As there have been no significant changes in the near final rules compared to the initial proposals (CP17/42) the FCA are minded that no forbearance or leniency will be given to firms who are not wholly compliant with the new rules and requirements on the implementation dates noted above. Coupled with this, the FCA have been generous with the exceedingly long lead time given to firms to implement the regulation.

The FCA’s intended outcomes for SM&CR are to prevent consumer harm and strengthen market integrity. This is intended to be achieved by increasing the accountability of senior managers, focusing on robust governance and by setting higher (if not stricter) conduct standards for staff at all levels within organisations.

Responding to calls from the industry to clarify the application of the conduct rules, the FCA has provided additional guidance and industry specific examples. Now, firms need to develop their own internal conduct risk frameworks and test them to ascertain whether they are likely to meet the FCA’s intended outcomes.

Clarifying the scope of rules for firms that conduct both regulated and unregulated business, the FCA has confirmed that the rules under SM&CR only relate to regulated activities and those functions that support regulated business, such as middle or back office functions.

Proportionality – Defining your firm’s type

Within the FCA’s near final rules, they have published a tool for individuals to assess their SM&CR firm type.  If you are a firm that is currently subject to a limited application of the Approved Persons Regime, then you will be a Limited Scope SM&CR firm.  If your firm is not and you are a firm that is not currently exempt, then you will be a Core SM&CR firm.  Although, your firm will be an Enhanced SM&CR firm if any one of the following bullet points apply:

• You are a ‘Significant IFPRU Firm’;
• You are a ‘CASS Large Firm’;
• Your firm has Assets Under Management of £50 billion or more based on a three-year rolling average (The submission date (return due date) of the first FSA038 return that takes the firm over a three-year rolling average of £50 billion assets under management);
• You are a firm with total intermediary regulated business revenue of £35 million or more per annum, calculated as a three-year rolling average (The submission date (return due date) of the first RMA-B return that takes the firm over a three-year rolling average of £35 million intermediary revenue.);
• Your firm has an annual revenue generated by regulated consumer credit lending of £100 million or more calculated as a three-year rolling average (The submission date (return due date) of the first CCR002 return that takes the firm over a three-year rolling average of £100 million consumer credit lending revenue); or
• You are a mortgage lender or administrator (that is not a bank) with 10,000 or more regulated mortgages outstanding.

First Steps?

A firm’s first steps should include an analysis of the impact of the requirements under SM&CR on the firm’s current arrangements. This would include the firm’s structure in its current form, proposed scope under SM&CR (‘Limited’, ‘Core’ or ‘Enhanced’), policies & procedures, systems & controls, reporting & management information.

When it comes to SM&CR programmes, firms need to ensure they have senior management buy-in and include representatives from all key business areas, including legal, compliance, HR and IT.

Overview

The FCA identifies Senior Management Function (SMF) roles as the most senior people in a firm with the greatest potential to cause harm or impact upon market integrity.  Under the SM&CR regime the FCA will continue to approve such individuals before they perform an SMF role at a firm.  The SM&CR introduces the requirement for firms to consider and produce a Statement of Responsibility (SoR); a single document that each Senior Manger must have to outline what they are responsible and accountable for.  Firms will need to submit this to the FCA when they are making a Form A application for an SMF.  Firms will also need to keep this up to date and resubmit it when there is a significant change to a Senior Managers responsibility.

Prescribed Responsibilities and the sharing of responsibilities

The FCA will publish all Prescribed Responsibilities within SYSC 24 of the FCA Handbook and each firm should review this and assign responsibilities to the relevant Senior Manager as appropriate.

In the near final rules, the FCA has provided guidance on how responsibilities can be allocated. They have paid special attention to areas that have different departments having responsibility for different parts of a process chain. In the publication, the regulator commented that responsibilities should not be shared across different ‘lines of defence’. For example, if an Executive Director has oversight of financial crime policies and procedures, the fact that compliance is involved in the process does not mean they [compliance] should have the responsibility for that area split with them.  Instead, in this instance, the role of compliance would be included in the Supplementary Information part of the Statement of Responsibilities.

When it comes to culture, the FCA has confirmed that there is no prescribed responsibility for this area. Culture is the responsibility of everyone within a firm and not of a particular individual.

Certification Regime

For employees of the firm that are not approved by the FCA for an SSMF, but whose activities have a significant impact on customers, the firm and/or market integrity under SM&CR, the firm will be required to certify such individuals on at least an annual basis.

Firms will need to consider and issue certificates to staff members whose role meets the definition of a Certification Function.  The FCA has issued guidance in terms of factors that firms should consider as part of the certification process and also detail with regard to the information that should be included with the certificates issued by the firm. The FCA highlight that if the firm does not have any individuals performing a Certification Function then the Certification Regime will not apply.

