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The FCA wants to tell you how to run your firm (and it's not all bad)

The senior managers and certification regime is an opportunity to set out in black and white who is responsible for each area of your business, which can have long-term benefits

The FCA wants to tell you how to run your firm (and it's not all bad)

The senior managers and certification regime (SMCR) is a game-changer. Cleverly disguised as a small change in acronyms for the regulated functions, in reality it is a transfer of responsibility for the conduct of advice firms from the Financial Conduct Authority (FCA) to the firms themselves.

Currently directors and senior managers of advice firms must be approved by the FCA to carry out certain controlled functions (CFs). Under SMCR, these will become senior management functions (SMFs).

However, SMFs come with a duty of responsibility that carries personal accountability for misconduct by staff.

SMFs cover both ‘governing’ and ‘required functions’, which are management duties similar to the existing CFs. And there are additional ‘prescribed responsibilities’ (PRs), which are designed to give managers personal accountability for the conduct of the firm.

In other words, the FCA is not just telling you that you must manage your firm properly. It is telling you what you have to manage to achieve this.

This is not all bad. SMCR is being imposed on firms, but it is a good opportunity to re-examine your business and create a more efficient management structure. This sounds obvious, but for some businesses this will never been formalised.

Project plan

Compliance firms strongly recommend setting up a project plan to meet SMCR responsibilities in time to meet the 9 December deadline.

This should start with identifying who the senior managers are going to be under the new regime, and who is going to take on each of the SMFs/PRs. The PRs are listed in the FCA Handbook (SYSC 24.2) and include:

  • responsibility for compliance with SMCR;
  • policies and procedures for countering financial crime;
  • procedures for recruitment, development and training of staff.

Each responsibility must then be allocated and formally recorded in a Statement of Responsibilities for each manager.

It is possible for a single manager to do all of this, but firms should consider if this is the most suitable course of action.

It is not uncommon for the managing director (MD) of a firm to have direct control of every area of the business. However, this means when anything goes wrong they will have to deal with it themselves. Spreading the responsibilities across other managers leaves the MD free to intervene only in the most serious cases, thereby offering a second line of appeal.

Conversely, responsibility should not be entirely delegated to subsidiary staff. Each SMF should be allocated to the ‘most senior person’ responsible for that area of business. PRs may also be outsourced. However, the responsibility for PRs being suitably carried out still lies with the relevant SMF.

Taking responsibility

Once the senior managers have been identified, it is a good idea to follow a similar process throughout the rest of the firm.

SMCR also includes the requirement to certify all staff are fit and proper to perform ‘certified functions’, which could affect client outcomes. This is in addition to the SMFs and covers functions such as the pension transfer specialist, where extra qualifications are required, any staff who deal with clients (other than in the performance of a set administration procedure) and the managers who oversee them. It is therefore necessary to have a documented reporting structure that includes everyone in the firm.

It is also necessary to have a defined recruitment process, which includes robust pre-employment checking of candidates’ honesty and integrity as well as overall competence. This should include criminal records checks, as well as in-depth references from previous employers.

Certification then becomes an annual process. It is important to realise it covers an individual’s conduct as well as capability. When the senior manager certifies them as fit and proper, they effectively take responsibility for their actions.

Much of this is simply good business practice and it is possible that SMCR could actually be a good thing by forcing firms to be more structured. What bothers me slightly is that, from being a regulator that previously did not seek to tell you how to run your business, the FCA is now showing signs of doing just that. That is one to keep an eye on.

Fiona Tait is technical director at Intelligent Pensions

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