Tag Archives: SM&CR

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SM&CR: the countdown begins

The Senior Management and Certification Regime (or SM&CR) will become part of everyday life for thousands of smaller regulated firms on the 10th December 2019. So, what’s it all about?  What is the impact of this likely to be? Read on to understand more about this important change; what it is and how you might be affected.

What is SM&CR?

After the dust settled on the Financial Crisis in 2008, the Government looked long and hard about what caused it to understand how such a melt-down could be avoided in the future. They concluded that the primary fault didn’t lie with regulation, but in a failure of the culture within authorised firms. In some cases, the actions and messages being communicated by senior managers undermined, rather than supported, good regulation and good business practice.

The result is SM&CR, also increasingly (and accurately) referred to as the ‘accountability regime’. This is designed to make the people who run authorised firms – of all types – personally responsible for their actions and for failings that lead to significant customer detriment. The intention is to put individual responsibility at the heart of how regulated firms conduct themselves. The banks and insurers have been subject to these requirements for over 2 1/2 years and on the 10th December 2019, it will also apply to all solo-regulated firms, i.e. FCA-only regulated firms.

The new rules will replace and expand the current approved persons regime. There are 3 key parts to the SM&CR:

  1. the Senior Managers Regime
  2. the Certification Regime
  3. Conduct Rules

Earlier this year, the Patterson Group conducted a survey that asked those preparing for SM&CR for their views. The results of this are shared with you to identify some of the likely key issues. It should also enable you to better understand what other smaller firms are thinking and how of people perceive the potential impact of SM&CR.

Click here and here for further details of SM&CR from the FCA website

Click here for the very useful CII SM&CR resource hub

Prepared for SM&CR?

This article was written on the 11th December 2018 so we know that SM&CR will be extended to all authorised firms in a years time. The next few months will be crucial in planning the implementation of this.  A year sounds like a long time but not when you look more deeply at what it entails.

SM&CR will apply to firms irrespective of size. 76% of those who responded worked for larger firms, 24% for medium sized firms and, interestingly, there were no responses from small firms.  This could  possibly indicate that their awareness of SM&CR is lower and they felt less able to comment on it.

Reassuringly, the survey found that most respondents felt senior management understood the key issues. A respectable 82% of respondents agreed or strongly agreed that management grasped the key issues; only 18% of respondents did not.  Many appeared to already be making plans for the introduction of SM&CR.

What will SM&CR cost?

We asked about the perceived expense of meeting SM&CR. Significantly, 65% believe that SM&CR will represent a significant cost to their business. This is broadly in line with what the existing banks and insurers have found. That said, these larger organisations already have many of the processes that are necessary such as performance management systems and appropriate record keeping. The costs for smaller firms – in terms of time and expense – may well be higher.

Finally, we asked respondents what they thought the three main challenges would be in introducing SM&CR in their firm.  Four key areas stood out:

  1. How to define the competence of people within the business and evidence this
  2. Communicating and educating staff about SM&CR
  3. Allocating prescribed responsibilities
  4. Defining who is covered by the ‘significant harm’ function

It was slightly surprising that record keeping and the lack of money or resource didn’t feature more highly. Whether this turns out to be the  case (or misplaced optimism), we’ll have to wait and see.


SM&CR is intended to strengthening consumer protection by increasing the personal accountability of staff across the organisation and through strengthened governance processes.  Whatever the potential benefits, it’s clear that many firms expect SM&CR to come at a cost. The research flags up four areas that are most likely to challenge firms. Overall, the research suggests a generally positive picture but with work still to do.   Time will tell.

Click here for details of our services.

Ian Patterson

Founder of The Patterson Group and author of the CII’s AF6 study text on Senior Management and Supervision, and J07 study text Supervision in a Regulated Environment.

FCA business plan 2018/19

FCA: Business Plan 2018/19

If you read nothing else that the FCA publishes, one document is worth reading – and it’s the FCA Business Plan for 2018/19. Anyone who is involved in running a business – as a senior manager or as a supervisor – needs to identify the future risks the firm might face and create a culture where the interests of clients are foremost in the thoughts of staff. The FCA Business Plan 2018/19  provides a useful insight on what you need to focus on.

Click here to download the FCA Business Plan 2018/19

What’s on the FCA radar?

It’s perhaps worth just asking yourself why you think that the FCA goes to the effort of publishing its business plan every year? There is a simple answer. If you are aware of what the FCA sees as a major concern, you’ll do something about it within your own firm before the FCA potentially forces you to. It is designed to gives you an insight into what the FCA will be looking at so there shouldn’t be any surprises.

At a high level, there’s a sense of veja vu with the FCA Business Plan 2018/18. There have been two recurring themes that have run through the last two FCA Business Plans.  These are ‘culture’ and ‘value for money’.  They are pretty prominent again in this year’s Business Plan so clearly, there is no intention that these will go away anytime soon.