Whilst firms will have to identify staff subject to the Certification Regime when the SM&CR is implemented, firms will have 12 months from this date to complete the initial certification process.

Fitness & Propriety and Reasonable Steps

Under SM&CR firms must ensure that all staff are fit and proper to perform their roles.  It will be mandatory for firms to undertake criminal record checks for SMF roles and they should consider undertaking them if appropriate for Certification Functions.

Additionally, firms should ensure they obtain a regulatory reference for an individual who is seeking to perform an SMF.  The FCA is prescriptive about the information such a reference should include.

Conduct Rules

Conduct rules are to apply to all staff within a firm except for ancillary staff (cleaners, receptionists etc.). The conduct rules will be split into two clear tiers; Individual Conduct Rules and Senior Manager Conduct Rules.  This in essence mirrors the current regime of Principles and Code of Practice for Approved Persons.  The second tier which focuses on SMF holders is attempting to achieve the aim of reflecting that their duty is to oversee and run the firm effectively.

Firms must ensure Senior Managers and Certification Staff have been trained on the new Conduct Rules at the date of SM&CR implementation.

Firms should note that they will be required to report to the FCA when disciplinary action has been taken against a person for a breach of the Conduct Rules.  If the breach was by a Senior Manager this should be notified within seven business days.  For breaches by all other individuals these should be reported to the FCA via the new REP008 GABRIEL return.

Closing Comments

Due to the nature of the regulation when it comes to scope and territoriality, in some situations, overseas based senior managers and certified persons will be captured by SM&CR, although the FCA is continuing with its proposed approach to the territorial limitations for certified and conduct staff.  The FCA is waiting until there is clearer guidance relating to Brexit before it will give further guidance for UK branches of EEA firms.

As we make our way towards 9 December 2019, we will continue to update this article or produce additional ones as and when further information becomes available.

Firm should consider the impact SM&CR will have upon their firm and any action that they are required to take to ensure full compliance with the regime upon implementation.  If you have any questions or would like assistance in making such assessment or project planning for SM&CR, please contact us at: info@complyport.co.uk

The post FCA releases near final rules on SM&CR for FCA regulated firms. first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .

He went on to address other key topics, including Brexit – a topic that would be discussed later on in the day by part of the FCA team in charge of porting the rules and regulations out of EU legislation and into UK legislation.

There were a number of hosted panel sessions throughout the day, a summary of the ones attended are set out below.

UK Withdrawal from the EU

All FCA personnel were especially careful to maintain the government’s stance on Brexit.  Nothing remarkable was mentioned and there was little in the form of new insights. During the breakout session ‘Asset Management & UK Withdrawal from the EU’, it was mentioned that all existing regulations that firms are required to comply with, will have been or will be ported across from the day the UK leaves the European Union. The individuals leading the discussions were keen to mention that the FCA had teams working with the government to go through existing regulations, looking for references to European laws.  Where a regulation is based on a European law, an  equivalent UK law would be put in place to ensure a smooth transition.

The session also considered the subject of ‘mutual recognition’.  The FCA team were asked how this concept would work in practice.  In their response, they inferred that mutual recognition would in essence work in a similar way to how ‘equivalence’ works at present.  Another difficult question asked of the FCA was what the regulator and government are doing to try and encourage funds/fund managers to move back and set up onshore. One attendee was keen to point out that in their opinion, due to over regulation, funds had been set up in other jurisdictions and that by bringing them onshore, it would cause job creation, both directly and in supporting industries in the UK.

Market Trends

The panels during the conference were refreshingly well balanced, with individuals representing large firms, small firms, industry experts, academics and the regulator and the questions posed were diverse, covering different points of view. Particular areas of interest were the varying views on robo-advice, the use of technology within firms and new technologies like Blockchain.

Panellists were keen to remark that asset management firms, as an industry sector, are only touching the tip of the iceberg when it comes to the innovative use of technologies such as Blockchain, mentioning that the industry would be at least 10 years away from seeing any meaningful usage of this technology. This is in part due to the fact that asset management is not a sector in high demand by data scientists. The leading lights within the Blockchain world (and other such technologies) are more likely to go into other sectors or industries; a sentiment echoed by all the panellists.

Another sentiment echoed by all the panellists was in relation to the shortcomings of PRIIPs. Specifically, they were quick to be critical of the need for asset managers to provide Key Information Documents (“KIDs”) and the content that should be included in them. The mindset on PRIIPs seemed universal as it was mentioned by Andrew Bailey in his keynote speech.

