HMT, FCA & PRA Consultations on SM&CR Reform: Practical Implications

There are a number of overlapping proposals and impacts to consider from each CP:

• 12-week rule for temporary SMF cover: Firms would have 12 weeks to find a replacement and submit the SMF application (rather than to submit and receive approval within that period). The FCA and PRA then have three months to make a decision and the incoming SMF can stay in role until the decision is made subject to internal fitness and propriety checks. If recruitment takes longer than 12 weeks, the firm would have to make an Form A application and supporting documentation for the temporary or interim SMF (likely to be another SMF) to hold the position. Impact: With the regulator backlog being resolved, this change will give firms valuable time to execute succession plans and/or identify credible candidates.
• Criminal Record Checks: These would be valid for 6 months, instead of 3 months which aligns with the six months it could take to get a new SMF onboard and approved (as per the above). The FCA go a step further to state that these checks also would not be required for approved SMFs moving/applying for an SMF within the same firm or group. Impact: This should provide more flexibility for firms but not expected to have huge cost savings.
• SMF 7 Clarifications: The FCA and PRA are proposing to provide more guidance and on the applicability of the SMF 7 Group Entity SMF i.e. those group executives who can exert significant influence on the UK authorised entity. Impact: Overall, this could reduce the number of SMF7 applications (see PRA proposals below).
• Streamlining Annual Certification: The FCA and PRA are looking to provide new guidance to streamline the annual certification process. Impact: This aims to reduce the ‘gold-plating’ by firms and will clarify the expectations on annual certification, which will inevitably save some administrative burden/cost especially for those larger firms with higher numbers of CPs.
• More time to submit key SM&CR artefacts: The FCA are proposing to allow submission of changed Statements of Responsibility (“SoRs”) and Management Responsibility Maps (“MRMs”) on a periodic basis and no later than every 6 months after the last submission, with the PRA stating that they must be submitted within 6 months of a significant change or unless required sooner. Impact: Dual-regulated firms that have made multiple significant changes (e.g. SMF allocations and PR changes) to one or more individuals during the 6 month period, the PRA will require each updated version of the SoR and MRM to be submitted. Whereas the FCA have stated for solo-regulated firms that only the latest SoR(s) and MRM would need to be submitted all in one go. We expect this to be further aligned to each other following the consultation to ensure consistency.
• Updated guidance on regulatory references: The FCA proposes to require Regulatory References to be provided within 4 weeks rather than the current 6 weeks. The PRA are sticking with 6 weeks for now to allow firms more time to respond to requests. Impact: Dual-regulated firms and their PRA related SMF positions would continue as they are.
• Resolution-related roles: There are proposals to clarify the list of resolution-related roles which will be exempt from SM&CR. Impact: Reduction in roles caught by the SM&CR for those going through formal resolution/wind up.

• Certification role overlap: To remove overlap in certification roles (between the FCA and PRA) such as the FCA’s Material Risk Takers and PRA’s Significant Harm Functions. Impact: For dual-regulated firms, this will remove the need to allocate both FCA and PRA certification functions to the same individuals in some cases.
• Integration of SoRs into Form A: A redesigned Form A consolidating SoRs and supporting documentation into one document including skills gaps analysis, competency assessment and the learning and development plan. Impact: This will make applications more efficient and of a higher quality. This is likely driven by the fact that firms have been doing this already for many years to aid the Regulators review process.
• SMF 18 (other overall responsibility function): Additional guidance provided to limit those who may hold an SMF 18, especially those who are insufficiently senior as well as allowing SMF18s to hold PRs beyond PR Z (CASS related). Impact: Given the broad capture of the SMF18 role historically, this will likely reduce the number of SMF 18 applications.
• FCA Directory: Firms would have more time to update the FCA Directory, extending this from 7 to 20 working days, with the exception of when an individual departs which remains at 7 working days. Impact: Given CP populations can chop and change fast, this will provide firms significantly more time to submit the data and reduce non-compliance of this requirement.
• Raised thresholds for Enhanced SM&CR status: Regulatory financial threshold increased (from £50bn to £65bn AUM and intermediary business from £35m to £45m on rolling 3 year average). Impact: This will result in c.5% reduction of firms subject to enhanced requirements.
• Technical Handbook Changes: The FCA will make technical changes to align with PRA proposals, where appropriate.

• Expanding the SMF7 definition: The PRA will take there SMF7 updates a step further by expanding the definition to include controllers and their key executives who exert a significant influence over the decision making and what this means in practice. Impact: The net impact for dual-regulated branches and subsidiaries is likely to be minimal given most already apply a prudent approach.
• Conduct Rules for Interim SMFs: The Senior Manager Conduct Rules would apply to interim SMFs under the 12-week rule, which is sensible given the temporary role they are undertaking. Impact: This will have minimal impact as in most cases, other SMFs within the firm (who are already subject to these rules) will take on these temporary roles unless a succession plan is initiated.
• Key Function Holders (“KFH”): Streamlining the application and notification process relating those KFHs i.e. removing the need to submit a Form M (notification of a non-executive director or KFH) if they are already an SMF holder. Impact: For PRA regulated insurers, this will have minimal impact but is often one form that is typically forgotten.
• SMCR Inventory and Policy Index: The PRA will be creating an inventory and policy index for the SM&CR collating all the requirements, expectations and guidance in one place. Impact: This one is for the all compliance and HR staff and will really enhance firms’ ability to navigate the SM&CR rules.

Phase 2 will explore more significant reforms as proposed by the HMT. A summary of those and our thoughts on how this might be achieved are as follows:

• Removal of the Certification Regime and the FCA Directory altogether or replace it with a simpler regime. How: A simpler regime could include less certification functions required and slightly less stringent fitness and propriety requirements. This represents the most significant proposal but is likely to take the most time to implement.
• Fewer SMF roles requiring pre-approval from the FCA/PRA, with only notification required. How: A risk- based approach could be applied and include the SMF3 (Executive Director), SMF5 (Head of Internal Audit), SMF6 (Head of Key Business Area) and SMF18. SMF24 seems unlikely given the increased focus on operational resilience.
• Reducing the number of SMFs and PRs required. How: A tiered approach to dual-regulated firms could be put in place similar to that of the FCA’s solo regulated regime consisting of core, enhanced and limited firms.
• Simplified Conduct Rule breach reporting. How: Aligning the current 7 day reporting for SMFs to the non-SMF rules which is to submit annually (unlikely due to NFM proposals) or less detail required when submitting the reports.
• Further proportionality and alignment with other regulatory regimes. How: There is overlap with Solvency II which could be streamlined.
• Expanding the applicability of SM&CR to other sectors in a proportionate manner. How: This could include buy-now-pay-later, crypto-asset firms and exchanges, payments and e-money firms. This intention has already been described in the FCA’s Crypto Roadmap.