New FCA CP19/04 - optimising SMCR and feedback to DP16/4 Overall Responsibility and the legal function

This article will cover the key proposals of the recently published FCA Consultation Paper 19/4 and the next steps for SMCR.

The FCA has published Consultation Paper 19/4 Optimising the Senior Managers & Certification Regime and feedback to DP16/4 - Overall responsibility and the legal function.

The key proposals and categories of firms to which each will be relevant are indicated below.

Legal function as a Senior Manager Function?

For banks, Solvency II/ large non-directive (NDF) insurers and Enhanced solo-regulated firms, one key point of interest is the proposal to exclude the legal function from the Overall Responsibility Requirement in the SMR:

  • The Paper indicates that 24 of 33 responses to the original Discussion Paper in 2016 suggested the Legal Function should be removed from the SMR.

  • Key concerns raised included protection of legal professional privilege, independence of the function and practical/policy-related justifications.

  • The FCA acknowledges the possible restrictions on its Senior Manager supervisory processes arising due to privilege.

  • The FCA indicates that:
    • In-house lawyers are expected to be subject to the Individual Conduct Rules, and
    • Heads of Legal will also fall under the Certification Regime as either an MRT or Significant Management Function (with a proposal to add additional guidance to the Handbook to make this clear).
  • Given that, the FCA’s view is that including Heads of Legal in the Certification Regime and applying Individual Conduct Rules delivers 'most of the benefits of including individuals within the SMR' without compromising privilege.

  • This is considered to be sufficient to drive up standards to conduct and ensure the F&P of legal staff.

  • Nothing in the proposals prevents a Head of Legal holding a Senior Manager function. Where that is the case (ie, where the Head of Legal performs another SMF) firms will be expected to clearly outline the responsibilities for each role in the relevant Statement of Responsibilities.

The Other Overall Responsibility Function (SMF18) (under which the Head of Legal was proposed to be captured) does not apply for Core or Limited Scope solo-regulated firms. Consequently it is clear that Core and Limited Scope Firms will not be required to designate a senior manager who is assigned overall responsibility for the legal function.

What are the wider proposals?

The key proposals - which focus on points which the FCA identified as requiring further consideration when consulting on the extension of the regime to insurers and solo regulated firms - are:

Proposal Summary   Firms affected

Proposal to exclude the Legal Function from the Overall Responsibility Requirement in the SMR.

Proposal to exclude the Legal Function from the Overall Responsibility Requirement in the SMR.

  • Banks
  • Solvency II and large non-directive (NDF) insurers
  • Enhanced solo-regulated firms
  • For the avoidance of doubt: the Other Overall Responsibility Function (SMF18) (under which the Head of Legal was proposed to be captured) doesn’t apply for Core or Limited Scope firms

Client Dealing Function

Proposal (as indicated in the FCA’s article last November) to amend the scope of the Client Dealing Function in the Certification Regime to allow firms to exclude purely administrative roles that involve “taking part in” investment activities.

  • Banks
  • Solvency II and large NDF insurers
  • Other (non-Solvency II/ non-large NDF) insurers
  • Enhanced solo-regulated firms
  • Core solo-regulated firms
  • Limited-scope solo-regulated firms

Systems and Controls functions

Proposal to ensure that the Certification Regime applies to individuals performing roles that were Systems and Controls functions under APER but which are no longer approved under SMCR, in order to ensure that firms assess the F&P of such individuals at least annually. 

  • Other (non-Solvency II/ non-large NDF) insurers
  • Core solo-regulated firms
  • Limited-scope solo-regulated firms 

Application of Senior Manager Conduct Rule 4 (SC4) to non-approved Executive Directors

Proposal to apply SC4 (obligation to disclose information of which the regulator would reasonably expect notice) to non-approved Executive Directors at Limited Scope firms to ensure that executive and non-executive directors at these firms are subject to equivalent requirements on this point.

  • Limited-scope solo-regulated firms

Intermediary revenue criteria for the Enhanced tier

Proposed amendment to the intermediary revenue criteria for the Enhanced tier (to ensure large or complex firms are allocated to the correct tier).

  • Enhanced solo-regulated firms
  • Core solo-regulated firms

Next steps

  • The consultation is open until 23 April 2019.

  • Rules and guidance will follow in a Policy Statement in Q3 2019, with the intention that the changes will take effect before 09 December 2019.

  • Insurers and banks can rely on the existing statements on the Client Dealing Function and the Legal Function on the FCA’s website (linked) when considering how overall responsibility and the application of the Client Dealing Function pending the new rules and guidance. 

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.