- FCA finalise Senior Managers & Certification Regime framework for all firms
The FCA published on 4 July 2018 the final rules setting out how they plan to extend the Senior Managers and Certification Regime (SMCR) to all solo-regulated firms which are regulated by the FCA only (for both conduct and prudential purposes).
SMCR is a new accountability system that is more focused on senior managers and their individual responsibility. In its first phase, the SMCR regime was created and applied, in conjunction with the Prudential Regulation Authority (PRA) to banks, building societies, credit unions and PRA-designated investment firms from March 2016.
Now, the final rules published by them will replace the FCA’s ‘Approved Persons’ Regime that currently applies to other firms. The proposed changes form a key part of FCA’s Culture & Governance priority, and their overarching aim to reduce harm to consumers. This is aimed to be achieved by raising the standards of conduct for everyone who works in financial services, and by making senior management in firms personally responsible and accountable for their actions.
As part of the changes to the accountability regime, The FCA propose to apply a baseline of framework to most firm, known as the ‘core regime’. The regime applies in restricted sense to very small ‘limited scope’ firms while there are far more extensive requirements for larger ‘enhanced firms’.
The three main elements of the SMCR will apply to us a) the Senior Managers Regime, b) Certification Regime and c) Conduct Rules.
The key features of Senior Managers framework are:
- The regime focuses on the most senior people in the firm. The FCA rules define which roles are ‘Senior Management Functions’ depending on the type of firm involved. Anyone who holds a Senior Management Function needs to be pre-approved by the FCA before they start their role, which is the same as under the Approved Persons Regime.
- Firms also need to make sure that Senior Managers are suitable (adequately skilled and experienced) to do their jobs. Every Senior Manager will need to have a document that says what they are responsible and accountable for (a ‘Statement of Responsibilities’).
- Firms need to provide this statement to the FCA when they apply for a senior manager to be approved, and whenever there’s a major change to their responsibilities.
- The FCA will propose some new responsibilities that firms will need to give their Senior Managers (‘Prescribed Responsibilities’). This won’t apply to limited licence firms and more responsibilities will apply to bigger/ enhanced firms.
Every Senior Manager will also have a ‘Duty of Responsibility’, which means if something goes wrong in an area that they are responsible for, the FCA will consider whether they took ‘reasonable steps’ to prevent this from happening.
Additionally, there are detailed provisions for the ‘certification’ part of the regime including guidelines for identifying the certification staff (which include NEDs except for the Board Chair) and how firms should ensure ongoing review of their competence and certify them as ‘fit and proper’ at least on an annual basis.
The new ‘Conduct Rules’ will apply to almost every individual who works in financial services. They include provisions for ‘acting with integrity’ and ‘treating customers fairly’. The new Conduct Rules are designed to improve the behaviour of all staff in financial services firms through statutory provisions, any breach of which is subject to notification to the FCA and appropriate action against the individual member.
[The Regulatory team at Lightfoots will be able undertake a full gap analysis for any firm for the purposes of the implementation of SM&CR framework including provision of appropriately tailored training solution for their senior managers and other staff as required under the new regime]
- Approach to Consumers – Duty of Care
The FCA published a discussion paper in July 2018 on ‘Approach to Consumers’ detailing their initial proposals to include statutory provisions on regulated firms to exercise an overarching ‘duty of care’ in all their dealings with customers. The paper sets out:
- The FCA’s vision for well-functioning markets that work for consumers
- Relevant (proposed) regulatory and legal framework
- When and how the FCA will act to protect consumers
- FCA’s strategy for advancing their consumer protection objective with the greatest impact
FCA’s aim is to make markets work well for consumers. They therefore need to ensure that we have markets in which firms are competing vigorously for consumers’ business, and where consumers are well-informed and empowered to make decisions. This in turn increases competitive pressures on firms. The FCA recognise that in some circumstances, competition alone may not be sufficient to make markets work well and achieve the necessary outcomes for consumers. When this happens, they will continue to intervene as necessary to protect consumers. FCA’s consumer strategy is underpinned by their vision which allows them to measure the progress in working towards ensuring that regulated financial services markets work well for consumers.
The FCA have set out the following 4 outcomes for achieving their vision.
- Consumers can buy the products and services they need because they are sold in a way that is clear, fair, not misleading and has a good choice architecture (sales, disclosure or marketing environment that helps consumers to make good decisions)
In markets with effective choice architecture, The FCA would like to see the following:
- Where consumers are active and able, it is easy for them to get relevant information and to switch to better products.
- Where consumers intend to be more active and able, they are supported to become so.
- Where consumers cannot be active and able, or face constraints in being so they are matched with products that better meet their needs wherever possible.
- Products: High-quality, good value products and services that meet consumers’ changing needs
In markets where consumers are offered good products and services, FCA would like to see the following:
- A range of products offered by a range of suppliers.
- Good quality products and services that meet consumer needs.
- Competitively priced products that are value for money.
- Inclusion: Where the financial needs of all consumers, including vulnerable consumers, are taken into account when accessing financial products
In markets where consumers are fairly included, the regulator will expect:
- Fair treatment and fair risk pricing mean consumers are not unduly excluded.
