FCA - Final rules on SMCR and confirmation on Head of Legal - overview

The FCA has now published the Final Rules extension of the Senior Managers & Certification Regime (SMCR) and additional changes following consultation on optimisation of the SMCR in PS 19/20.

Broadly the final rules are similar to the near-final rules previously published in PS 18/14. However, there are a few key points to note (some of which will be of interest to banks and insurers already in scope):

  • Head of legal function: Confirming the approach the FCA proposed in CP19/4, the head of legal function is not a senior management function, due to the difficulty in applying the senior manager regime to lawyers due to the restrictions arising from legal privilege. Those performing this function will be subject to the certification regime and conduct rules. Enhanced firms applying the requirements of SYSC 26 (the no gaps approach) may allocate overall responsibility for the legal function (and its associated functions, such as HR services for the legal staff) to someone who is not an SMF manager. The Policy Statement indicates that dual regulated insurers may wish to consult the PRA for guidance on whether or not the Head of Legal should be treated as a Key Function Holder.

  • Enhanced scope firms category expanded: The scope of the Enhanced Firm category will be expanded to bring Non-Retail Mediation Activity (RMA) B firms in scope. We don’t expect this to impact many of our clients. These are firms with over £35m in regulated revenue (as a 3-year rolling average) from activities undertaken using the following permissions:
    • Retail investment activities
    • Advising on P2P agreements (except when carried on exclusively with or for professional clients
    • Advising on pensions transfers & opt-outs
    • Arranging (bringing about deals) in retail investments
    • Home finance mediation activity
    • Insurance mediation activity (non-investment insurance contracts)
  • Client-dealing function excludes those not exercising skill or discretion: The scope of the client-dealing function has been amended to exclude an individual who has no scope to choose, decide or reach a judgement on what should be done in a given situation and whose tasks do not require them to exercise significant skill, confirming the approach the FCA proposed in CP19/4. The FCA declined to give further guidance on the interpretation of client-dealing function activities such as "dealing", "arranging" and the application of function to sales and product specialists, saying it would depend on the firm’s business and the way responsibilities were allocated across its staff.

  • Systems and controls function should be certified: For Core and Limited Scope firms, the CF28 (Systems and Controls Function) is now an example of the significant management certification function, so individuals carrying out this function will need to be certified to the extent that they do not already fall into a certification function. This means that individuals performing the chief finance officer, chief risk officer, head of internal audit and chief operations functions for a Core or Limited Scope firm will need to be certified on that basis (unless they are already performing that function as part of their job as an executive director (SMF3).

  • SC4 extended to apply to non-approved executive directors at Limited Scope firms: In the Limited Scope tier, which includes sole traders, limited permission consumer credit firms and other businesses which are not primarily financial, a narrower set of SMFs apply. In some cases, executive directors do not need to be approved as a senior manager. However, they will be required to comply with Senior Manager Conduct Rule 4 (the requirement to disclose appropriately any information of which the FCA or PRA would reasonably expect notice).

  • Form changes: Some minor changes have been made to Form H and Form O.

  • Key dates: Fixed dates are set as:
    • Form O start date - 09 June 2019 - firms permitted to lodge Form O to opt up from Core to Enhanced or from Limited Scope to Core
    • Enhanced firm cut-off date - 01 September 2019 - a firm must meet the Enhanced firm criteria at this date to be treated as an Enhanced firm for the purposes of the Transitional Provisions
    • First notification date - 09 September 2019 - Form A and Form K available
    • Final notification date (Form K) - 06 December 2019 - deadline for firms to submit Form K (although - NB - this contradicts the information currently contained on the FCA’s website which indicates that 24 November 2019 is the deadline for submitting Form K and Form O. We are seeking clarification of this with the FCA
    • Commencement date - 09 December 2019 - the date the SMCR applies to solo-regulated firms

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.