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Implementing the SM&CR – considerations for Private Equity firms

23 April 2019

The regulatory landscape is constantly evolving for the Private Equity (PE) sector. With the Senior Managers and Certification Regime (SM&CR) coming into force for all solo regulated firms on 9 December 2019, PE firms should now be progressing well with their SM&CR implementation plans. 

The SM&CR consists of four key areas, including the: 

  • Senior Managers Regime: this applies to the most senior people performing key Senior Management Functions (SMF) who need FCA approval before commencing their role. Every Senior Manager requires a Statement of Responsibility that clearly says what they are responsible and accountable for.  

    There are also some specific responsibilities that the firm will need to allocate to their Senior Managers, which are known as ‘Prescribed Responsibilities’. Moreover, a new statutory ‘Duty of Responsibility’ will be applied across Senior Managers, requiring each to take reasonable steps to prevent regulatory breaches in areas that they are responsible. 
  • Certification Regime: applies to employees whose role means it’s possible for them to cause significant harm to the firm, clients or market, which may include the PE fund and its investors.  These roles are called ‘certification functions’. These people don’t need FCA approval, but the firm will need to check and certify that they are fit and proper to perform their role.  
  • Conduct rules: aim to improve standards of individual behaviour in financial services. There are two tiers of Conduct Rules, the first tier being individual Conduct Rules which apply to all staff, excluding ancillary staff; and the second tier being the Senior Managers Conduct Rules. The firm will need to make sure staff are trained and know that the Conduct Rules apply to them in a tailored manner, and to be fully aware of their reporting requirements to the FCA when someone breaches a Conduct Rule.  
  • Directory: will act as a public register, allowing individuals and firms to check the status history of people working in the financial services sector. The Directory will include more information than the Financial Services Register. Given that firms will need to update the Directory within seven business days of any changes, the need for effective and embedded processes to capture and notify information is paramount.  

Specific considerations for PE

Whilst the SM&CR is a key agenda item at most PE management meetings, we have found that many firms are yet to document their SM&CR project plan and start those preparations. With this in mind, we have outlined below some of the key structural considerations that a PE firm may need to factor in as part of their SM&CR project plan: 

  • PE managers may have a greater degree of involvement in their investee companies compared to other fund managers. As a result of their greater involvement, PE managers are naturally expected to play a greater role in influencing the corporate governance practices of their investee companies and may even sit on the Board. Where the investee company is also regulated, careful consideration of how the PE manager’s role in the investee company applies in context of the SM&CR should be appropriately addressed.
  • PE firms often adopt a partnership structure, however, those currently appointed to conduct the CF4 Partner governing function may not perform a SMF (e.g. if they are a silent or junior Partner who does not have substantial involvement in the management of the partnership). If this is the case, firms may want to also explore the HMRC tax position in terms of the salaried members rules to ensure complete unity in regard to how their Partner role is viewed and defined. 
  • Similarly, for PE LLP structures, unless there is a strong justification, the FCA would not normally expect the Prescribed Responsibilities to be divided, or shared, between PE Senior Managers. In larger partnerships, it would usually be ineffective for numerous partners to share one, or more, Prescribed Responsibilities. In practice, certain PE SMF partners should take responsibility for the Prescribed Responsibilities to avoid diluting accountability. 

SMCR project plan

To assist PE firms, BDO has developed an SM&CR project plan to help outline a series of action points that need to be considered and addressed prior to 9 December 2019. 

PE firms should not underestimate the time required to ensure SM&CR compliance. For more information, please contact us to discuss how SM&CR will impact your firm.

How we can help

With our regulatory expertise and industry knowledge obtained through assisting a variety of clients with implementing the regime, our Regulatory Consultancy team is well prepared to advise and assist PE firms. We offer a range of services to help firms implement the SM&CR that are tailored to a firms SM&CR category, business model, governance structure and operations. Find out more.