- All consumers can access basic financial services.
- The needs of all consumers, including vulnerable consumers, are taken into account.
- Protection: Consumers will be appropriately protected against harm
In markets where consumers are well protected, the FCA would like to see that:
- Consumers are not exposed to deceptive or unfair practices by financial services firms.
- Consumers are provided with the appropriate level of protection against fraud and scams.
- When things go wrong, there are mechanisms in place to support redress.
- Where appropriate, consumers are prevented from taking out products that carry a high risk of harm.
- FCA reveal fourth round of successful firms in Regulatory Sandbox
The FCA announced in July 2018 the names the 29 firms that were successful in their applications to begin testing prior to receiving regulatory authorisation in the fourth cohort of the sandbox.
The regulatory sandbox allows firms to test innovative products, services or business models in a live market environment, while ensuring that appropriate protections are in place to meet regulatory standards. It is part of ‘Innovate’, an initiative launched by the FCA to promote competition in the interest of consumers. Since its inception Innovate has had over 1200 applications and has supported more than 500 firms. The regulatory sandbox is a first such initiative by any regulator worldwide, underlining the FCA’s commitment to innovation in financial services.
The FCA received 69 applications to cohort four of the regulatory sandbox, an increase on the number of applications to cohort three. It has been decided that twenty nine firms will proceed to test.
As with the previous cohorts, the FCA continue to see successful applications from a diverse range of sectors, locations and firm sizes. Areas covered include consumer credit, automated advice and travel insurance.
Eight firms (27%) are operating in the wholesale sector. This is a large increase on cohort 3 where the FCA had three firms with wholesale propositions. Five large firm tests will be conducted in cohort 4, this is the largest number to date.
Over 40% of companies accepted to cohort four are using Distributed Ledger Technology (DLT). Of these, six are using DLT to automate the issuance of debt or equity. Two are using DLT to support the provision of insurance. Other technology applied includes geo-location technology, use of Application Programming Interfaces (APIs) and artificial intelligence.
FCA have accepted a small number of firms that will be testing propositions relating to crypto-assets. They are keen to explore whether, in a controlled environment, consumer benefits can be delivered while effectively managing the associated risks.
Tests will be conducted on a short-term and small-scale basis and the FCA have worked with the sandbox firms to agree testing parameters and build in robust consumer safeguards.
- Consumer Credit (EU Exit) Amendment Regulations
HM Treasury have published in July 2018 a statutory instrument containing the draft amendments to the Consumer Credit Regulations. This instrument is being made in order to address deficiencies in retained EU law in relation to consumer credit arising from the withdrawal of the United Kingdom (UK) from the European Union (EU), ensuring the legislation continues to operate effectively at the point at which the UK leaves the EU.
The instrument amends references to an “EU obligation” within the Consumer Credit Act 1974. These references will be deficient once the UK leaves the EU.
The instrument amends references to “Standard European Consumer Credit Information”, “European Consumer Credit Information” and “Member State” within the Disclosure of Information Regulations. These references will be deficient once the UK leaves the EU, as the UK will no longer be a member of the EU.
The instrument omits the reference to the Consumer Credit Directive (CCD) in defining replacement interest within the Consumer Credit (Green Deal) Regulations 2012. This reference will be deficient once the UK leaves the EU, as the CCD will no longer apply in the UK. The instrument omits the reference to powers of intervention against incoming passporting EEA firms within the Financial Services Act 2012 (Consumer Credit) Order 2013. This reference will be deficient once the UK leaves the EU, as the EEA financial services passport will be unworkable without a negotiated agreement with the EU.
- Future of UK relations with EU
The government has published a white paper in July 2018 outlining the status of future relationship between the UK and EU based on the current state of negotiations.
In summary, government proposals attempt to strike the balance between what the UK’s needs what are its rights and obligations, as set out below
- It would return accountability over the laws we live by to London, Edinburgh, Cardiff and Belfast, and end the jurisdiction of the European Court of Justice in the UK.
- It would preserve the UK’s and the EU’s frictionless access to each other’s markets for goods, protecting jobs and livelihoods on both sides, and propose new arrangements for services.
- It would meet our shared commitments to Northern Ireland and Ireland through the overall future relationship, in a way that respects the EU’s autonomy without harming the UK’s constitutional and economic integrity.
- It would end free movement, taking back control of the UK’s borders.
- It would see the UK step out into the world, driving forward an independent trade policy by striking trade deals with new friends and old allies.
- It would maintain the shared security capabilities that keep citizens in the UK and the EU safe, as we work in partnership with Member States to tackle crime and terrorism.
- It would end vast annual contributions to the EU budget, releasing funds for domestic priorities – in particular our long-term plan for the NHS.
- It would take us out of the Common Agricultural Policy and Common Fisheries Policy, ensuring we can better meet the needs of farming and fishing communities.
- It would maintain our current high standards on consumer and employment rights and the environment, AND
- It would enable co-operation to continue in areas including science and international development, improving people’s lives within and beyond Europe’s borders.