SMCR: FCA Proposes Guidance on the Statement of Responsibilities

The Financial Conduct Authority (FCA) proposed guidance on 11 October 2018 for formulating a Statement of Responsibilities for Senior Managers, ahead of the extension of the Senior Managers and Certification Regime (SMCR) to all FCA solo-regulated firms from December 2019. The FCA also published a consultation paper on 20 September 2018 on the application of SMCR to claims management companies, in light of it becoming the regulator of claims management companies from April 2019.

The FCA is extending the SMCR to all FSMA authorised firms. Under SMCR, all firms must have a Statement of Responsibilities for Senior Managers and all Enhanced firms must also have a Responsibilities Map displaying how their firm is managed and governed. The proposed guidance provides firms with self-assessment questions and examples of good and poor practices, proportionate to whether a firm is a Core, Enhanced, or Limited Scope firm under the SMCR.

The consultation closes on 10 December 2018.

Statement of Responsibilities

The purpose of a Statement of Responsibilities is to make clear what a senior manager is responsible and accountable for, under the ultimate accountability of the firm’s governing body. Importantly, a Statement of Responsibilities is also specific to each legal entity. The key sections of a statement are the following:

1. Core firms – Prescribed Responsibilities, other responsibilities, and supplementary information
2. Enhanced firms – Prescribed Responsibilities, Overall Responsibilities, other responsibilities, and supplementary information
3. Limited Scope firms – other responsibilities and supplementary information

Prescribed Responsibilities are those set out in the FCA’s Guide. Overall Responsibilities are those used to describe responsibilities for the main functions and activities of the business; the FCA includes “market making” and “corporate investments” as examples for a banking group. Other responsibilities can be used to describe responsibilities which have not been covered by the other sections but which are nonetheless business functions and activities; the FCA includes “sales” and “staff training” as examples. Supplemental information can be used to provide any additional information, possibly concerning the scope of activities if a Senior Management Function, such as SMF4 – Chief Risk, varies in detail between businesses.

The FCA includes the following as good practices:

• Explaining the sharing of any responsibilities in the event of departing and incoming senior managers
• Listing the scope of certain functions where relevant, such as human resources functions
• Indicating to whom senior managers are accountable

The FCA includes the following as bad practices:

• Not explaining how a Prescribed Responsibility would work in practice, particularly where a Prescribed Responsibility is divided between individuals or reporting lines
• Not explaining with sufficient clarity where accountability for a responsibility ultimately lies
• Not providing a rationale for senior managers taking on certain responsibilities
• Not providing sufficient specificity for certain Overall Responsibilities, for which the FCA gives “investment research” that could be broken down by client types or asset classes as an example
• Detailing the responsibilities of senior managers in other legal entities

Responsibilities Maps

The requirement to have a Responsibilities Map applies only to Enhanced firms. The FCA states that these should be provided at a legal entity level but if a firm is part of a group, it should show clearly how the firm relates to its group.

The FCA states that good Responsibilities Maps usually have a mixture of graphics and text. When formulating Responsibilities Maps, firms are recommended to consider, amongst other things, whether

• it is easy to understand the firm’s governance structure;
• the information provided is too detailed and more appropriate for a Statement of Responsibilities;
• clear distinctions are made between multiple reporting lines; and
• the remit, membership, and influence of any decisionmaking committees are clear.

Application of SMCR to Claims Management Companies

Ahead of the FCA replacing the Claims Management Regulator as regulator of claims management companies (CMCs) from April 2019, the FCA published a consultation paper on 20 September 2018 on how it proposes to apply the SMCR to CMCs.

Highlighting evidence of misconduct within CMCs, which is harming consumers, the FCA aims to raise standards of governance, management, and professionalism in the sector through its application of SMCR. The FCA previously consulted on high-level standards and rules for CMCs in June 2018, as part of its overall approach to regulating the sector.

The FCA's proposals include

• making a small number of senior roles in a CMC senior management functions (SMFs);
• making certain requirements dependent on whether the CMC is “Class 1” (with annual income of at least £1 million) or “Class 2” (with annual income below £1 million);
• applying the certification regime to certain non-SMFs;
• requiring CMCs, at least annually, to ensure that the individuals performing SMFs and certified functions are fit and proper to do their jobs; and
• introducing conduct standards for nearly everyone who works in a CMC.

SMCR will not apply to solo-regulated firms until 9 December 2019, although the FCA proposes not to subject CMCs to the Approved Persons Regime before then.

The consultation closes on 6 December 2018. The FCA will review the responses and publish its feedback, including the final text of the rules, in Q1 2019.

Driving Cultural Change

The FCA is already rolling out SMCR to most insurers this coming December and to remaining FCA solo-regulated firms from December next year. The FCA’s proposals to extend SMCR to CMCs represents yet another evolution of the reach of SMCR.

While SMCR is designed to improve standards by ensuring key responsibilities are clearly assigned to individuals who are personally accountable, and that staff in certain positions are fit and proper to perform their functions, SMCR’s ongoing rollout is just one component of a broader ongoing conversation about the culture of firms serving the public. It’s a conversation that the FCA is driving, with the expectation that firms will (and must) take note.

In March earlier this year, the FCA published a discussion paper on transforming culture in financial services. In a covering note to the discussions paper, the FCA explained that SMCR is just one step towards effecting cultural transformation:

Culture and governance is a priority for the FCA and we have a strong focus on the role of the individual as well as the firm. The FCA has considered the role of leaders, incentives and capabilities, and governance of decision making. The introduction of the Senior Managers and Certification Regime (SM&CR) is an example of this; it sets minimum standards for the behaviour of financial services staff and aims to promote a culture where Senior Managers take responsibility for identifying where harm might occur, and take action to prevent it. The SM&CR creates a formal link between the behaviour of individuals and the conduct of the firm. 

The ever-expanding number of firms grappling with SMCR should not see the new regulations as a one-off compliance and HR headache, but part of a series of measures to change the attitude and mindsets of firms for the better. Other cultural issues on most firms’ agendas at the moment are gender pay, whistleblowing, and diversity. SMCR is a prime opportunity for each firm new to the regime to self-reflect and ask itself whether it has a culture of which it can be proud – protecting and promoting staff and consumers alike.

Contacts

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:

London
Simon Currie
William Yonge
Louise Skinner
Steven Lightstone