FCA publish final rules for Senior Managers & Certification Regime
The Financial Services Authority (FCA) published a Policy Statement, PS 19/20, in July 2019 that sets out their final rules on the provisions of Senior Mangers & Certification Regime (SM&CR) and clarifies certain aspects in relation to the implementation of the new regime. The SM&CR was introduced for banking firms in 2016 and insurers in December 2018. It will now apply to all solo-regulated firms from 9 December 2019.
SM&CR is a new accountability system that replaces the Approved Persons Regime (APR) and is more focused on senior managers and their individual responsibility that comes into force for all FCA regulated firms from 9 December 2019. The proposed framework forms a key part of FCA’s Culture & Governance priority as set out in their business plans for the last few years including the plan for 2019-20. The new regime is aimed at 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.
The three key elements that make up the SM&CR are:
- The Senior Managers Regime (SMR) that focuses regulatory approval on fewer senior individuals in a firm than under the current APR
- The Certification Regime, which requires firms to assess the fitness and propriety of certain individuals who could harm the firm or its customers
- The Conduct Rules, which are high-level standards of behaviour expected of those working in financial services (FCA have provided extensive guidance on what these rules mean in practice and all firms are required to give a mandatory training to senior managers and other staff on their application)
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 the ‘limited scope’ firms whereas there are far more extensive requirements for larger ‘enhanced firms’.
The new regime introduces a ‘duty of responsibility’ whereby a senior manager can be personally held to account for a regulatory breach in his/ her area of responsibility with the onus on the individual to demonstrate that he/ she had taken ‘reasonable steps’ to ensure compliance with the requirements through due allocation and oversight.
Firms are required to assess the impact of the new framework and ensure implementation in time before the deadline, this includes a) reviewing the internal governance arrangements, b) identifying the Senior Management Functions and Certification staff, as defined by the FCA, c) documenting Statements of Responsibilities (SoRs) supported by detailed job descriptions and Responsibility Maps where applicable, d) making required notifications to the FCA and d) completing the ‘conduct rules’ application training for Senior Management Function (SMF) and Certification Function (CF) roles (a transition period of 12 months is allowed to give the required training to all other staff).
[Lightfoots LLP has ‘in-house’ expertise to assist firms with their SM&CR implementation plan including carrying out a ‘gap analysis’, review of internal governance (including SoRs and JDs) and Conduct Rules awareness/ application training to senior management. You may contact either Ian Norman at firstname.lastname@example.org or Rajiv Agarwal at email@example.com if you need any help with this]
Fair treatment of vulnerable customers – FCA Guidance
The FCA have issues in July 2019 a guidance consultation paper (GC19/3) for firms on the fair treatment of vulnerable customers.
The FCA have reiterated that consumer vulnerability is one of their key priorities and the proposed Guidance sets out the FCA’s view of what the FCA Principles for Business require of firms to ensure that vulnerable consumers are consistently treated fairly across financial services sectors.
The draft Guidance contains three main sections which discuss:
- Understanding the needs of vulnerable consumers;
- Ensuring staff have the skills and capabilities needed; and
- Converting that understanding into practical steps.
The FCA would like to see ‘doing the right thing for vulnerable consumers deeply embedded in the culture of firms‘. The draft guidance therefore focuses on consistency of outcomes for vulnerable retail consumers across financial services sectors and when compared with outcomes for other retail consumers.
The FCA have cross-referred to their ‘Approach to Consumers’ to define a vulnerable consumer in an intentionally broad manner as ‘someone who, due to their personal circumstances, is especially susceptible to detriment, particularly when a firm is not acting with appropriate levels of care’ (as presented in its Occasional Paper 8 on Consumer Vulnerability). They have pointed out that consumers’ circumstances are constantly changing and explained that vulnerability for these purposes can be both ‘actual’ and ‘potential’.
The draft guidance sets out the five Principles which the FCA have identified as underpinning the fair treatment of vulnerable customers, namely:
- Principle 2: Skill, care and diligence;
- Principle 3: Management and control;
- Principle 6: Customers’ interests (TCF);
- Principle 7: Communications with clients;
- Principle 9: Customers: relationships of trust.
Principle 6 is singled out as being key to underpinning the need for firms to take particular care in the treatment of vulnerable customers and the FCA have reminded firms of their six target outcomes for firms to achieve the fair treatment of customers (known as TCF Outcomes).
The Guidance will be finalised in two stages. This first stage of the consultation closes on 4 October 2019. In the light of the feedback received from stage one, the FCA propose to consult on the final Guidance in a second stage.
FCA’s paper on fair pricing in financial services
The FCA released in July 2019 a feedback statement (FS19/4) in which they have provided a summary of the responses to feedback on their October 2018 discussion paper (DP18/9). The discussion paper had initiated a debate on fair pricing in the broad context of financial services.
