FCA’s Senior Managers and Certification Regime comes into effect

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As of 9th December 2019, and as legislated by the UK Parliament, a new piece of regulation and financial compliance has come into effect, as per the warnings of the Financial Conduct Authority (FCA) in recent months (more information). The FCA’s latest compliance regime, the Senior Managers and Compliance Regime (SMCR) is part of the FCA’s latest moves to shore up the UK economy and trust in the UK Financial Sector as ongoing moves to transform the industry continue.

Since the Financial Crisis of 2007-8, financial institutions and industries across the world and in the UK have been seeking remedial and preventative measures designed to ensure such a crisis never again occurs. In the UK, this falls predominantly on the broad shoulders of the FCA. With lending and borrowing having been and continually being tightened up by the financial regulators, naturally, a range of other areas have come under increased scrutiny.

The SMCR regime being rolled out in effect, ensures increased clarity and accountability with regards to the financial regulations to which all nature of regulated financial institutions and financial firms must abide by. In previous times, compliance and financial governance were placed squarely at the doors of the compliance officers employed or contracted to work with regulated firms.

A New Age of Financial Compliance

This old-fashioned type of compliance meant that the buck could easily be passed to the compliance manager or professional if another member of a financial team in a company did something which didn’t comply with regulations and the FCA’s regulatory frameworks. This was the case for many loan types ranging from home improvement loans (read more) to first and second charge mortgages, personal loans and more.

This led to a blame culture and meant that those who were truly culpable of a breach of regulation may have been able to escape the scrutiny they deserved.

SMCR however, requires all senior managers, staff members and employees within financial firms who perform what the FCA term ‘key roles’ to be trained and FCA authorised to offer the services in question. This creates a much clearer chain of accountability and responsibility within financial firms.

The Three Pillars of SMCR

SMCR has three pillars as defined and explained by the FCA which can be summed up as follows:

  1. Senior Managers Regime – Most senior managers and people within financial firms, performing the FCA-defined key roles need to be FCA authorised (as opposed to the company with specific individuals not being as detailed). Furthermore, senior managers must understand the FCA’s Statements of Responsibility and the FCA’s Prescribed Responsibilities
  2. Certification Regime – This applies to and covers employees who are of non-senior levels, but who may, through their actions be able to cause significant harm to the financial firm in question. The Certification Regime means that employees need to be certified [by the FCA] and need confirmation and the necessary training every year
  3. Conduct Rules – These are the rules in place for both senior and non-senior people at a firm. All employees must be trained on financial conduct rules and firms have a duty to report any disciplinary actions taken as the result of any breaches of the FCA’s regulation

Who is Subject to SMCR?

SMCR covers most financial firms in the UK, however, being under different sets of rules, banks and building societies, authorised representatives and others are regulated under different sets of regulation, with banks being covered by the FCA’s Senior Managers Regime (SMR).

There are three distinct types of firms that are covered by the SMCR regime which can be broadly explained as:

Core Firms – This includes the majority of firms and the regulations for Core Firms represent the FCA’s baseline expectations and requirements with regards to SMCR.

Enhanced Firms – These types of firms are subject to all of the regulation that Core Firms are. However, operating as more complex and more ‘enhanced’ financial firms, they are also subject to enhanced regulations and requirements.

Limited Scope Firms – Firms qualifying as Limited Scope will have reduced obligations under SMCR. These are often those covered by other similar regulatory frameworks and may include those who are covered by an existing regime such as the Approved Persons Regime.