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  • Getting ahead of the game on the FCA Senior Managers and Certification Regime: A quick-read guide for asset finance brokers Posted on 21 May 2019

    If you’re an asset finance broker authorised by the FCA, brace yourselves for yet another round of regulatory change following last year’s GDPR implementation. This time it’s the FCA’s Senior Managers and Certification Regime (SMCR), starting this December.

    SMCR is designed to prevent situations where individuals in the financial services industry can cause havoc and, frankly, lead to headlines that accuse the regulator of being asleep on the job. If you recall the Coop Bank’s Paul Flowers affair - the “Crystal Methodist” - it’s no surprise the FCA felt a need to shake things up a bit.

    Like GDPR last year, no doubt brokers will be receiving plenty of information from lenders and their lawyers. Expect to see some updates to broker agreements too.

    Before you lock yourself in a room to read all of that, this article is intended to show that SMCR shouldn’t be a big problem for most brokers. The changes for firms included in this second round of SMCR (the first round was for banks and insurers) are incremental. Particularly for smaller brokers, they are unlikely to significantly change how you organise and run your business. Some firms might even conclude the new rules are actually quite helpful.

    Here are 6 key high-level points to be aware of at this stage:

    1.      Most asset finance brokers will be ‘Core’ SMCR firms, but check in case Limited Scope applies

    There will be three levels of SMCR firms: Limited Scope, Core, and Enhanced. There’s (almost) a straight read-across here from the existing FCA authorised status. Brokers who have full FCA permissions will be Core firms.

    If unsure, check your FCA authorisation on the FCA Register. If it includes Debt Adjusting and Debt Counselling, you are currently full permission. Or check your annual fees: Most full permission firms will be paying around £600 per year.

    Only Limited Permission credit brokers will be Limited Scope SMCR firms. There aren’t many of these, as the option only became available after most brokers had already applied for their permissions. Limited permission firms pay total fees closer to £150 per year.

    2.      The FCA will automatically transfer your existing Approved Persons to be Senior Management Function responsibility holders, but you might need to make some new appointments between September and December

    The key change for both Limited Scope and Core Firms is that your FCA Approved Persons will change to be holders of Senior Management Functions (SMFs). 

    For most brokers, the existing Approved Persons will automatically be transferred to SMFs by the FCA. For example, individuals who are currently ‘Directors’ in the existing regime (CF1s) will automatically become ‘Executive Directors’ (SMF3s) under SMCR.  

    Core firms will each require a Compliance Oversight officer and a Money Laundering Reporting Officer. If you already have individuals holding the corresponding Controlled functions, these will automatically be transferred across by the FCA. Many smaller brokers won’t already have them, so they will need to appoint individuals into these roles using a new form on the FCA’s Connect system that will be available from September. Given they are very likely to be existing Approved Persons, I expect that should be a very simple process.

    For Limited Scope Firms, the individual who is currently the CF8 (Apportionment and Oversight Function) will automatically become SF29 (Limited Scope Function).

    Oddly, any firms that have appointed Non-Executive Directors, other than one designated as Non-Executive Chair, will no longer need these individuals to be approved by the FCA. Their existing approvals will automatically lapse in December.

    3.      Each Senior Management Function holder will need a Statement of Responsibilities (SoR) and will be personally accountable for their designated responsibilities

    Each SMF will need a Statement of Responsibilities (SoR). This is simply a short explanation of the individual’s role. For example, the SMF 17 Money Laundering Officer is the person who has responsibility for “overseeing the firm’s compliance with the FCA’s rules on systems and controls against money laundering”. The FCA provides some wording for each SMF, and firms can add to this to form a fuller job description.

    The Responsibilities can’t be divided but they can be shared. For example, the Chief Executive (SMF1) is responsible for the conduct of the firm for regulated business, but he/she can share that responsibility with other SMFs (including other Directors) as the firm sees fit. Whatever is decided, it will need to be written down in individuals’ SoRs. The firm should have an overview of all the responsibilities, in the form of a 'responsibility map'.

    SMFs will be held personally accountable for their roles. That means they need to “take reasonable steps to prevent or stop a breach of the FCA rules in the scope of their area of responsibility”.

    Personal accountability is the aspect of the SMCR that has attracted the most attention. This personal accountability to the regulator might be a huge deal for someone working in a bank. I'd suggest it’s business as normal in most brokers, where the risks of individuals and the firm are already indivisible. 

    The biggest impact on brokers of personal accountability might be a little indirect. Put yourself in the shoes of your contacts at the lenders, who are always having to balance the need to be as flexible as possible to help small businesses raise finance, and ensuring regulatory compliance. For better or worse, personal accountability under SMCR may make some lenders slightly less flexible than they are today. 

    4.      It doesn’t stop with Senior Management Functions (SMFs), a wider group of people - probably including employed brokers and agents - will need to become holders of Certified Functions (CFs)

    In addition to Senior Managers, Certified Function (CF) rules will apply to other managers, such as managers of business units, that play a significant role in the firm. For small brokers, an employed broker, or a self-employed broker working under a contract for services, is likely to fit the criteria.

    Details of individuals holding Certified Functions will not be notified to the FCA but the Fitness and Propriety rules, and Conduct Rules described below, will apply to them.

    So where there are currently somewhat loose affiliations between brokers and self-employed brokers or agents, the SMCR introduces clearer requirements for these individuals to be monitored. Often those arrangements are already in place, and SMCR should not be interpreted as requiring any fundamental changes to existing business models.

    5.      Fitness and propriety of Senior Management Function and Certified Function holders will need to be checked more formally 

    The FCA has extended its guidance on what makes someone fit and proper.

    For new hires, extra checks will include references from all previous FCA-regulated employers going back 6 years. Firms will be expected to share information cooperatively, making it more difficult for individuals to switch firms and hide any ‘history’. For SMFs there will need to be criminal records checks, to the extent allowed by law.

    On an ongoing basis, firms will need to complete an annual ‘fit and proper’ assessment for both SMF and CF holders, considering whether individuals have any new developments that might impact their fitness and proprietary.

    6.      All or most staff will need to be trained in relevant aspects of FCA conduct rules

    There will be enhanced requirements for all employees (other than ancillary staff, which the FCA helpfully suggests would include your switchboard operators, cleaners and drivers) to be trained in FCA conduct rules relevant to their roles. Firms will have 12 months after the start of the SMCR to put this in place.

    There are no set rules on how this training should be delivered. Basic guidance that is highly relevant to the individual’s role, perhaps delivered in short sessions by managers, should fit the bill (see note at end of this article). It will be key to keep good records of what was delivered and who participated.

    Any breach of conduct rules resulting in disciplinary action will need to be notified to the FCA, either within 7 days for Senior Managers, or annually for others. So, to be practical, other than in truly exceptional circumstances, brokers will simply need to confirm annually to the FCA that there have been no disciplinary actions taken arising from breach of regulatory conduct rules.

    Closer to the launch of SMCR, Asset Finance Policy will be offering a SMCR Toolkit, including template documents and training materials specifically developed for asset finance brokers. 

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