March 18, 2019

March 18, 2019

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March 15, 2019

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The Senior Managers & Certification Regime

As a reaction to the financial crisis of 2008/2009 and following the subsequent review of the financial services industry, UK Parliament decided to replace the discredited Approved Persons Regime (APER) in the UK, with a regime that focuses more on individual accountability in financial services firms—the Senior Managers & Certification Regime (SM&CR).

The SM&CR has been in force for firms regulated by both the UK Financial Conduct Authority (FCA) the UK Prudential Regulation Authority (PRA), such as banks, building societies, credit unions and designated investment firms since March 2016. It will be extended to cover individuals working at all firms only regulated by the FCA, from December 9, 2019.

The SM&CR aims to reduce harm to consumers and to strengthen market integrity. It intends to achieve this by creating a system enabling firms and UK regulators to hold specific individuals to account. It is intended that standards of conduct for everyone who works in financial services will be raised, and senior people in firms will be made more accountable for their conduct, actions and competence.

Types of Firms Affected

SM&CR requirements apply differently, depending on the category to which an FCA-regulated firm belongs—'core', 'enhanced' or 'limited scope'.

Most FCA-regulated firms will come under the core regime. The enhanced regime will impose additional rules to approximately 350 firms, where the FCA considers that their size, complexity and potential impact on consumers warrant greater regulatory focus. For example, firms with £50 billion or more of assets under management as a three-year rolling average, or significant IFPRU firms, would be considered enhanced-regime firms. By contrast, the limited scope regime will apply fewer of the SM&CR requirements to firms that currently have a limited application of the existing APER.

SM&CR Requirements

Senior Managers Regime

Under the SM&CR, there is a new class of controlled functions—Senior Management Functions (SMFs) in place of the existing FCA governing functions under APER. The FCA has prescribed a number of SMFs which apply to regulated firms. Such Senior Managers are the most senior people in a firm with the greatest potential to cause harm or impact upon market integrity. This will include all partners in a partnership, unless, for example, they are 'sleeping partners' or junior partners, who do not meet the legal definition of a Senior Manager.

Below is a table which maps current controlled functions to possible corresponding SMFs.

Current Controlled Function

Possible Corresponding SMFs

CF1 – Director

SMF3 – Executive Director

CF2 – Non-Executive Director

SMF9 – Chair

CF3 – Chief Executive

SMF1 – Chief Executive

SMF19 – Head of Third Country Branch

CF4 – Partner

SMF3 – Executive Director

SMF27 – Partner

CF10 – Compliance Oversight

SMF16 – Compliance Oversight

CF11 – Money Laundering Reporting Officer

SMF17 – Money Laundering Reporting Officer

CF29 – Significant Management Function

SMF21 – EEA Branch Senior Management Function

All such Senior Managers will have to be approved by the FCA before they commence their role. Also, the Senior Managers Regime has no territorial limitation, so it applies to anyone who performs a Senior Manager role for an FCA-regulated firm, regardless of whether they are based in or outside the UK.

All Senior Managers will need to have a Statement of Responsibility, clearly setting out their role and responsibilities. Every Senior Manager also will have a Duty of Responsibility. So if a firm breaches one of the FCA's rules, the Senior Manager responsible for that area could be held personally liable if they failed to take reasonable steps to prevent or stop the breach, which could result in a criminal prosecution against the Senior Manager.

Additionally, a firm (except for limited-scope firms and EEA branches) must give Prescribed Responsibilities to Senior Managers who are the most senior person for an issue. Prescribed Responsibilities are additional to the inherent responsibilities that are an essential part of a Senior Manager's role, to ensure that a Senior Manager is accountable for key conduct and prudential risks. Enhanced-regime firms must prepare and maintain a Responsibilities Map, including, for example, how the Prescribed Responsibilities have been allocated and how responsibilities are shared or divided between different people.

Of particular relevance to UK fund managers is a new, specific Prescribed Responsibility. The aim of this Prescribed Responsibility is to ensure that a Senior Manager, usually the chair of the board of an authorised fund manager, must take reasonable steps to ensure that the firm complies with its obligation to carry out the assessment of value, the duty to recruit independent directors, and the duty to act in the best interests of fund investors.

Certification Regime

The new Certification Regime covers specific functions that are not SMFs, but can still have a significant impact on customers, the firm and/or market integrity. The purpose of the Certification Regime is to lay the emphasis on firms, not the FCA, as being responsible for ensuring their staff meet the FCA's fit and proper requirements, because firms will need to assess and certify at least annually that such people have suitable skills and expertise to do their job. Certification must state that the individual:

  1. has obtained the requisite qualification(s) to do their job;
  2. has undergone or is undergoing training; and
  3. possesses the requisite level of competence.

The Certification Regime only applies to employees of firms, including contractors and secondees to a firm, but not to non-executive directors. However, the fit and proper test will apply to anyone performing an SMF or Certification Function, and will be extended to non-executive directors, even if they are not Senior Managers.

The following key examples will be Certification Functions under the SM&CR:

Certification Function

Overview

Significant Management Function (current Controlled Function 29)

This will capture individuals with significant responsibility for a business unit, including HR or IT.

Proprietary traders

The Certification Regime will cover all proprietary traders.

The client dealing function

This function will expand on the current Controlled Function 30 to any person dealing in or arranging investments with clients, e.g., investment managers, financial advisers, people involved in corporate finance.

Algorithmic trading

This includes people with responsibility for approving the deployment of a trading algorithm.

The Certification Regime only applies to relevant individuals based in the UK or who deal with a UK client (except for material risk takers—the Certification Regime applies to them wherever they are located).

©2019 Katten Muchin Rosenman LLP

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About this Author

Christopher Hitchins, Katten Muchin London UK, investment documentation attorney, labor disputes management lawyer
Partner

Christopher Hitchins focuses his practice on the full range of employment law issues, acting for employers or senior individuals in a wide range of sectors, with a particular focus on the financial services, technology, hotel, retail and media industries.

Chris advises on all contentious and non-contentious UK employment law matters. He has significant experience advising on senior executive employment, partnership and investment documentation, managing disputes and exits as well as team moves, advising businesses on restructurings involving the...

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Emma Khoo, Financial Lawyer Katten Law Firm London, UK
Associate

Emma Khoo represents clients across the wider financial services industry, focusing on regulatory and compliance work as well as transactional matters. She advises a wide variety of clients, including proprietary trading firms, hedge funds, broker-dealers, financial institutions, asset managers and general corporate clients. Emma regularly addresses Financial Conduct Authority (FCA) and European Union (EU) authorisation and compliance issues under EU directives, cross-border issues in the financial services sector, financial crime, regulatory capital requirements, conduct of business rules as well as data privacy compliance. She also advises on transactional matters including fund structuring, corporate transactions and commercial matters.

At her prior firm she was also seconded to a UK government entity, where she provided counsel on key regulatory developments.

Prior to law school, Emma worked at a global financial services data provider.

+44 (0) 20 7770 5221
Neil Robson, private equity fund managers counselor, Katten Law Firm, London
Partner

Neil Robson, a regulatory and compliance partner with Katten Muchin Rosenman LLP, focuses his practice on counseling hedge and private equity fund managers and other investment advisers on operational, regulatory and compliance issues. He regularly addresses Financial Conduct Authority (FCA) and EU authorization and compliance under both the EU Alternative Investment Fund Managers Directive (AIFM Directive) and MiFID, cross-border issues in the financial services sector, market abuse, anti-money laundering and regulatory capital requirements, formations and buyouts of...

44-0-20-7776-7666