The changes to SMCR published by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) on 21 April have been welcomed by firms across sectors. 

Many of the changes in this Phase 1 of reforms to SMCR took effect on 24 April, and – in very broad terms – afford firms more flexibility in some areas, relax some of the administrative burdens of the regime and pragmatically address some of the perceived issues in the regime, including the delays and other burdens associated with notifications.

However, firms (and Senior Managers) should not underestimate the significance, or the implications, of some of these changes and this short piece highlights one of these in particular.

Recap of changes

Before that, to recap, the headline points from the FCA’s policy statement include:

1. Criminal record checks: Validity periods are now extended from three to six months, and checks are no longer required for internal or intra-group moves
2. The 12-week rule is amended: Firms now have 12 weeks to submit an application for approval of a new Senior Manager, rather than 12 weeks to receive approval – candidates can act in role until determination, but will be subject to conduct rules
3. SMF 7/18: There is important new guidance on these functions, and rules on applicability
4. Splits: The FCA has introduced new guidance on splitting PRs
5. SoR changes: Firms now have six months to notify changes and only need to make one notification, if there is more than one change in the relevant period
6. Regulatory references: Firms now have only four weeks, not six weeks to respond to requests
7. Conduct rule guidance: The FCA has introduced new guidance on certain SCs and related notification requirements (see below)
8. Enhanced firm thresholds are being increased: an approximately 30 percent increase in certain thresholds will take effect from July, for example, average AUM moves from £50 billion to £65 billion; and average revenue from regulated consumer credit lending moves from £100 million to £130 million.

Whilst these are all surely welcome measures for the sector, firms – and in particular, their Senior Managers, will want to go through the detail of the changes carefully. As ever, there are some areas which bear close scrutiny and which will require a number of process changes internally. The FCA has explicitly acknowledged this, and some changes will only take effect in July this year.

Non-compliance with SC2

As enforcement against individual Senior Managers has now gathered pace, one example of an area that individuals will wish to evaluate is the further examples of indicative non-compliance with SC2; at COCON 4.2.16G. In practice, we’ve seen many individuals (and compliance teams) contend with the duality of notification obligations between firm-level obligations and those at an individual level in SMCR. COCON 4.2.16G is now bridging the regimes in an important way. 

Although a feature of compliance with SC2 already, the new guidance brings out much more clearly Senior Managers’ responsibility for firm compliance with FCA notifications at Principle 11 and within SUP 15; and also per COCON 4.2.16G(10), explains the oversight responsibility for employees, officers, agents and contractors within their business area. Senior Managers must take reasonable steps to ensure such persons escalate matters subject to reporting requirements internally so that they are disclosed promptly to the FCA. 

This guidance brings home the possibility that failures to report matters to the FCA will call into question Senior Manager conduct rule compliance, too. 

However, the story does not end here. The guidance goes further, and explains that “the duty to report to the FCA referred to in this paragraph… applies even if the matter is, in parallel, the subject or referred to or described in, legally privileged communications, documents or other records created within or for the firm”.

Practical implications

The practical implications of this are significant and complex. Firms and their senior manager populations will wish to take care in evaluating whether existing internal reporting, escalation and notification arrangements (particularly cross-functionally) remain fit for purpose in light of these clarifications.

Upcoming non-financial misconduct reforms

Meanwhile, from September this year, reforms relating to non-financial misconduct will take effect resulting in a further enhancement of the scope of SMCR for some firms. You can read more about the steps firms should take to address the regulator’s reforms relating to ‘NFM’, from my colleagues Katie Stephen and Rebecca Dulieu, here.