Conduct and Culture

Another topic the panels felt balanced on was that of conduct and culture within the asset management industry. The difference in cultures between a large multi-national firm and a boutique one might be obvious due to the size difference, but it was still interesting to hear the perspectives and approaches taken to instil a compliance culture from both points of view. Understandably, the large firm in attendance was very much process driven, as a firm of that size would need to be. Their CEO said during the panel that the still wants his middle management to have the flexibility to input their own judgement.

On the other hand, the CEO of the boutique firm in attendance, talked about how (due to their much smaller size) he knew the majority of employees and was able to directly influence the culture of the firm rather than have to rely on middle managers to do so.

Refreshingly, Octavius Black, CEO of The MindGym, provided input from an academic point of view. He was able to quote studies, facts and figures that backed up both points of view.

It was not mentioned during the conference, but the FCA has listed out “Five Conduct Questions” to help a firm put a robust conduct and culture framework in place. These are:

1. What proactive steps do you take to identify the conduct risks inherent within its [the firm’s] business?
2. How do you encourage the individuals who work in front, middle, back office, control and support functions to feel responsible for managing the conduct of their business?
3. What support, broadly defined, do you put in place to enable those who work for it [the firm] to improve the conduct of their business/function?
4. How do the Board and senior management gain oversight of the conduct of their organisation and consider conduct in their deliberations?
5. Have you assessed whether there are any other activities that the firm undertakes/way in which it operates that could undermine strategies put in place to improve conduct?

Disappointingly, SMCR was not mentioned much during the discussions. No firm timeline was given besides the fact that final rules will be released during the summer.

The FCA’s MiFID II Supervisory Priorities

The FCA were clear to indicate their priority areas for supervisory review in relation to the implementation of MiFID II. The main areas are:

• Product & Cost Disclosures;
• Research Unbundling; and
• Transaction Reporting.

It was indicated that these particular areas would be subject to thematic reviews over the coming months. Part of these thematic reviews would include a questionnaire being sent to approximately 400 firms, which would contain questions on the areas mentioned above. The FCA didn’t clarify how they had selected or were going to select the firms that would be receiving the questionnaire but said that they were aiming to get a snap shot across the sector.

Further details

If anything mentioned in this article raises questions or there is something you would like to discuss further, please get in touch with us at info@complyport.co.uk.

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In November 2015 the FCA published its terms of reference in relation to the intention to undertake a market study into asset management – see Regulatory Roundup 70 “Asset Management: Under the Microscope”.

The intention to conduct such a market study was set out in the FCA’s Business Plan for 2015/16 with the terms of reference having identified three main topics to be explored:

• how asset managers compete to deliver value;
• whether asset managers are willing and able to control costs and quality along the value chain; and
• the effect of investment consultants and other advisers on competition for institutional management.

The FCA has published an interim report on the market study taking in various areas including the impact of intermediaries and fund governance bodies on competition between asset managers and the control of costs and performance. The latter is often an emotional subject and there are probably no surprises in learning that:

• active funds, on average, underperformed benchmarks after charges;
• institutional active products, on average, provided no significant return over the benchmark after charges;
• there is little evidence of persistence in outperformance, but there is some evidence of persistence of relatively poor performance;
• annual management charge ‘price clustering’ for active equity funds around the 1% and 0.75% region.

The study also looked at the role of investment consultants.
Amongst the findings is that, on average, investment consultants are not able to identify managers that offer better returns to investors, nor do they appear to drive significant price competition between asset managers.

The report also comments that there is a strong culture of gifts and hospitality in the investment consultancy sector, with a review by the FCA showing “a statistically significant positive relationship between the number of high ratings given to an asset manager and the number of gifts and hospitality items recorded by the consultants in a year” (the FCA reviewed the logs for 2015). Whilst the FCA acknowledges that there may be other factors to consider, at this stage the regulator is not ruling out the possibility that consultants may well have been influenced by the acceptance of gifts and hospitality and it is the intention to examine this area more fully.

The interim report concludes with a variety of proposed remedies including:

• recommending that HM Treasury considers bringing the provision of ‘institutional investment advice’ (as in strategic asset allocation and manager selection) within the regulatory perimeter;
• introducing an all-in fee so that investors in funds can easily see what is being taken from the fund;
• helping retail investors identify the best fund for them by providing tools to identify persistent underperformance;
• requiring increased transparency and standardisation of costs and charges information for institutional investors;
• consulting on whether to make a market investigation reference to the Competition and Markets Authority on the institutional investment advice market.

The FCA invites comments (to be sent to: assetmanagementmarketstudy@fca.org.uk) on the report by 20 February 2017. The final report will be published later that year setting out the FCA’s findings and conclusions – which may include a consultation on any proposed actions (“we will continue to develop our thinking on whether we should intervene in this market, and what interventions would be most effective …”).

The post FCA Asset Management Market Study: Interim Report first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .