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16 October 2019

SMCR – Briefing Note for Broking and Trading Firms

On 9 December 2019, all broking and trading firms which are regulated by the Financial Conduct Authority (FCA) will become subject to the Senior Managers and Certification Regime (SMCR).

SMCR is a major reform.  It is designed to encourage individuals to take greater responsibility for the activities or their firms; it will also make it easier for firms and regulators to hold individuals to account.  Broking and trading firms would therefore be well-advised to take great care in their preparation for SMCR.

This note provides a high level summary of SMCR.  Please note that, as most broking and trading firms will fall into SMCR’s Core tier (as opposed to the Enhanced or Limited Scope tiers), this note only addresses the Core tier requirements.

SMCR’s component parts

Senior Managers Regime (“SMR”)

The SMR establishes a list of senior management functions (SMF).  Under the SMR, any individual (Senior Manager) who wishes to perform an SMF will need to be approved by the FCA. 

Certification Regime

This applies to any staff who could pose a risk of significant harm to the firm or any of its customers.  The Certification Regime does not require such individuals to be approved by the FCA.  However, the Certification Regime does require firms to certify that such individuals are fit and proper for their roles, both at the beginning of their employment and on a continuing basis. 

Conduct Rules

These are high-level conduct requirements.  They replace the Statements of Principle and Code of Practice for Approved Persons. 

SMR

Senior Management Functions

The table below sets out the SMFs that may be relevant for Core tier firms. 

SMFs for Core tier firms

SMF

Description

FCA Governing Functions

SMF1

Chief executive function

This is the person(s) with responsibility, under the immediate authority of the governing body, for the conduct of the whole of the business (or relevant activities). Note: Although the Chief Executive is the most senior member of an executive team, it does not mean that a firm’s governing body cannot allocate specific responsibilities to other Senior Managers.

SMF3

Executive director function

A director of a firm, other than a non-executive director.

SMF27

Partner

A partner in a firm, other than a limited partner in a partnership registered under the Limited Partnership Act 1907.

SMF9 Chair

The person with responsibility for chairing, and overseeing the performance of the role of, the governing body of the firm.

FCA Required Functions

SMF16

Compliance oversight function

This is the person responsible for the compliance function in the firm and reporting to the governing body on this.

SMF17

Money laundering reporting function

This is the person who has responsibility for overseeing the firm’s compliance with the FCA’s rules on systems and controls against money laundering.

 

Not all SMFs will be relevant for all firms.  SMF27 (Partner), for instance, will clearly not be relevant if the firm is a limited company.  SM3 (Chief executive) will not be relevant if the firm is small and does not have a CEO.

Broking and trading firms, must determine which SMFs apply to them and which Senior Managers will be carrying them out.

Prescribed Responsibilities

Firms must assign all applicable prescribed responsibilities (Prescribed Responsibilities) among their Senior Managers.

The table below shows the Prescribed Responsibilities that apply to Core tier firms (other than authorised fund managers, which have an additional Prescribed Responsibility).

Prescribed Responsibilities for Core tier firms in the broking, trading and markets sector

Handbook

Prescribed Responsibilities Reference

Description

(a)

Performance by the firm of its obligations under the SMR, including implementation and oversight.

(b)

Performance by the firm of its obligations under the Certification Regime.

(b-1)

Performance by the firm of its obligations in respect of notifications and training of the Conduct Rules.

(d)

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

(z)

Responsibility for the firm’s compliance with CASS (if applicable).

 

Prescribed Responsibilities (a), (b), (b-1) and (d) will be applicable to all firms but clearly (z) may not be (and will not be relevant for proprietary trading firms).

Not all Senior Managers must have a Prescribed Responsibility but each applicable Prescribed Responsibility must have a Senior Manager. 

Generally speaking there should only be one Senior Manager who is responsible for each Prescribed Responsibility.

Statements of Responsibility

Every Senior Manager must have a statement of responsibility (Statement of Responsibility).

A Statement of Responsibility must be set out in the applicable template from the FCA Handbook.