In the latest paper, the FCA have:
- Summarised the main themes in the submissions they received and, where appropriate, given their view on the responses;
- Provided further clarification on how they will apply the framework in practice; and
- Outlined how the FCA will approach the next stage of work, which will focus on operationalising their approach to fair pricing in retail markets. The FCA state that the first application of the fair pricing framework will be in the General Insurance Pricing Practices Market Study, on which they will publish findings later this year.
The FCA will also begin the work required to formally embed their thinking on fair pricing into the regulatory approach. A part of that work will involve contributing to the review of FCA’s Handbook principles, which will be the first strand of the FCA’s review of the Handbook, as set out in their Business Plan for this year. The FCA further intend to publish a discussion paper on the review of the principles in Q4 2019/20 and they propose to report on the next phase of their fair pricing work at that time.
New sources of risks to be factored under proportionality provisions of Supervisory Review (Pillar 2) of capital adequacy
Following the Great Financial Crisis (GFC), the Basel Committee on Banking Supervision (BCBS) introduced the Basel III (CRD IV) reforms, which significantly strengthened the minimum Pillar 1 regulatory requirements. These changes focused on strengthening existing Pillar 1 prescribed risk-based capital (RBC) rules. In addition, it also introduced new requirements on leverage, liquidity and capital buffers for systemically important banks as well as for the macro-financial environment.
The Financial Stability Institute (FSI) has published in July 2019 a paper on proportionality under Pillar 2 of the Basel framework that sets out further guidance on the approach that the prudential regulators (in the UK, it is the PRA for banks and insurers and FCA for others) should take under the Pillar 2 requirements of capital adequacy. Although the Pillar 2 rules text was unaffected by Basel III and remains unchanged, its practical interpretation by supervisors has changed over time.
Pillar 2 contains four principles that guide the responsibilities of banks and supervisors to ensure, among other objectives, that minimum Pillar 1 requirements are aligned with a bank’s overall risk profile. Pillar 2 is a principles-based standard that is premised on sound judgment. The first principle of Pillar 2 requires banks to assess their own risk profile; this is influenced by the second principle that imposes cumulative set of risk management requirements on banks, which typically varies with a bank’s size, complexity and risk profile. The remaining principles are underpinned by supervisory responsibilities, with an indirect effect on banks, and are driven by their implementation of risk-based supervision (RBS). The collective implementation of all four principles necessitates a proportionate approach and is reliant on supervisory judgment.
The FSI surveyed 16 jurisdictions, including the UK, the EU and the US, on their Pillar 2 implementation approaches, including their application of proportionality. It also looked at the post-crisis evolution of bank rating systems, given their fundamental role in shaping supervisory outcomes.
While all surveyed jurisdictions have a process that incorporates the key elements of Pillar 2, the FSI finds that their implementation approaches vary.
The FSI concludes that supervisors should pay closer attention to Pillar 2. It notes that the expansion of Pillar 1 requirements under Basel III has led to an expansion of the supervisory review process and its interactions with Pillar 1. It also notes the implications for Pillar 2 of new sources of risk such as cyber and climate-related risk, as well as an increased focus on banks’ conduct and culture.
Brexit – Extension of temporary transition powers
The FCA have confirmed that they intend to extend the proposed duration of the directions issued under the temporary transitional power (which apply in the event of a no-deal Brexit) to 31 December 2020. This is to reflect the extension of the Brexit deadline under Article 50(3) of the Treaty on European Union that was announced in April 2019. Other than the additional time, the FCA’s approach remains unchanged.
The temporary transitional power is intended to minimise disruption for firms and other regulated entities if the UK leaves the EU without a withdrawal agreement. Under the power, firms do not generally need to prepare now to meet the changes to their UK regulatory obligations that are connected to Brexit. Nausicaa Delfas, Executive Director of International at the FCA, said:
“The temporary transitional power is a key part of our contingency planning if the UK leaves the EU without an agreement. This extension should give firms and other regulated persons the time they need to phase in any regulatory changes they may need to make as a result of ‘onshored’ EU legislation. The power will provide certainty, ensure continuity and reduce the risk of disruption.”
“As we said in February, there are some areas where it would not be appropriate to phase in the changes. For example, reporting rules under MiFID II as receiving these reports is crucial to our ability to ensure market oversight and the integrity of financial markets. In these few areas only, we still expect firms and other regulated entities to take reasonable steps to comply with the changes to their regulatory obligations by exit day.”
There are specific areas where the FCA will not be granting transitional relief. In these areas, the FCA will continue to expect firms and other regulated entities to take reasonable steps to comply with the changes to their regulatory obligations by exit day.
The FCA expect firms to use the additional time between now and the end of October to prepare to meet these obligations. If firms are not ready to meet these obligations in full, the FCA will expect to see evidence of why this was not possible.
The FCA will publish further information before exit day on how firms should comply with post-Brexit rules. The extension is aligned with the end date intended by the Bank of England and the Prudential Regulation Authority.