Senior Managers and Certification Regime (SMCR)

What is SMCR?

There are three key parts to the SMCR: Senior Managers Regime, Certified Persons Regime and Conduct Rules.

• Senior Managers Regime
  This enforces a detailed and clear allocation of responsibilities between senior managers at each firm, with particular emphasis placed on key documents - 'Statements of Responsibilities' and 'Responsibilities Maps'. These help to record the distribution of responsibility to individual Senior Managers and to demonstrate to the regulators that there are no gaps or excessive overlaps.
  
  Always bear in mind that Senior Managers have a statutory duty of responsibility "to take reasonable steps to prevent regulatory breaches in the areas of the firm for which they are responsible".
• Certification Regime
  This requires firms to check and confirm that employees performing roles relating to the firm's regulated activities are fit and proper, based on their qualifications, competence and personal characteristics.
  
  Once this has been confirmed, the firm needs to issue them with a certificate that must be renewed every year.
• Conduct Rules
  This consists of a set of rules provided in the FCA's Code of Conduct Handbook (COCON) that covers all individuals: Senior Managers, Certified Persons and other employees.

SMCR Scope

SMCR rollout waves

The SMCR has been rolled out in three waves:

• Wave 1: Banks, building societies, credit unions and large investment firms in March 2016 (updated July 2018)
• Wave 2: Extended to insurance firms (those regulated by the FCA and PRA) in December 2018
• Wave 3: The remaining financial services firms (otherwise known as 'solo-regulated firms' since they are regulated only by the FCA, not the FCA and PRA) came under the scope of this regime in December 2019.

SMCR categories

The range of firms in the third wave is very diverse. Consequently, the FCA has grouped them into three categories to ensure that the regulation is proportionate to their sizes and activities:

• Core: Firms that have to comply with the baseline requirements for solo-regulated firms
• Limited scope: Firms that already had exemptions under the Approved Persons Regime, and are exempt from some requirements and require fewer senior management functions
• Enhanced: Firms that have extra requirements - these are large, complex firms with potential impact on consumers or markets which warrant more attention from the FCA

How to Comply with SMCR

1. Statement of Responsibilities - Set out the areas for which each Senior Manager is personally accountable
2. Responsibilities Map - This knits together the Statement of Responsibilities
3. Pre-approval for all Senior Managers - obtain this from the regulators before they carry out their roles
4. Duty of Responsibility - Ensure that Senior Managers understand their responsibilities and take reasonable steps to prevent regulatory breaches in their areas of responsibility
5. Identify all Certified Persons - These are all material risk takers
6. Fit and Proper Assessment - Of all Certified Persons, then re-assess on an annual basis
7. Training - Of all those who are subject to the Conduct Rules

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SMCR Training

To stay on the right side of the FCA's guidance, all firms must ensure that all employees subject to the conduct rules are notified and provided with 'suitable' training.

Such training must result in employees gaining awareness and a broad understanding of all of the conduct rules, as well as a deeper understanding of the practical application of the specific rules which are relevant to their work.

To help with SMCR implementation, we have created a 3-step training model.

We provide a comprehensive set of SMCR training courses for all financial firms, including banking, insurance and solo-regulated firms.

SMCR Functions

The Senior Managers Regime (SMR) applies to those who perform a Senior Management Function (SMF). The FCA has classified specific functions as SMFs, so that it knows who a firm's senior decision-makers are, and to make sure that firms clearly allocate specific responsibilities to those key individuals.

In certain circumstances, firms can have more than one individual performing a single SMF. However, the FCA expects that SMFs are only shared where it is justified and appropriate.

The list of SMFs that apply depends on the type of firm.

5.1 Governing Function SMFs

5.2 Required Function SMFs

The Overall Responsibility requirement means that an Enhanced firm will need to make sure that every activity, business area and management function has a Senior Manager with overall responsibility for it. This is to prevent an unclear allocation of responsibilities.

Overall Responsibility means that a Senior Manager:

• Has ultimate responsibility for managing or supervising a function
• Briefs and reports to the governing body about their area of responsibility
• Puts matters requiring decisions about their area of responsibility to the governing body

5.3 Systems and Control SMFs

SMCR Responsibilities

You need to be aware that there are more responsibilities for Senior Managers than just the ones found within each SMF's definition. The regulators have listed certain 'Prescribed Responsibilities' (PRs) that each firm is required to allocate between Senior Managers.

Each PR would generally be allocated to the Senior Manager who performs the SMF most closely linked to the given responsibility. PRs can be shared but not split between Senior Managers. Where responsibility is shared, it is recorded identically in each of the Senior Manager's Statements of Responsibilities.

If there is a breach, all Senior Managers sharing that responsibility may be required to demonstrate that they took reasonable steps to prevent or stop the breach.

