SMCR: FCA publishes new indicators on assessing fitness and propriety

The FCA has issued new indicators for assessing fitness and propriety and conduct rule training. While this is expressly addressed to solo-regulated firms, it is of clear interest to all firms which are subject to the Senior Managers & Certification Regime (SMCR) as it sets out specific criteria by which the FCA would assess the effectiveness of the firm’s processes.

Assessing Fitness and Propriety (F&P)

The new guidance has been added to the FCA’s web-page for solo-regulated firms. It sets out good and bad practice (which it refers to as “positive and negative indicators”) regarding how firms are expected to conduct their F&P assessments. The guidance says that firms are expected to demonstrate that they are making “regular, thorough and consistent” assessments. Key points are:

• It should not be a “rubber stamp” exercise where nothing new is identified. The assessment should identify new issues with staff: some staff may fail or lead to development plans.
• Even where they delegate, relevant SMFs should be able to demonstrate adequate oversight of the F&P process.
• There should be a detailed process which is integrated into existing HR/performance management processes.
• F&P panels, which include Senior Managers, should be convened to consider marginal cases.

For solo-regulated firms, this is the first year to undertake F&P assessments under the SMCR. In light of the coronavirus pandemic, the deadline has been delayed from 9 December 2020 to 31 March 2021. This new deadline gives firms the opportunity to ensure that they have effective processes in place, but they should act now. If firms are able to certify staff earlier than March 2021, they should do so and not wait to remove staff who are not fit and proper.

Conduct Rules training

Under the SMCR, the Conduct Rules set minimum standards of individual behaviour and apply to almost all employees who carry out financial services activities. Firms are required to ensure that relevant staff are trained on the rules and how they apply. The FCA’s new guidance also includes a list of positive and negative indicators on their expectations when training staff on Conduct Rules. Key indicators include:

• Training should be interactive and use realistic scenarios (not just obvious ones), rather than computer-based training which is not tailored.
• Training should be reinforced regularly and effectiveness assessed.
• Conduct Rules should be linked to F&P or performance assessments.

The indicators reinforce the conclusions in the FCA’s “Stocktake” from August 2019 here which raised a similar point around tailoring conduct rules to the staff’s job roles and emphasise the importance of embedding conduct rule training so that it is meaningful for staff.

The importance of a continued and evolving approach to conduct risk training generally has also been reiterated in the latest 5 Conduct Questions Industry Feedback report published by the FCA this month here. The report acknowledges the good work firms have been doing to ensure focussed training and awareness re: conduct risk in practice but emphasises that this remains an “incomplete” process. To quote, work on this remains “incomplete, as the depth of understanding and the ability to identify conduct risk in day-to-day working life remains unacceptably weak”. Firms continue to need to focus on embedding detailed understanding in practice.

To ensure the SMCR deadlines remain consistent and provide extra time for firms, the FCA has also consulted on extending the date that the Conduct Rules come into force (for staff who are not Senior Managers or Certification Staff) from 9 December 2020 to 31 March 2021. The outcome is expected in a Policy Statement in October 2020.

Action

Our experience is that all firms subject to SMCR have been putting in place processes to manage certification and provide conduct rule training. However, the FCA’s list of indicators provides a helpful checklist for review of these processes. In particular, firms may want to think carefully about how they bring together their performance management processes with their F&P/certification processes as a means to demonstrate that performance issues are being addressed but that the firm remains satisfied that F&P is not affected. Firms may also want to review their processes for identifying certification staff so as to be able to demonstrate to the FCA that they can do so on an ongoing basis in a reliable way.

SMCR Solution

We have developed a comprehensive SMCR portal which is designed to assist with managing the overall SMCR certification process, including training. It enables you to assign functions, run and monitor attendance at training sessions (using the SMCR Academy) and keep records of the organisation's compliance with SMCR. Implementation can be managed and viewed via an interactive management dashboard. See here for more information.

SMCR Academy

Alongside this, we have also developed the SMCR Academy, which is a series of e-learning modules designed to provide the required SMCR training in a specific, tailored way to reflect the application of the rules to different categories of staff. The training has been designed specifically with the asset management sector in mind and covers both general and specific training modules on the application of the conduct rules to individual rules (e.g. portfolio managers, traders etc). See here for more information.