audit function, in accordance with the internal audit requirements for SMCR firms and the PRA requirements referred to in column (2) of this row

(1) This responsibility includes responsibility for:

(a) safeguarding the independence of; and

(b) oversight of the performance of;

a person approved to perform the Head of Internal Audit function for the firm if that function applies to the firm.

(2) This responsibility only applies if and to the extent that:

(a) the internal audit requirements for SMCR firms; or

(b) any requirements of the PRA about the matters in paragraph (1) of this column of this row (7);

apply to the firm.

(3) Independence means independence to the extent it is required by the requirements referred to in paragraph (2) of this column of this row (7).

(4) The Head of Internal Audit function means the PRA’s Head of Internal Audit designated senior management function.

(8) Responsibility for:

(a) safeguarding the independence of; and

(b) oversight of the performance of;

the compliance function in accordance with the compliance requirements for SMCR firms.

(1) This responsibility includes responsibility for:

(a) safeguarding the independence of; and

(b) oversight of the performance of;

the person performing the compliance oversight function for the firm.

(2) This responsibility only applies if and to the extent that the compliance requirements for SMCR firms apply to the firm.

(3) “Independence” means independence to the extent it is required by the compliance requirements for SMCR firms.

(9) Responsibility for:

(a) safeguarding the independence of; and

(b) oversight of the performance of;

the risk function, in accordance with the risk control requirements for SMCR firms and the PRA requirements referred to in column (2) of this row (9).

(1) This responsibility includes responsibility for:

(a) safeguarding the independence of; and

(b) oversight of the performance of;

a person approved to perform the Chief Risk function for the firm if that function applies to the firm.

(2) This responsibility only applies if and to the extent that:

(a) the risk control requirements for SMCR firms; or

(b) any requirements of the PRA about the matters in paragraph (1) of this column of this row (9);

apply to the firm.

(3) “Independence” means independence to the extent it is required by the requirements referred to in paragraph (2) of this column of this row (9).

(4) The Chief Risk function means the PRA’s Chief Risk designated senior management function.

(10) Responsibility for overseeing the development of and implementation of the firm’s remuneration policies and practices in accordance with SYSC 19D (Remuneration Code)

This responsibility does not apply to a firm to which SYSC 19D does not apply.

(11) Responsibility for the firm’s compliance with CASS

(1) This responsibility only applies to a firm to which CASS applies.

(2) A firm may include in this FCA-prescribed senior management responsibility whichever of the following functions apply to the firm:

(a) CASS 1A.3.1R (certain CASS compliance functions for a CASS small firm);

(b) CASS 1A.3.1AR (certain CASS compliance functions for a CASS medium firm or a CASS large firm);

(c) CASS 11.3.1R (certain CASS compliance functions for certain CASS small debt management firms); or

(d) CASS 11.3.4R (certain CASS compliance functions for a CASS large debt management firm);

but it does not have to.

(3) If the firm does not include the functions in paragraph (2) of this column of this row (11) in this FCA-prescribed senior management responsibility, this FCA-prescribed senior management responsibility includes responsibility for supervision of the person performing the functions in paragraph (2) of this column of this row (11) that apply to the firm.

(12) Responsibility for compliance with the requirements of the regulatory system about the management responsibilities map

(1) This responsibility does not include allocating responsibilities recorded in the management responsibilities map.

(2) This responsibility does not apply to a firm to which the requirements about management responsibilities maps in SYSC 25 (Senior managers and certification regime: Management responsibilities maps and handover procedures and material) do not apply.

(13) Acting as the firm’s whistleblowers’ champion

(1) The whistleblowers’ champion’s allocated responsibilities are set out in SYSC 18.4.4R.

(2) This responsibility does not apply to a firm that is not required to have a whistleblowers’ champion.

(14) Responsibility for:

(a) providing for an effective internal audit function in accordance with one of the sections of the PRA Rulebook listed in paragraph (2) of column (2) of this row (14); and

(b) overseeing the performance of the internal audit function.

(1) Only applies to a firm:

(a) that outsources its internal audit function to an external third party service provider; and

(b) to which one of the following internal audit PRA-prescribed senior management responsibilities applies:

(i) the responsibility in rule 3.3(1) in the Insurance – Allocation of Responsibilities Part of the PRA Rulebook; or

(ii) the responsibility in rule 3.2(1) in the Large Non-Solvency II Firms – Allocation of Responsibilities Part of the PRA Rulebook.

(2) The parts of the PRA Rulebook referred to in column (1) of this row (14) are:

(a) Solvency II firms – Conditions Governing Business 5; and

(b) Non-Solvency II Firms – Governance 9.2. (3) Terms used in column (1) of this row (14) have the same meaning as they do for the corresponding PRA-prescribed senior management responsibility described in paragraph (1) of this column of this row (14).

