The government have provided that by 2018 the Senior Managers Regime (SMR), Certification Regime (CR) and Conduct Rules will apply to all firms authorised by the Financial Conduct Authority (FCA). The FCA for its part has made it very clear that this regime is aimed directly at those individuals who are responsible for the actions of financial services firms, and that it will in future be looking to hold such individuals personally accountable for any compliance failure by the firm. The FCA has not only stated that enforcement against individuals is the way forward, but is also actively gearing up to deal with the consequences of this approach, including the likely increase in tribunal appeals.
The long delayed FCA consultation paper is now scheduled for quarter 2 (although this is likely to mean June rather than April); however, the implementation date of 2018 remains unchanged and there is no prospect of this date moving. The FCA has confirmed that although there will be differences, the provisions that firms will need to introduce are likely to be broadly similar to those currently applying to banks, and has stressed the extent of preparation that will be needed to comply with the new regime.
In the circumstances, the FCA is advising affected firms to press on now with preparation for compliance based on the existing banking regime. Although some changes will inevitably have to be made following the consultation, the FCA’s opinion is that firms “will be half way there” if they prepare now. On the other hand, based on the experience of the banks, one thing is certain – if firms continue to wait for the release of the consultation paper before commencing preparations for implementation they are unlikely to have the time they will need to complete them
Firstly, early preparation is needed to provide feedback to the FCA. The difference in individual firm structures makes it difficult to identify which employees fall under the certification regime. The FCA has therefore indicated that it will consult widely with the industry, firms and consumers on their proposals, and request that firms identify and notify the FCA of individuals not falling within the current CR functions. The FCA will then consider such individuals when developing the regime, in an attempt to reduce the number of changes needed post implementation.
Secondly, if consumer credit firms do not start preparing now, it is highly likely they will fail to be compliant by 2018. The scale and depth of preparation required by firms to comply with the regimes black letter requirements and cultural changes should not be underestimated, and the period between publication of the consultation paper and implementation is too narrow to allow firms to safely wait until publication to prepare.
Thirdly, consumer credit firms should consider lessons learnt by the banks to avoid making the same mistakes. Work carried out by the FCA to ensure senior managers responsibilities are properly allocated and understood has, one year on, evidenced challenges experienced and lessons learnt by the banks. The FCA has confirmed “there continues to be work needing to be done” to achieve the objective of increasing individual accountability within the banking sector. Work carried out by the FCA evidences that in some firms responsibilities had been overlapped or were unclear, and had on occasion even been shared between employees. This clearly obscures who is genuinely responsible.
The management responsibilities map and statement of responsibilities which must accompany an FCA SM’s application are likely to be very similar to those currently used by the banks. Firms should use the map to set out all SM’s and their responsibilities in light of the 16 new Senior Manager Functions; they should also notify the FCA of any relevant individuals not falling within the current functions. On identifying the SM’s and their responsibilities, firms can then draft their statements of responsibilities keeping in mind the need to avoid overlap and uncertainty. Although alterations may be needed post release of the consultation paper, the majority of work will have been done, if started now.
Firms should also begin implementing processes for assessing fitness and propriety of individuals throughout the firm. This is a requirement of the regime which banks have found particularly difficult to implement due to many situations not being clear cut. To ensure firms remain compliant, robust processes are needed to address uncertain areas and provide consistent decisions; this will take a great deal of time to build and implement. The FCA have been relatively generous in allowing the banks time to sort out their implementation problems, not least because the FCA themselves have been coming to terms with the detailed implications of the new regime. However, they are unlikely to be so generous a second time
Fourthly, the FCA has made it clear that the new regime will be broader in its approach, and more employees will be caught both by the certification regime and the conduct rules. It is likely that proportionality will be a significant factor when applying the regime, but the extent to which it applies in practice will not become apparent until the consultation gets under way.
To sum up, there is a lot of work that needs to be done over the next 9 – 12 months, and the key message from the FCA is that firms should start to prepare now rather than continue to wait for the consultation paper!
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