Ask the experts: Senior Managers and Certification Regime extension

Paul Young, managing director and head of compliance, risk management and finance at accountancy firm Grant Thornton, talks through the Senior Managers and Certification Regime and its extension, to be implemented in 2019
by Bethan Rees

What is the Senior Managers and Certification Regime, and the extension?The Senior Managers and Certification Regime (SMCR) is being rolled out in two phases. Phase one, which came into force in March 2016, affected banks, building societies, credit unions and investment firms that are dual-regulated by the FCA and the Prudential Regulation Authority (PRA). This covered about 1,000 firms. It has now been extended to FCA solo-regulated firms, of which there are over 46,000. 

In essence, the aim of SMCR is to drive greater individual accountability of senior persons in an FCA-regulated environment by the establishment of senior managers and certified staff. This will enable the FCA to identify accountable individuals within an organisation when something goes wrong and with it the potential for salary clawback, significant fines and jail term.

Phase two, called the SMCR extension, includes solo-regulated firms such as securities houses, spread betters, hedge funds, private equity firms, consumer finance groups, asset finance firms, and so on. 

The regime is at an entity level, so if you have more than one regulated firm within your group, you will need to implement the regime for each firm.

The Senior Managers Regime includes specified senior management functions (SMFs), which focuses on the most senior individuals within a firm. The SMFs must be individually identified, together with their specific role responsibilities (statements of responsibilities), with more precision than is typical under the Approved Persons Regime.

The Certification Regime includes individuals responsible for key functions, employees who are not senior managers, and material risk takers (MRTs) whose role would make it possible for them to cause significant harm to the firm or its customers. Judgement is required to identify employees that are MRTs or who could cause ‘significant harm’.

The SMCR includes conduct rules and fitness and propriety rules. The application of conduct rules applies to all employees, excluding ancillary staff such as receptionists or cleaners. These rules govern how an individual behaves in their firm. Firms are required to make employees aware that they are subject to the conduct rules and train them on how these rules apply to them. The FCA can take action against any individual that fails to meet these conduct rules, as well as regulated firms that fail to train their staff in how to meet them. SMFs also face an additional layer of conduct rules.

Fitness and propriety rules are also applied to all senior managers and certified staff. These rules govern how an individual behaves in their daily life. The rules include honesty, integrity, competency and capability.
When will the extension happen?The FCA published the near-final rules on the extension of SMCR on 4 July 2018, and it is due for implementation on 9 December 2019. 

On the same day, the FCA published a consultation paper that proposed creation of a new ‘directory’, which will provide a public record of the firms and individuals the FCA and PRA have approved, including certified staff. 
Who categorises the senior managers and the certified population?The regulator approves the senior managers, but the organisation itself approves the certified people. 
What is the penalty for not complying?There is a combination of penalties. First, there are unlimited fines; second, there is remuneration clawback; and third, those who are not compliant could face seven years in prison, and you can potentially have all three at once. 
What should solo-regulated firms do in preparation for the extension? The first steps are to create a core team to kick off the project and identify what type of firm you may be. The FCA has identified three types: Limited scope; Core; and Enhanced. Then to appoint a working committee, or steering committee, and working parties to identify the population of senior managers, certified staff and all other staff that need to be trained on conduct rules. 

About the expert
Paul Young is a managing director and head of finance, risk management and compliance at Grant Thornton, an accountancy firm. Grant Thornton’s clientele mostly covers financial services and Paul leads the team that helps with SMCR implementation, oversight and programme assurance. 

He has previously held roles as managing director and global head of valuations at JPMorgan Chase, and chief finance officer at Barclays Bank, Barclays Capital Markets Division and Bank of America.
For example, asking for organisational charts and identifying not only the senior manager population but also who does a certification role, is an important first step. Identifying and agreeing roles and responsibilities can be a time-consuming task from our experience in phase one.

Governance committees that are involved in the decisions about the operations of a firm need to be assessed as anyone who is a member of such a committee is automatically a member of the regime. 

The infrastructure of the firms needs to be reviewed to assess what mechanism will be used to record who is in the SMCR. Questions a firm should be asking itself are: Do I have to buy a dashboard? Do I get IT to build something? As for every person covered by SMCR, you must retain their job descriptions, their qualifications, their CVs and their annual appraisal records. 
What is the impact of the extension going to be?Similar, but proportional to the size of the firm. The regime’s essence is the same as it was in phase one, so it is not watered down at all – the penalties are the same. 

For further background, see FCA Investigations – on CISI TV
Seen a blog, news story or discussion online that you think might interest CISI members? Email
Published: 13 Aug 2018
  • Wealth Management
  • The Review
  • Compliance, Regulation & Risk
  • SMCR
  • Senior Managers Regime
  • FCA
  • Banking

No Comments

Sign in to leave a comment

Leave a comment