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SM&CR - changes to the legal function

Paul Young Paul Young

Last week the FCA released Consultation Paper 19/4, which is open for comments until 23 April 2019. The consultation paper outlines several amendments to the Senior Managers and Certification Regime (SM&CR).

The key change, relevant to all firms subject to the regime (banks and insurers, who are already covered, and ‘second wave firms’ who are solo regulated by the FCA and will enter their regime in December 2019) is a clarification on the status of the legal function within the regime. These changes will only impact second wave firms.

Some of these updates are quite minor and firms should carefully assess how they affect their business – specifically in relation to gaining certification for the below roles and making the necessary FCA notifications. Firms must also check that their people understand how they affect their individual responsibilities.

SM&CR continues to evolve for a proportionate approach

Overall responsibility for the legal function

The FCA has proposed that the legal function be excluded from the overall responsibility requirement, meaning that there does not need to be a Senior Management Function (SMF) accountable for the firm’s legal function. This follows an earlier discussion paper where the conflict between the role of a legal officer, level privilege and the SMF duty to the regulator were explored.

Under the proposed changes, the head of legal is to be classified as Certified Function either as a material risk taker or as a significant harm function.

Intermediary revenue criteria for enhanced regime

Firms with intermediary regulated business revenue of £35 million or more, that do not submit an RMA-B return, will be in the enhanced regime. This acts as a clarification – current SMCR rules already include £35 million of intermediary business revenue per annum as one of the thresholds for becoming an enhanced firm. In the existing wording that defines that threshold reference was made to the RMA-B return. In practice, not all intermediaries complete this specific return, and the consultation paper now makes it clear that all intermediaries, irrespective of sub-sector, are included in the £35 million threshold.

Additional minor changes across the regime

The scope of the Client Dealing Function has been updated to exclude administrative functions from the certification regime. This refers to client facing staff whose role does not require them to exercise significant skill, make judgement calls or decisions in respect of the services being provided to the client.

Individuals performing system and control roles (leading the risk, compliance or internal audit functions) should be included under the certification regime if they are not captured as SMFs.

Senior Manager Conduct Rule 4 will be applied to executive directors in limited scope firms who are not themselves SMFs. This conduct rule requires a SMF to notify the FCA of any matter which they reasonably believe the regulator should be made aware of. The Limited Regime only requires a single SMF and, as a result, not all executive directors will be captured as SMFs, although they will be certified individuals. This change ensures that all executive directors Limited Regime firms are subject to equivalent requirements.

Changes have been updated to the FCA handbook and regulatory forms to reflect the updates. The consultation paper also provides a resource of links of past SM&CR policy statements and discussion papers. 

What should firms do to embed the SM&CR updates? 

Firms should review the above proposed amendments and check how they would relate to their business:

  • Banking firms, insurers, FCA solo-regulated firms authorised under FSMA and EEA and third-country branches should review next steps for the head of legal in terms of gaining certification
  • Affected firms will need to calculate if they have intermediary revenue of £35 million before 1 September 2019 and notify the FCA. If this revenue criterion is met then they will be treated as an enhanced firm from the start of the new regime on 9 December 2019. After 1 September 2019, notification requirement will align to post-commencement, enabling firms to have a year to transition into the enhanced regime
  • Core and limited scope firms should review the individuals that perform the systems and controls role and include them in the certification regime if they are not a senior management function

For further information on SM&CR an how we can help, please contact Paul Young or David Morrey.

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