The FCA has released final rules for extending the Senior Managers Regime to benchmark administrators. Sonia Shah looks at the new rules and what firms should do now.
Recognising the overlap with the benchmark regulation, the FCA are not applying the full Senior Managers and Certification Regime, just the Senior Managers Regime (SMR), the conduct rules and fitness and propriety requirements.
The benchmark regulation (BMR) will achieve a similar outcome as the certification regime, helping to improve good conduct and accountability. As such, the Approved Persons Regime will stay in place for appointed representatives, with other roles falling under the Senior Managers Regime.
The rules apply to benchmark administrators that are authorised in the UK and don't conduct any other regulated activities. And all firms must be compliant with the rules by 7 December 2020. The Senior Managers Regime will not apply to third-country benchmark administrators and their UK-based legal representatives.
Limited, core or enhanced scope?
All benchmark administrators will apply the core-scope Senior Managers Regime as the default. If this is disproportionate, firms can apply for a waiver to limited scope.
The question of scope is a key issue for benchmark administrators, especially Annex II firms. As these firms collate and report on market data, there are concerns that the Senior Managers Regime would be unnecessarily stringent, with an impact on competitiveness and journalistic freedom.
Annex II firms are also concerned that the waiver criteria and processes are unclear, so it could be difficult to move to limited scope. In response to these queries, the FCA have asked firms to speak directly to their authorisation team, but it has noted that a move to limited scope would be unlikely if the firm administers an important benchmark.
The enhanced scope application of the Senior Managers Regime will not be necessary for any benchmark administrator (ie, those who do not undertake any other regulated activities).
Expectations of core-scope firms
Under the core-scope application, firms must appoint the following Senior Manager Functions if someone is already performing these roles:
Chair (SMF 9)
Partner (SMF 27)
CEO (SMF 1)
Executive director (SMF 3)
Due to the overlap with the BMR, two key senior management functions, Compliance Oversight Function (SMF 16) and Money Laundering Reporting Function (SMF 17) do not apply. Fit and proper assessment should be conducted on SMFs annually.
There are three prescribed responsibilities:
1 Senior Managers Regime implementation and oversight
2 Notifying and training staff on their obligations under the conduct rules
3 Managing policies and procedures to mitigate the risk of financial crime
Expectations of limited-scope firms
Firms granted a waiver must only apply the limited-scope function (SMF 29). There are no prescribed responsibilities for limited-scope firms.
Applying the conduct rules
Regardless of the firm’s scope, benchmark administrators must apply the firm-wide individual Senior Managers Regime conduct rules and the senior management-specific conduct rules to all employees that undertake regulated and unregulated financial service activities. Given the importance of these firms in the financial markets and economy, high standards of personal conduct are crucial.
As with any outsourced activity, regulatory responsibility remains with the firm, not the third party, and the same applies to the Senior Managers Regime conduct rules. If any in-group entity outsources benchmark activities, contractual arrangements should be in place to make sure the outsource provider applies the conduct rules. The benchmark administrator should report any breaches of the Conduct Rules to the FCA.
The FCA also asks benchmark administrators to apply robust processes on how information is sourced and used. Restricting conduct rules to a few individuals would not allow it to deliver its market integrity and consumer-protection objectives.
Individual and SMF conduct rules requiring disclosure of information to authorities will be restricted to Annex II firms. Although the FCA will tailor the conduct rules for Annex II firms, those with mixed models, ie, Annex II and non-Annex II benchmark administrators, receive the same treatment to ensure there is a level playing field.
Applying the individual conduct rules
Benchmark administrators must apply five individual conduct rules and four senior manager conduct rules to all employees. In its final rules, the FCA highlighted key stakeholder concerns over the individual conduct rules, as outlined below:
Individual Conduct Rule 3 - freedom of expression
Some stakeholders thought Individual Conduct Rule 3 may result in a conflict with freedom of expression and should not be applied to journalists working at Annex II firms as they need to protect confidential sources of information. The FCA explained that such an exemption would compromise their ability to request information and not meet the objective of this rule.
Individual Conduct Rule 4 - conflict of interest
In respect to Individual Conduct Rule 4, stakeholders were concerned that this may create a conflict of interest by compromising the integrity of employees who may feel incentivised to manipulate the benchmark in the interest of the customer. The FCA has clarified that manipulation of benchmarks is prohibited and that ‘customers’ are users of the benchmarks and, therefore, have a license or agreement with the firm.
Individual Conduct Rule 5 - market participation
Stakeholders were also unclear on how Individual Conduct Rule 5 applies in the context of benchmark administration as these firms do not participate in any market. The FCA clarified that this obligation can be met through compliance with existing obligations under the BMR and other relevant legislation.
Further guidance with be provided for Individual Conduct Rules 4 and 5.
To meet the December deadline, benchmark administrators should prepare for the Senior Managers Regime with three key themes in mind:
1 Organisational impact
Gaining the right Senior Managers Regime classification will inform next steps, and firms should apply for a waiver if they may be classified as limited scope. Firms should establish ownership of SMR and create appropriate governance committees communication plans for its roll out.
Once SMFs have been identified, firms must allocate prescribed responsibilities and create individual statements of responsibility and appropriate job descriptions. Benchmark administrators should also establish processes for annual fitness and propriety checks for SMFs and train all staff on the conduct rules.
3 Business as usual
Firms should put ongoing processes in place to maintain Senior Managers Regime compliance. This includes succession planning and the relevant handover procedures, changes in business activity or breach reporting.
To learn more about the FCA's application of the Senior Managers Regime, get in touch with Sonia Shah
Creating a conduct framework for COVID-19 initiativesFind out more
ArticleWhat’s expected of senior managers during COVID-19?Find out more