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Senior Managers Regime for IFAs

By the end of June (FCA willing) we should have the consultation paper covering the Senior Managers and the Certification Regime (SM&CR), to the wider financial services arena in 2018. However, it is worth noting that the Director of Supervision stated in March that the consultation may not appear until “the summer”.

How will this affect financial advisers?

It may serve as a very nasty shock and cause a great deal of work and some sleepless nights in some firms. This is because it is a regime which has little relation to that with which they have had to comply already. Indeed, it was the third greatest concern after Brexit and MIFID II to those in the industry when surveyed. Yes, the approved person’s regime requires compliance with the principles set out in the FCA handbook, and an approved person is FCA approved, but we believe that the new regime for financial advisers, among others, will go much further.

The Senior Insurance Managers Regime (SIMR) was implemented with relative ease by the mutual insurance industry. However, there are some substantial differences between that and what may hit financial advisers. SIMR does not contain the personal duty of responsibility set out in the Senior Managers Regime (SMR). In fact, that duty could lead to the offence of reckless misconduct under the SMR. Indeed, the duty applies to the vast majority of bank employees under the SMR but only to pre-approved persons under the SIMR. The certification regime does not apply to the SIMR. The emphasis will be on personal responsibility and duties.

An approved person at a firm of financial advisers, a wealth manager, an investment adviser, an insurance or mortgage broker or a consumer credit adviser currently holds a controlled function. That person will have been approved as fit and proper after looking at his or her honesty, capability, competence, and financial soundness. Such person must comply with the statements of principle and codes of practice for approved persons in APER. If there is a problem with that person, the FCA may withdraw his status, grant a prohibition order, take disciplinary action for misconduct or fine individuals who perform a function without approval. While those sanctions can have a dire outcome, we believe that the duties to be observed under the upcoming changes will be even more onerous.

The SMR imposed wide personal responsibilities on individuals which did not appear in the SIMR. The broad differences between the regimes are set out above. So the question is, which way will the FCA jump when looking at advisers? It is clear to us that there will be a great deal more personal accountability of individuals as, after all, that is where the decisions are taken. There is likely to be a much-reduced ability to hide behind a corporate veil and there will have to be clearly demonstrable evidence as to how senior management decisions (of all types) are reached.

What are the changes likely to be?

In practical terms we believe that the changes will be along the following lines:

  1. The approval regime may be focused very much on the senior management – executive and non-executive – with requirements on firms to submit or have available robust documentation on the scope (and limitation) of individual responsibilities/job specification and authority. That senior management will extend beyond formal directors and will certainly cover all of the existing controlled function holders.
  2. A statutory requirement for senior managers (note this goes beyond directors) to take reasonable steps to prevent regulatory breaches in their areas of responsibility. This will probably need to be evidenced by them showing what steps they took (or did not take) and why they were considered reasonable. Without demonstrating that they took action, they may become liable to reckless misconduct in a form similar to that under the SMR.
  3. A requirement on firms to certify as fit and proper individuals who perform any function that could cause significant harm to the firm or its customers. That could go beyond a controlled function. That certification may well apply both on recruitment and annually thereafter (with the incumbent obligation to maintain records for six years).
  4. A power for the regulators to apply enforceable rules of conduct to any individual who can impact their statutory objectives.
  5. An enhanced process for showing how the corporate governance within the firm is organised, and there may be a requirement for a less sophisticated form of management responsibilities map required by the SMR. However, such a map may need to focus on the abilities, diversity, knowledge and contribution brought by senior management to the firm.
  6. Clearly those possible features of the extended regime will have very different effects in not only the diverse range of FCA-regulated businesses but also in the size of those businesses. We would expect to see some statement around proportionality, but of course that is different in the eye of each beholder and particularly the regulator.
  7. It should be remembered that most adviser firms are corporate bodies, and that there are numerous existing duties to comply with under company law, but that coming down the line is the current government pressure on corporate governance.

What about the potential impact on firms?

In the case of the SIMR, there was a reduction in the number of appointments subject to prior regulatory approval, although the work and costs of those who do need approval will increase together with the effort of putting together the required information. Similar to the SM&CR regime, many people below senior management are likely to become annually certified persons and will clearly cost time and energy in complying with the certification requirements together with all the appropriate monitoring and recording of information about the performance and suitability of the relevant employees. While large advisory firms have such processes in place already, we believe that smaller firms may struggle to provide these.

All of this must also be seen in the context of the enhanced whistleblowing requirements and protection for whistleblowers. While the principle of whistleblowing is well founded, it is open to abuse, particularly by aggrieved employees and those who feel put upon. The resultant damage and delays caused to the business by regulatory enquiries can be substantial. Therefore, being able to demonstrate good compliance with the upcoming processes should reduce any pain in this direction.

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This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.

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