A Statement of Responsibility must explain:

  • the responsibilities that the Senior Manager is to perform as part of their SMF; and
  • how those responsibilities fit in with the firm’s overall governance and management arrangements.

A Statement of Responsibility is not the same as a job profile.  It should not describe the competencies and skills required for the role nor should it state how the responsibilities should be discharged. It should focus on the matters for which the Senior Manager is accountable.

A Statement of Responsibility should contain succinct, clear descriptions of each responsibility while avoiding unnecessary detail.  The FCA has stated that these descriptions should not usually exceed 300 words.

A Statement of Responsibility must be a self-contained document and may not cross refer to other documents, attachments or links.

Duty of responsibility

A crucial feature of SMR is the concept of a duty of responsibility (Duty of Responsibility).  Senior managers can face enforcement action if:

  • their firm contravenes a regulatory requirement for which they are responsible; and
  • they did not take such steps as a person in their position could reasonably be expected to take to avoid the contravention occurring (or continuing).

Certification Regime

The Certification Regime is aimed at individuals (Certification Staff) who, while not within the scope of SMR, could nevertheless pose a risk of significant harm to the firm or any of its customers (where applicable).

While Certification Staff are not subject to regulatory approval, firms must certify such persons and as being fit and proper to perform the relevant functions (Certification Functions).  This certification must take place before the individual begins to perform the functions (save for those carrying out such functions on 9 December 2019) and on an annual basis for as long as they perform them.

The Certification Functions are as follows:

  • CASS oversight;
  • Proprietary trader;
  • Significant management;
  • Functions requiring qualifications;
  • Managers of certification employees;
  • Material risk takers;
  • Client-dealing; and
  • Algorithmic trading.

Not all Certification Functions will be relevant to all firms.

Firms must identify which individuals are performing Certification Functions before 9 December 2019.  However, firms will have until 9 December 2020 to certify such staff as fit and proper

A Senior Manager who performs a Certification Function which is closely linked to their SMF would not need to be certified in order to perform that Certification Function. However, if a senior manager performs a Certification Function that is notably different from their SMF then they would need to be certified in order to perform that Certification Function.

Conduct Rules

Firms must ensure that their compliance manuals and procedures reflect the requirements of the Conduct Rules. The Conduct Rules apply to the following staff (Conduct Rules Staff):

  • all Senior Managers;
  • all Certification Staff;
  • all non-executive directors who are not Senior Managers;
  • all other employees, except the following ancillary staff (ie people who do not perform a role specific to financial services);
  • receptionists;
  • switchboard operators;
  • postroom staff;
  • reprographics/printroom staff;
  • property/facilities management;
  • events management;
  • security guards; and
  • invoice processing staff.

The FCA’s view is that staff carrying out a broad range of roles have the potential to cause harm and that, as such, the Conduct Rules should apply to the majority of employees working in FCA-authorised firms.

There are two tiers to the conduct rules:

First Tier – Individual Conduct Rules (which apply to all Conduct Rules Staff)
  • You must act with integrity;
  • You must act with due care, skill and diligence;
  • You must be open and cooperative with the FCA, the Prudential Regulation Authority and other regulators;
  • You must pay due regard to the interests of customers and treat them fairly; and
  • You must observe proper standards of market conduct.
Second Tier – Senior Manager Conduct Rules (which apply to Senior Managers)
  • You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively;
  • You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system;
  • You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively; and
  • You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice.

Firms must provide training regarding the Conduct Rules to all Conduct Rules Staff.

Applications under SMR

Process

Firms must to ensure that individuals are approved by the FCA before beginning to perform an SMF.  Failure to do so may lead to enforcement action being taken against the firm, the individual, or both.

Firms must undertake due diligence to satisfy themselves as to the appropriateness of the relevant individual.  Firms may wish to engage with the FCA before submitting the application, particularly if the application is sensitive in nature or for a key role.

Generally speaking SMR applications must be made via Connect.  Applications must be made by the firm (the applicant) and countersigned by the individual (the candidate). Applications must include:

  • evidence of the due diligence undertaken in appointing the candidate;
  • confirmation that the firm has obtained and scrutinised regulatory references and completed a DBS check;
  • an account of the basis on which the firm has concluded that the candidate is fit and proper to perform the relevant role.