(15) Responsibility for management of the firm’s risk management processes in the UK

 

(16) Responsibility for the firm’s compliance with the UK regulatory system applicable to the firm

 

(17) Responsibility for the escalation of correspondence from the PRA, FCA and other regulators in respect of the firm to each of the governing body or the management body of the firm and, as appropriate, of the firm’s parent undertaking and the ultimate parent undertaking of the firm’s group

This includes taking steps to ensure that the senior management of the firm and, where applicable, the group, are made aware of any views expressed by the regulatory bodies and any steps taken by them in relation to the branch, firm or group.

Responsibilities Maps

The requirement to have a responsibilities map only applies to “SM&CR Enhanced Firms”.

Enhanced firms, which are those who: (i) meet the criteria of a Core firm; and (ii) additionally one or more of the following also applies to the firm:

  • it is a Significant IFPRU firm;
  • it is a CASS Large firm;
  • it is a firm with Assets Under Management of £50 billion or more as a three year rolling overage;
  • it is a firm with total intermediary regulated business revenue of £35 million or more per annum, calculated as a three year rolling average;
  • it is a firm with annual revenue generated by regulated consumer credit lending of £100 million or more calculated as a three year rolling average; or
  • it is a mortgage lender or administrator (that is not a bank) with 10,000 or more regulated mortgages outstanding

Enhanced firms are FCA solo-regulated large and complex firms to which extra rules apply. These firms will be subject to the most requirements but it is expected that fewer than 1% of firms likely to fall into this category. Enhanced firms will generally be larger in size or have more complex structures where weakness in accountability or governance could cause greater harm to consumers, or impact on market integrity.

The key rules and guidance relating to management responsibilities maps can be found in SYSC Chapter 25. A SM&CR firm must, at all times, have comprehensive and up-to-date document (the management responsibilities map) that describes its management and governance arrangements.

A management responsibilities map must include details of the reporting lines and the lines of responsibility and reasonable details about: the persons who are part of those arrangements and their responsibilities.

The firm’s management responsibilities map must show clearly how any responsibilities covered by a firm’s management responsibilities map are shared or divided between different persons.

A management responsibilities map must include the names of all the firm’s approved persons (including PRA approved persons); members of its governing body and (if different) management body who are not approved persons; senior management; and senior personnel. The map must also include details of the responsibilities which the foregoing persons hold. In addition, the must contain all responsibilities described in any current statement of responsibilities. The map must also include details of the management and governance arrangements relating to the FCA-prescribed senior management responsibilities and the PRA-prescribed senior management responsibilities; including the identity of the persons to whom those functions are allocated. Further the map must note the reasons why (if it has done any of these things) the firm allocates responsibility for an FCA-prescribed senior management responsibility to more than one person jointly; or divides responsibility for an FCA-prescribed senior management responsibility between different persons.

The map must also include details about the functions allocated under, SYSC 26 (Senior managers and certification regime: Overall and local responsibility), including (i) what the activities, business areas and management functions allocated under that chapter are; (ii) the management and governance arrangements relating to them; (iii) the reasons why (if it has done this) the firm allocates responsibility for any such function to more than one person jointly; and (iv) the identity of the persons to whom those functions are allocated;

The map must also list matters reserved to the governing body (including the terms of reference of its committees) and, if different, the management body. It also must include details of how the firm’s management and governance arrangements fit together with its group. It shall also include details of the extent to which the firm’s management and governance arrangements are provided by, or shared with, other members of its group or others. The map must also show the details of the reporting lines and the lines of responsibility (if any) between the firm and those who carry out functions in relation to it and (i) other members of its group or other third parties; (ii) persons acting as employees or officers of, or otherwise acting for, anyone in (a); or (iii) committees or other bodies of anyone in (i).

The map must also contain reasonable information about the persons described or identified in the management responsibilities map, including, whether they are employees of the firm and, if not, by whom they are employed; if they are certification employees of the firm; and the responsibilities they have in relation to other group members; and details of how the foregoing fit together and fit into the firm’s management and governance arrangements as a whole.

How Cummings Fisher can help

As a full-service law firm for the alternative investments field, Cummings Fisher is able to help clients prepare for all aspects of legal compliance with the SM&CR, including structuring, regulatory and employment.

Specifically, we can assist with the following:

  • reviewing of the applicability of the SM&CR rules and guidelines;
  • proposing structure changes and advise on any recommended amendments for SM&CR compliance;
  • reviewing policies and documentation and provide suggested amendments and documentation for SM&CR compliance;
  • providing on-site SM&CR compliance training for staff;
  • reviewing staff handbooks, compliance manuals and any supplementary handbooks; and
  • advising on employment implications of the SM&CR such as terms and conditions of employment, certification and appraisal process and termination of employment

We will also be publishing additional notes addressing more specific issues facing fund managers in relation to the SM&CR.

SM&CR Toolkit News

Claire Cummings

Claire practises financial services law with a focus on regulatory issues, cryptocurrencies and tokens, trading and brokerage documentation and advising both existing and start-up funds and fund managers.

If you would like to discuss any of the points we raise, please contact me or one of our other lawyers.

Phone: 0207 585 1406
Email: claire.cummings@cummingsfisher.com

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