You’d have to be steering completely clear of the media right now not to know about the big news announced by the government on 15 October. But if you really haven’t heard what’s going on, and work for or run an authorised financial services firm, you’re best advised to read this now.
It’s talking about the government’s intention to extend a regime that until now was reserved for banks, insurers and investment firms, to all parties that are authorised under the Financial Services and Markets Act. The regime is known as the Senior Managers and Certification Regime (or SM&CR for short). So if you’re not involved with one of these types of firms, then this will be a completely new development.
Perhaps you’ve been watching from the sidelines, reading material like this and thinking “I’m glad this doesn’t apply to me”. The especially scary bit was likely to be the reverse burden of proof, which, under the proposed regime, meant that the most senior individuals within a firm would have been deemed guilty until proven innocent by the regulators, in the event of a failing in the firm relating to an area for which they were responsible.
There’s at least some good news here, though. The reverse burden of proof will no longer figure in this regime. But despite this, for many firms, the extension of the SM&CR regime to them will represent a significant shift in the way they’re governed, and the way in which they’ll be accountable to the regulators in future.
The good news, though, is that for all these firms that will be captured, the regime won’t come into effect until 2018. So there’s time to get prepared. And even more good news is that, because most of the features of the regime are the same as what’s being proposed for the banks, then a lot of the training materials available now will be of relevance to them as well.
Let’s take a look at this in more detail.
Approvals and responsibilities
Firms will be used to the approved persons’ regime by now. There are some big changes coming, though, in terms of the way that people are approved to carry out specific roles, and the way in which they’re assessed on an ongoing basis.
The two big areas of change are firstly, the new Rules of Conduct (the Rules) . Refer to the materials published by the regulators and you’ll see that, although at first glance, these look similar to the Statements of Principle for Approved Persons (the APER Principles), the big difference is that people are not only assessed against these when they take on their appointment. Firms must assess their most senior peoples’ performance against these Rules on a recurring basis.
The other difference is that the focus given by regulators to these Rules. It’s true that under the current APER principles, individuals can be judged and ultimately placed in enforcement. This time, the assessment against the Rules is something that the regulators will expect firms to carry out regularly, on the basis that they will hold people directly accountable if there are failings against these at any time. So what was originally treated in practice as a set of entry level requirements have now moved to front and centre for approved persons. So the affected individuals need to know what’s involved to make sure that they never at any time breach any of these Rules.
The other big change is the need for what are called Prescribed Responsibilities to be allocated between the approved persons in a firm. When I last looked, there were 23 of these for the banks and investment firms, and the regulator will need to be informed, for each approved individual, what the areas of responsibility are that have been allocated to them.
This is where the reverse burden of proof would have applied, as individuals would have needed to prove, if there was a breach relating to any of the areas of responsibility allocated to them, that the controls in place were suitably robust. However, this has now changed to a duty to take reasonable steps to prevent regulatory breaches in these areas of responsibility.
Nevertheless, the fact remains that the finger will still be pointed directly at the individual who has responsibility for the area of the firm in question, not just at the firm collectively. For many firms, this will be a significant shift in the way that they operate.
A question of certification
The other major change is the introduction of the certification regime. When this was introduced for banks and investment firms, it was meant to capture anyone who was not an approved person, but whose activities could pose a significant risk to the running of the firm if these were not done correctly.
This regime will also now be extended to all firms and the government expects that most senior managers who are not approved persons will be captured by this certification regime.
What this means in practice is that firms will have to monitor the activities of these individuals more closely and report to the regulators in the event of any significant breaches or failings. Also, these persons may find themselves subject to sanction from the regulators through this route even though they are not approved persons themselves.
A shift in culture
All of this means that for many firms, whilst the amount of work and cost to implement these changes may not be substantial (according to the government) for many firms this is a significant shift in culture. Many people will find themselves the subject of a greater degree of accountability than they have before and clearly that will be a concern.
The call to action is a simple one. Although the SM&CR regime isn’t expected to be extended until 2018, this will be a reality in the next few months for banks and investment firms. As a result the amount of training courses, conferences and seminars on this subject is likely to increase.
Firms who want to get ahead of the game and not have to make preparations at the last minute can use this opportunity by attending such events. This isn’t something to be left until the last minute.
Start here to see what’s going on now, and make sure you keep yourselves informed about future events too.
By Martyn Oughton a Professional Member of the International Compliance Association (ICA). Martyn now writes a regular blog for Industry Events Online focusing on the importance of training in all aspects of compliance. Read Martyn's other publications at Martyn's Writers' Residence website.
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