What does this mean?  

The SMCR consists of three core elements: (a) the senior managers regime (SMR); (b) the certification regime (CIR); and (c) the conduct regime (COR). 

• Asset Managers will be required to identify specific senior management functions (SMFs) and allocate the required prescribed responsibilities to senior managers.
• SMFs must be approved by the FCA following an assessment of their fitness and propriety. A statement of responsibilities document (SoR) must be prepared for all SMFs and submitted to the FCA as part of its assessment process. The SoR should be a self-contained document prepared by the Asset Manager and must clearly assign prescribed responsibilities to each SMF.
• SMFs will be subject to a duty of responsibility. SMFs will therefore be at risk of enforcement action for breaches of their areas of responsibility unless they can prove that they took reasonable steps to prevent the contravention from occurring or continuing.
• Under the CIR, individuals other than SMFs whose role means that they could pose a risk of significant harm to the Asset Manager or its customers are not subject to prior approval by the regulator, but their fitness and propriety needs to be vetted by the Asset Manager both at the time of appointment and on an ongoing basis. The individuals (each, a CI) who will be subject to this internal certification exercise will include investment managers, advisers, those who arrange and source deals and also material risk takers. The Asset Manager needs to issue an annual certificate confirming that the individual is fit and proper.
• Under the COR the existing statements of principle and code of practice for approved persons will be replaced with a two-tier set of conduct rules (Conduct Rules).
• Staff will need to be trained to ensure that they understand the scope of their responsibilities and what it means to be subject to the Conduct Rules.
• Asset Managers will be required to notify the FCA of certain breaches of the Conduct Rules and the FCA may take disciplinary action against any relevant employee who breaches the Conduct Rules or is knowingly concerned in a regulatory contravention by the Asset Manager. 

Criminal record checks and regulatory references

• In assessing fitness and propriety, Asset Managers will be required to consider whether the person has obtained a relevant qualification, has undergone training, possesses a level of competence or has the personal characteristics required by the FCA’s general rules.
• Asset Managers will be required to conduct criminal record checks on each SMF and obtain regulatory references from previous employers (covering the past six years of employment) for both SMFs and CIs.
• On receipt of a request for a reference, Asset Managers will be required to provide all the prescribed information relevant to the hiring firm’s fit and proper assessment, including details of any misconduct. Regulatory references should focus on regulatory matters only.
• This will mean that performance management and disciplinary procedures should be carefully documented and maintained.

The enhanced regime

Enhanced firms will be subject to certain additional requirements over and above the core regime to reflect their respective size and complexity. In summary:  

• Six additional responsibilities must be given to senior managers in enhanced firms and seven additional prescribed responsibilities will apply (e.g., compliance with the requirement to map governance arrangements and safeguarding and overseeing the independence of the (a) internal audit function; (b) the compliance function; and (c) the risk function).
• Enhanced firms will be required to prepare and maintain a ‘map’ showing the firms’ overall governance and management arrangements (Map). The Map should include information such as: (a) a list of all approved SMFs; (b) a checklist showing that all prescribed responsibilities have been allocated; and (c) a list of reporting lines from all senior managers, including, as relevant, the nature, purpose, remit and interaction of committees or any other governance arrangement. The Map must show how the various responsibilities have been allocated and firms must ensure that, when looked at with the SoRs, there are no gaps in accountability.
• Finally, enhanced firms will be required to have a handover procedure in place for those performing a SMF. This procedure will require individuals performing a SMF to prepare a handover note to their successors to enable a smooth transition of responsibilities.

The limited scope regime

There will be fewer SMFs for limited scope and the requirements relating to the allocation of prescribed responsibilities for SMFs do not apply.  

Territoriality 

The territorial reach of the SMCR is significant.  

• There is no territorial limitation for the SMR. This will mean that an individual who performs a SMF will be caught by the regime regardless of whether they are based in the UK or overseas.
• CIs who spend more than 30 days in the UK or have direct contact with UK clients or are material risk takers will be subject to the CI regime. 

Conclusion 

The SMCR will require extensive engagement from senior management and certified persons (including those based in overseas offices) and changes will need to be made to asset managers’ governance policies, procedures and arrangements (including how they are documented and maintained). In certain instances a review of certain individuals’ terms of appointment and/or employment contracts may be necessary.

Audit trails of SMFs’ decision making will be critical in demonstrating that reasonable steps were taken to discharge their respective responsibilities. In addition, employees will need to be trained on the SMCR to ensure that they understand their respective responsibilities.

Application of the SMCR to banks and other financial institutions was a long, protracted and complex process and, with the clock ticking, Asset Managers are well advised to start implementation now.