The FCA ‘cross-sector priorities’

Some of the FCA priorities potentially apply to all of the 58,000 or so regulated firms. These cross-sector priorities include:

  • Firms’ culture and governance, e.g. the role-out of SM&CR to a wider audience and remuneration arrangements. To quote the FCA: ‘We do not attempt to measure or assess culture; instead we seek to form judgements as to whether the drivers of behaviour we are interested in as a regulator are driving appropriate behaviours that are unlikely to cause harm’.
  • Financial crime, e.g. AML, raising awareness of frauds and scams.
  • Data security, resilience and outsourcing, e.g. cyber attack, due diligence on out-sourcing arrangements.
  • Technological resilience and innovation, e.g. how well is new technology improving competition and benefiting clients?
  • Treatment of existing customers, i.e don’t treat them as second class citizens and don’t use them to cross-subsidise acquiring new clients

Part of the FCA’s approach to culture and governance involves identifying and managing conduct risk.  What proactive steps do you take as a firm to identify the conduct risks inherent within your business?  Click here for further details of suggested approaches to answer this using five key questions. The FCA content refers to the banks but elements will apply to most firms and it provides lot’s of ideas about the actions you can take to manage conduct risk.

There are also other areas that apply to a particular sector. They are also issues which the FCA sees as being deep seated, i.e. they aren’t going away anytime soon. There are six of these:

Sector specific risks

The FCA Business Plan 2018/19 identifies seven sectors. Three of these will be of most interest to most people reading this – pensions and retirement income, investment management and retail investment management.

Pensions and retirement income

Key issues highlighted by the FCA that impact on adviser firms include:

  • Reducing costs (advice and product charges) to offset potential future reductions in investment returns. To quote the FCA, they want firms that ‘offer products and services that are better value for money for consumers, and actively and honestly compete to keep them’.
  • Concerns about people taking drawdown without advice. Some will not want to pay for advice but others would if they felt more able to access it/trusted it more/understood the costs and benefits more clearly.
  • The complexity of pensions makes it hard for consumers to understand. How can the information we provide as a profession enable clients to make better informed decisions?

The FCA’s Retirement Outcomes Review provides some interesting data on the pensions market.  Click here for further details.

Investment management (institutional investors and DFM)

Key issues highlighted by the FCA that impact on adviser firms include:

  • Firms are able to demonstrate that they act in the customers’ interests at all times. This includes transparency of charges (such as all-in fees), and increasing understanding by reducing complexity.
  • It also includes value for money. The FCA questions whether there is sufficient competition and whether firms are able to demonstrate ‘added value’. This may involve firms looking at their advice models – and potentially moving them away from achieving returns of x% above benchmark and more towards providing a broader scope of advice that more clearly demonstrates value for money.
  • The ‘hunt for yield’ may drive dysfunctional behaviours.
  • Weak governance may lead to poor product design, weak oversight of portfolios and poorly managed conflict of interests.

Retail investment management

Key issues highlighted by the FCA that impact on adviser firms include:

  • The Financial Advice Market Review (FAMR), e.g. automated advice and streamlined advice.
  • Clients who enter into high-risk and complex investments, e.g. strengthening authorisations.
  • The impact of platforms on prices and competition.

The FCA’s Financial Advice Market Review (FAMR) provides some interesting information about how the current regulatory environment could be simplified.  Click here for further details.

Read our blog on SM&CR. who it applies to and what to do to prepare for it, click here.

To quote the FCA: ‘…we have prioritised areas where we consider both that the risks of harm to consumers, market integrity or competition are greatest and where we assess our intervention will have the most impact’.

With best wishes

Ian Patterson


Senior Management and Certification Regime

Why should you be interested in the Senior Management and Certification Regime?

If you run an investment advice business, mortgage, wealth management firm, or just about any other type of FCA authorised firm, the Senior Management & Certification regime (SM&CR) will apply to you. It is now expected to be introduced on the 9th December 2019.

Some estimates suggest that SM&CR may result in a 20-fold increase in managers with personal regulatory responsibility, from 3,000 in 2016 to 72,000 in 2019.

In this blog, I will look at the key changes and what you can do to prepare now for it’s introduction.

What is the SM&CR?

To answer this, i have to go back in time a little. In March 2016, the FCA rolled out a similar regime to the large banks and insurers. This was inspired by the Credit Crisis and the attitude of regulators in the USA who have taken the lead in making senior managers responsible for their actions. In this country, too often senior managers have been able to hide behind corporate ‘collective responsibility’ with the result that rarely have individual’s been hauled over the coals for their actions – however badly these have impacted on consumers. Take RBS and it’s take over of ABN Amro, for example.  Insurers will come into the SM&CR regime in December 2108 and all the remaining 46,000 or so authorised firms will be subject to it by Q4 2019 (subject to Treasury approval).