Firms must disclose all matters relating to a candidate's fitness and propriety. If in doubt as to whether a particular matter may have an impact on a candidate's fitness and propriety, the information should be disclosed.

Fitness and propriety – SMR and certification regime

In order to be approved by the FCA under the SMR or certified by their firm under the Certification Regime, an individual must meet certain standards of fitness and propriety.

The following should be taken into account when assessing fitness and propriety:

  • Honesty, integrity and reputation;
  • Competence and capability; and
  • Financial soundness.

As part of the assessment of fitness and propriety, firms must request a regulatory reference from all previous employers covering the past six years of employment.  There are various requirements governing the seeking, giving and updating of regulatory references.

Grandfathering

The FCA has stated that “Individuals at Core and Limited Scope firms will be automatically converted wherever possible, with no action required by firms” and that “Firms won’t have to apply for re-approval for currently approved individuals where there is no substantive change in the individual’s role before and after the commencement of the SM&CR”

Some current controlled functions will be automatically converted into SMFs.  These are set out in the table below:

Current controlled functions

SMFs

CF1 – Director

SMF3 – Executive Director

CF2 – Non-Executive Director

SMF9 – Chair (Please note that non-executive directors at Core tier firms who are not the firm’s Chair will no longer be approved by the FCA)

CF3 – Chief Executive

SMF1 – Chief Executive

SMF19 – Head of Third Country Branch (where relevant)

CF4 – Partner

SMF3 – Executive Director (in the context of Third Country Branches only)

SMF27 – Partner

CF5 – Director of Unincorporated Association

SMF3 – Executive Director

CF6 – Small Friendly Society Function

SMF3 – Executive Director

CF8 – Apportionment & Oversight

SMF29 – Limited Scope

CF10 – Compliance Oversight

SMF16 – Compliance Oversight

CF11 – Money Laundering Reporting Officer (MLRO)

SMF17 – Money Laundering Reporting Officer (MLRO)

CF29 – Significant Management Function

SMF21 – EEA Branch Senior Management Function (Individuals holding CF29 at other Core tier firms will not be automatically converted to an SMF)

 

Current controlled functions at Core tier firms that are not listed above, will not be automatically converted on 9 December 2019.  These include:

  • CF2 – Non-Executive Director (NED) (unless the individual will hold SMF9 – Chair);
  • CF10a – CASS Oversight Function;
  • CF28 – Systems & Controls Function;
  • CF29 – Significant Management Function (though this can be converted to the new EEA Branch Manager function for EEA Branches); and
  • CF30 – Customer Function.

Most of the individuals holding these controlled functions are likely to fall into the Certification Regime.

Directory of Financial Services workers

Alongside SMCR, the FCA is introducing a new Directory of Financial Services Workers (Directory) which will include various details regarding, inter alia, Senior Managers and Certification Staff.

The Directory will include various details regarding the following staff (Directory Staff):

  • Senior Managers;
  • non-executive directors who are not Senior Managers;
  • Certification Staff; and
  • other important individuals who undertake business with clients and require a qualification to do so.

Firms will be responsible for providing the FCA with information regarding Directory Staff and for keeping that information up-to-date. Firms will provide this information via Connect.

Next Steps

Broking and trading firms should:

  • Establish if Core Firm / Limited Scope Firm / Enhanced Firm*;
  • Establish who are Senior Managers / Certified Staff / Conduct Rules Staff;
  • Allocate/ agree Prescribed Responsibilities / Other Responsibilities for Senior Managers;
  • Agree Statements of Responsibilities for Senior Managers;
  • Fit And Proper assessments for Senior Managers
  • Conduct Rules training for all staff
  • Update internal policies and procedures for SMCR (including annual reviews); and
  • Prepare for Certification Regime (end 2020).

* NB additional steps if Enhanced Firm.

Please let us know if you would like to discuss any of these points further.

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