SMCR transitional arrangements: don’t be one of the late starters!
In July 2018, the FCA and PRA published the latest set of policy statements and consultation papers on the extension of the Senior Managers and Certification Regime (SMCR) to insurers and FCA authorised firms under the Financial Services and Markets Act (FSMA). The publications provided near final rules, transitional arrangements and most significantly the go-live of 9th December 2019 (the insurance go-live of 10th December 2018 had already been announced). Although the proposed dates may, at first glance, appear to allow plenty of time to prepare, firms must seize the opportunity to learn from the mistakes of the banking implementation and begin planning for go-live today.
Insurers have been operating their own distinct regime – the Senior Insurance Managers Regime (SIMR) – since March 2016, which will be superseded by SMCR later in the year.
Many aspects of Senior Managers Regime (SMR) are already operational in a similar guise under SIMR, which will ease the transition to the new regime. For example, the FCA have mapped existing Senior Insurance Management Functions (SIMF) to those that are applicable under SMR, with a few small additions, reducing the risk of complications in adoption. However, the most significant adjustment for insurers will be the transition to the Certification Regime and the introduction of Conduct Rules for all staff.
The Certification Regime will replace the Approved Person Regime (APR). It places the responsibility for fitness and propriety (F&P) of ‘certified’ staff firmly upon the organisation, a shift from the current FCA approval issued as part of APR. The FCA have proposed a phased approach to this, whereby F&P of certified staff must be conducted within the first 12 months of go live, which should ease the transition to the new rules. However, all certified staff must comply with the Conduct Rules prior to go-live, thus the mandated training should be designed and delivered well ahead of the effective date in late 2018. Furthermore, the mechanisms must be in place to identify, control and train anyone moving into a certified role thereafter.
Remaining FCA authorised firms under FSMA
The biggest challenge will be for the remaining FCA authorised firms under FSMA, who will have to implement changes to comply with all parts of SMCR. The larger organisations who will be subject to the enhanced regime must not underestimate the time and effort required to ensure that they are compliant in time. In essence, SMCR addresses the very core of an organisation: its culture and attitude towards accountability. To fully embrace the spirit of the regulation, firms should begin to consider and implement changes now.
Under the banking implementation of SMCR, a significant challenge faced by firms was the need to flex their organisational structure to fit the regime. However, the December 2019 go-live presents an opportunity for the newly in-scope parties to overcome this, by reflecting on their organisation, its structure and reporting lines, and taking the time to create and embed real strategic changes to assist them in compliance with the regulation. This can be a difficult but necessary process, particularly for organisations who operate as a subsidiary of a global company, or one where significant decision making currently occurs outside the UK.
Roles and responsibilities will likely be formally delegated from the parent company to the UK-based entity, to ensure that Senior Managers in the UK are empowered with the decision-making capabilities that enable them to take full accountability for their Senior Management Functions (SMF) and Prescribed Responsibilities. This re-structuring is arduous and time consuming, but may prove to be more helpful in the long-term than attempting to fit a round organisation-shaped peg in a square regulatory hole.
Additionally, the shift will place a huge burden of accountability upon Senior Managers, who will experience increasing pressure to attest to the workforce’s fitness and propriety, and illustrate their ability and control under the “reasonable steps” requirement. As such, firms should take every opportunity to assist those identified as SMFs to adjust to this additional exposure. This will expand beyond formal training, and may include the creation of tools and artefacts, new process and controls, additional governance and realigned or new MI that will facilitate the day-to-day and strategic objectives of the role.
Firms can embrace this remaining time to embed this new culture of accountability and take advantage of testing their new processes, controls and documentation as part of the annual review cycle. By acknowledging the complexities of their current business and the mistakes made by the banks, and beginning to action SMCR now, firms have nothing to lose and everything to gain.