SM&CR has (despite its name) three elements:
1. The Senior management regime – which broadly applies to those that currently hold a control functions because they are in a governance role within the authorised firm, e.g. CF1, CF3, CF10; and

2.The Certification regime – these are managers who are lower down the corporate ladder but who still, through their actions, could have a significant adverse impact on consumers. So the head of HR, Operations and the IT chief could be covered by this; and

3. Conduct rules. These are a beefed up version of the ‘Statements of Principle and Code of Practice for Approved Persons’ – but these new conduct rules will apply to just about every person in an authorised firm and not just the current relatively limited number of approved persons.

In other words, SM&CR will cover a much wider and larger population than the current approved persons regime (APER) but the numbers of people who are directly approved by the FCA is likely to reduce.

What’s the point of SM&CR?

SM&CR has two main aims:
1. Make senior managers and other staff more responsible for their actions and improve behaviours; and
2. To clarify and reinforce governance structures in all authorised firms.

What will change?

For full details, you will need to read the FCA’s consultation paper CP17/25 (or at least the executive summary). Click here for the link. If reading 392 pages is akin to a near death experience, here’s a synopsis of the important bits that will apply to ‘core firms’.

Here are the 7 things you need to know:
Senior management regime

1. The approved persons regime (as we know it) will be replaced. Only those individuals performing senior manager functions (SMFs) will be approved by the FCA in the new world, e.g. chair, chief executive, compliance oversight, and prescribed functions (see point 4).

2. Every SMF will have a statement of responsibility. This sets out their role and what they are personally responsible for if they fail to take ‘reasonable steps’.

3. Every SMF must be signed-off as being suitable to carry out their role by the firm at least annually.

4. Prescribed responsibilities. The FCA has identified six new roles that must be allocated to individual senior managers. These include oversight of the SM&CR, and the firms policy and procedures for fighting financial crime.

Certification regime

5. Most other managers are likely to be covered by the certification regime if they perform a ‘significant harm function’. This means that someone in their role could cause harm to the firm, customers or both. This is likely to cover any significant management function not covered by the senior management regime. For the first time, anyone that supervisors a ‘material risk taker’ such as any type of adviser, will also have personal responsibility under the Certification Regime. This part of the regime will also include existing CF30 roles. Under SM&CR, these will be ‘certified’ by the firm in the future instead of being authorised by the FCA.

6. Everyone covered by the Certification Regime, like senior managers, will need to be certified by the firm once a year that they are competent in the role. It is the firm that undertakes this. This includes conducting fit and proper checks at outset and annually.

Conduct rules

7. All staff in an authorised firm will be subject to new individual conduct rules except ancilliary staff, e.g. cleaners, receptionists. So para-planners, compliance and administration staff would be covered by conduct rules for the first time. The rules include wide ranging obligations, e.g. the need to ‘act with integrity’ and ‘pay due regard to the interests of customers and treat them fairly’. This will replace the current ‘Statements of Principle and Code of Practice for Approved Persons’ that currently only apply to just controlled functions. It will also dramatically broaden the number of staff covered by any sort of conduct requirements for the first time.

The very largest firms will be regarded by the FCA as ‘enhanced firms’. In addition to all of the above, they must also have responsibility maps (that show how responsibilities are allocated) and they will also be subject to handover requirements. Under these, a senior manager will need to sign to accept the role responsibilities. A successor with then sign to acknowledge that they are responsible from a given date. This is NOT a requirement for smaller firms, reflecting the FCA’s proportional approach to the wider roll-out of SM&CR.

We anticipate that existing approved persons will be grandfathered into the new SM&CR.

What should I be doing now?

Please remember that this a consultation document and things may be refined. Having said that, don’t pin too many hopes on anything significant changing as these proposals are, by and large, already in place for the banks. Any change is likely to be minimal given the political appetite for change.

Here are 7 steps to take now:
1. Determine which regime your people will be subject to.

2. Statements of responsibility. Start consulting and drafting these now as these should be clear and explicit. All senior management functions (SMF) will require one as will the FCA approval of any new SMR position.

3.Build value statements or conduct statements that are appropriate for your business and your clients. Measuring ‘conduct’ is a whole lot harder than assessing knowledge and will take time and thought to produce.

4. Train supervisors of mortgage, protection and general insurance advisers. Chances are they won’t have previously been trained to the same levels as those that supervise investment advisers.

5. Decide what training will be required – particularly for SMRs performing the prescribed roles and those who will be covered by the certification requirements. There is also a FCA obligation to train them so they understand how the rules apply to them.

6. Look at existing systems and procedures (such as the appraisal system and T&C) to see how they can be amended to support the  Certification requirements, e.g. the annual certification requirements and the subsequent notification of anyone who does not meet these requirements.

7. Determine which SMF(s) should pick-up the six new prescribed roles.

With best wishes

Ian Patterson

For details of how we might be able to help, click here

Related articles:
T&C Culture.  Click here 

Senior manager competence: getting it on the agenda. Click here