UK Financial Conduct Authority Publishes Final Rules on Extending SMCR to Solo-Regulated Firms

August 20, 2019

Following its consultation earlier this year, the UK Financial Conduct Authority has now published a policy statement setting out its final rules for extending the Senior Managers and Certification Regime to solo-regulated firms. All solo-regulated firms will need to prepare to be compliant with the new regime by 9 December 2019.

The Senior Managers and Certification Regime (SMCR) was introduced as a tool to further strengthen individual accountability in the financial services sector, and the UK Financial Conduct Authority (FCA) published its near final rules for solo-regulated firms on 4 July 2018. The FCA then consulted on optimising the SMCR in January 2019, setting out proposals in its consultation paper, “Optimising the Senior Managers & Certification Regime and feedback to DP16/4 – Overall responsibility and the legal function” (CP19/4), wherein it proposed to extend the SMCR to all FCA solo-regulated firms from 9 December 2019.

The FCA has now summarised and responded to the feedback it received on the consultation in its policy statement, “Optimising the Senior Managers & Certification Regime – Feedback to CP19/4 and Final Rules” (PS19/20), which it published on 26 July. The policy statement also follows the publication of HM Treasury’s commencement order on 18 July and serves to finalise the proposed rules on the SMCR’s extension to FCA solo-regulated firms, including claims management companies, and on the new directory of individuals working in financial services.

Key Changes

The SMCR will largely follow the near final rules consulted on with the following key changes, set out in more detail below:

  • Confirmation that the head of legal function is excluded from the requirement to be approved as a senior manager
  • Amendments to the intermediary revenue criterion for the enhanced regime
  • Clarification of the requirements and scope of the certification regime
  • Extension of Senior Manager Conduct Rule 4 (SC4) to nonapproved executive directors at limited scope firms

In addition to solo-regulated firms, these changes will affect claims management companies, dual-regulated firms, and European Economic Area (EEA) and third-country branches.

Exclusion for the Head of Legal Function

The FCA has confirmed that the head of legal function will be excluded from the requirement to be approved as a senior manager. Many of those parties providing feedback during consultation had expressed concern about difficulties in disclosing information of which the FCA or the Prudential Regulation Authority (PRA) would reasonably expect notice (under SC4), given the application of legal privilege to much of the work undertaken by the head of legal. However, individuals in this function will still be subject to the certification regime and conduct rules. The FCA concluded that taking this approach would be a proportionate means of ensuring accountability without posing significant difficulties as regards the application of legal privilege.

It is important to note that a head of legal may still perform other roles that are designated senior management functions and will have responsibility as a senior manager for those roles.

Amendments to Scope of Certification Regime

The FCA has amended the client dealing function within the certification regime, seeking to exclude individuals from the regime who have no authority to decide a course of action in the performance of their duties, and whose tasks do not require them to exercise a significant degree of skill. Under the final rules, firms will be given a degree of flexibility when it comes to determining whether a role requires certification. When making that determination, firms must give thought to two factors: (1) whether the role is considered simple or largely automated; and (2) whether the role involves the exercise of discretion or judgement. While the FCA provided some examples of client dealing activities caught under the regime in its consultation, it acknowledges that it is not possible to provide an exhaustive list.

The FCA is also proceeding to implement the proposal to introduce a new certification function to cover individuals in systems and controls functions at firms where these functions do not require approval. This will apply to core and limited scope firms, where senior managers would not be allocated a systems and controls senior manager function.

Amendments to Intermediary Revenue Criterion for Enhanced Regime

The FCA has amended the criteria used to identify enhanced firms so as to capture non–retail mediation activity (non-RMA) B firms. The FCA has now clarified that intermediary firms in the enhanced regime will include all non-RMA B firms that have more than £35M in regulated revenue from

  • retail investment activities,
  • advising on P2P agreements (except when carried on exclusively with or for professional clients),
  • advising on pensions transfers and opt-outs,
  • arranging (bringing about deals) in retail investments,
  • home finance mediation activity, or
  • insurance mediation activity (non-investment insurance contracts).

The FCA stipulates that non-RMA B firms will be required to calculate their regulated revenue from these permitted activities annually, on the basis of a three-year rolling average. If they meet the £35M threshold, they must submit a notification to the FCA in accordance with Handbook SUP 15.7.

Extension of SC4 to Nonapproved Executive Directors at Limited Scope Firms

SC4 under the near final rules included the requirement for senior managers to “disclose appropriately any information of which the FCA or PRA would reasonably expect notice.” While it was previously proposed for this disclosure obligation to apply also to nonexecutive directors (NEDs) that are not approved as senior managers, the FCA has now decided in its final rules to apply the obligation to both NEDs and executive directors who are not approved as senior managers.

Limited scope firms have a reduced set of senior manager functions, and there are some instances where not all executive directors at those firms would need approval. While it was previously envisaged, prior to the FCA’s consultation, that SC4 would apply to all NEDS but not to all executive directors, the FCA has now determined that this does not promote a consistent approach, especially given that nonapproved executive directors would likely have more involvement than NEDs in the running of the business. The FCA has therefore extended the scope of SC4 to all nonapproved executive directors to align the FCA’s expectations of executive directors with its expectations of NEDs.

Firms due to come within the SMCR’s scope from 9 December 2019 should be taking active steps to be ready for implementation. As well as putting in place practical governance arrangements and documentation in line with the FCA’s requirements, broader consideration should be given to firm culture and ensuring that it is consistent with the regime’s expectations of personal accountability and good conduct.


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Louise Skinner
Simon Currie
William Yonge
Steven Lightstone