The list of PRs that applies depends on the type of firm. Responsibilities (a), (b), (b-1), (d) below cannot be allocated to SMF 18 (Other Overall Responsibility) and responsibilities (j), (k), (l) below should be performed by a non-executive director if possible.

Duty of Responsibility

Senior Managers have a statutory duty of responsibility "to take reasonable steps to prevent regulatory breaches in the areas of the firm for which they are responsible".

The FCA can take action against a Senior Manager (SM) where it can show that:

• There was misconduct by the SM's firm,
• At the time of the misconduct or during any part of it, the SM was responsible for the management of any of the firm's activities in relation to which the misconduct occurred, and the SM did not take such steps as a person in their position could reasonably have been expected to take to avoid the misconduct occurring or continuing.

The burden of proof for all these elements lies on the FCA. The SM does not need to show that they took reasonable steps - rather, it is for the FCA to prove that they did not. The defence against such action is if the senior manager can show that they took "the steps that are reasonable for a person in that position to take to prevent a regulatory breach from occurring".

Fitness and Propriety

The FCA must approve all senior managers, which assess whether they are fit and proper to perform the given function or responsibility.

Three key factors determine whether you are Fit and Proper:

1. Honesty, integrity and reputation
2. Competence and capability
3. Financial soundness

When determining a person's financial soundness, the FCA will not normally require a statement of assets or liabilities of the person. Limited financial means does not in itself affect the suitability of a person to perform an SMF.

When appointing a Senior Manager or Certified Person, firms must obtain a regulatory reference from all their past employers going back six years. This requirement also applies when appointing NEDs who are not Senior Managers.

For this purpose, firms need to retain records of disciplinary and fit and proper findings going back six years and not enter into arrangements that conflict with their disclosure obligations.

SMCR Conduct Rules

SMCR incorporates new high-level standards of behaviour that apply to almost all employees who carry out financial services activities in a firm. Some Conduct Rules apply to all employees, while others apply only to Senior Managers.

The Conduct Rules are intended to drive up standards of individual behaviour in financial services. By applying them to a broad range of staff, the FCA aims to improve individual accountability and awareness of conduct issues across firms.

Individual Conduct Rules (ICRs)

These apply to all employees, with the exception of ancillary staff, such as facility managers, personal assistants, receptionists, medical staff, IT and HR, who perform a purely non-financial service's role. These ICRs also apply to Non-Executive Directors.

• ICR 1: You must act with integrity
• ICR 2: You must act with due skill, care and diligence
• ICR 3: You must be open and cooperative with the FCA, the PRA and other regulators
• ICR 4: You must pay due regard to the interests of customers and treat them fairly
• ICR 5: You must observe proper standards of market conduct

Senior Manager Conduct Rules (SMCRs)

These apply only to Senior Managers, including NEDs (SC 4 even applies to out of scope NEDs)

• SC 1: You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively
• SC 2: 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
• SC 3: 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
• SC 4: You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice

SMCR Best Practices

Stay up to date with SMCR best practices, industry insights and key trends across regulatory compliance, digital learning, EdTech and RegTech by subscribing to the Skillcast Compliance Bulletin.

3-Step SMCR Training Model

Whether you're new to the SMCR or benchmarking existing processes, our training model will help get your compliance training on track.

FCA Conduct Rules Training Aid

Our desk aid has ten tips on how to ensure your staff fully understand and adhere to conduct rules.

FCA COCON Breaches Desk Aid

Our desk aid reminds all of your staff fully of the ten easiest ways to breach the FCA Code of Conduct.

Operational Resilience Implementation Checklist

Ensure your firm follows the FCA guidelines for a compliant operational resilience programme.

Fit and Proper Training Presentation

Firms need to assess the Fitness and Propriety (F&P) of Senior Managers and Certified Persons when they are appointed and on an ongoing basis. Our F&P training presentation uses scenarios to help explain this further.

SMCR & Non-financial Misconduct

A lack of public confidence and some damaging press stories have renewed the FCA's focus on conduct, including non-financial misconduct. Find out more, including a free training module and a desk aid.

SMCR Solo-Regulated Firms Key Questions Answered

We answer the questions every solo-regulated firm has been asking.

SMCR Insurance Firms Key Questions Answered

We also answer the questions every insurance firm has been asking.

How to Evidence your SMCR Competence

If you cannot articulate what is adequate and competent within your firm, you simply won't be able to evidence SMCR compliance when the FCA comes knocking!

How to Prevent SMCR Training Damaging Staff Motivation

SMCR created a step-change in personal accountability, causing a headache, especially when dealing with those who've never been accountable before. That's why it's important to take steps to address any issues before they spiral out of control.