SMCR View - May 2021

1. Senior Manager Applications (FCA)

Many of you may remember the FCA's acknowledgement last year that there were delays in their processing of Senior Manager Applications (FCA Regulation Round Up email in December 2020 and on their Approved Persons page). We have long been discussing with the FCA how firms are expected to manage the implications of such delays, particularly where firms are relying on the 12 week rule. We know of clients who have applications outstanding submitted up to 8 months ago. We had a response from the FCA on this matter again recently where they acknowledged the delays and have said they will be contacting firms bilaterally - if you are concerned about Senior Manager Application delays do get in touch to discuss this further with us.

2. FCA's Regulatory Initiatives Grid (FCA/PRA and others)

Near the start of May the FCA published the grid of regulatory initiatives which it prepared in conjunction with the PRA, FRC, CMA and other regulators. A few SMCR/Culture/Governance related matters to flag which come from a number of sources:

1. SMCR: in Q2 2021 the PRA will publish the findings of its evaluation of the effectiveness of the SMCR following their December 2020 publication. This could lead to consequential policy proposals that would be subject to further consultation. We expect to report on this in the June 2021 SMCR View.

2. Diversity and Inclusion (D&I): We mentioned in the last SMCR View the PRA and FCA's focus on D&I and that they recognise the value of identity and cognitive diversity in improving the quality of decision making, leading to better consumer outcomes, safety and soundness. Following on from this, the FCA and PRA plan to issue a joint Discussion Paper on D&I next month, and send a one-off data request in mid-2021 to a statistically significant selection of PRA/FCA regulated firms. Following this there will be a Consultation Paper in Q1 2022 with a Policy Statement planned for Q3 2022.

3. Corporate governance: Many firms have been looking at their governance structures for a number of reasons, including SMCR, so it may be of interest that for the largest companies, the Government is seeking views on proposals to strengthen the UK's framework for audit, reporting and corporate governance. The proposals set out how companies should report on their governance and resilience; reports should be audited; audit and the audit market should change; and these should be overseen by a new regulator. The BEIS consultation closes on 8 July 2021.

4. Employment guidance: The ICO plan to issue new guidance on data protection and employment covering a range of topics including employee surveillance, health data, job applications, HR records and more. This will be of particular interest to firms and their senior managers given COVID-19 and a number of employee-related challenges firms have been experiencing. There is no time frame provided for when this will be issued.

3. Consumer Duty of Care - CP 21/13 (FCA)

This is something that has been rumbling on since 2018, but the FCA has now published a Consultation Paper on a Consumer Duty of Care in May ("CP") with the aim being to see higher levels of consumer protection in retail financial markets by setting a new 'consumer duty'. This is despite many previously representing that the FCA should wait for the SMCR to bed down before pressing ahead with these additional proposals. This CP is designed to drive a material culture shift (the FCA call it a "paradigm shift" in their expectations of firms in retail markets) within firms so that consumers always get products/services that are fit for purpose, that represent fair value and that are clearly communicated and understandable. In the CP, the FCA have a section outlining what this duty will mean for firms and their senior managers (page 13) which includes (amongst other things) (1) considering the duty at every stage of the firm's processes and at every level of the organisational structure. This will require broader cultural change and ties into the FCA's continued discussion about the 'tone from within' rather than just 'tone from the top' or 'tone from the above' which is something we mentioned in April's SMCR View, (2)'getting it right in the first place' particularly when designing products and services which may demonstrate the FCA's desire to move away from firms designing products that they then test / withdraw quickly once it's been released into the market, (3) firms will need to monitor and test and remediate (where needed) their practices and processes and may need to provide data on this to the FCA to evidence such activity. We are very active in this space and are helping clients in preparing their responses so please do get in touch to discuss this further. More information is available from the FCA here and feedback must be provided by 31 July 2021 with any new rules being made by 31 July 2022.

4. New authorised fund regime for investing in long-term assets - CP 21/12 (FCA)

Many of you will seen the FCA's proposals for the regulatory framework governing the new Long-Term Asset Fund ("LTAF") - a new authorised vehicle, which should allow retail investors better access to illiquid assets while also providing an appropriate degree of investor protection. We have done a full article on it here with our initial views but we want to flag the SMCR angle and that strong governance is a priority. Independent representation on the governing body of the LTAF's authorised fund manager (AFM) will be required (as for other authorised funds and in line with the general direction of travel we are seeing from the FCA more broadly whereby they are increasingly interested in firms' executives having independent oversight). In addition, the Senior Manager responsible under the SMCR for the prescribed responsibility relating to authorised funds will be responsible for ensuring that the AFM manages an LTAF in the best interests of the fund, its investors and the integrity of the market, that an annual assessment of value is carried out, and that there are enough independent directors on the board. We have been heavily involved with this and the HM Treasury's Call for Input, 'Review of the UK funds regime' so please do get in touch to discuss this further.

5. More FOI data (FCA)

We find FOI data really interesting and shared some of the 2020 data released previously here in a short slide deck. The FCA have since published more SMCR related FOI requests.

• This one relates to the number of SM applications received and associated data for calendar years since 2016. In 2020 the FCA received 7,067 SMF applications (perhaps explaining the delays mentioned above, given it's about 60% more than in 2019). Of these c.7k applications, 132 were interviewed and 323 applications were withdrawn. Further, in 2020 there were 68 "qualified Form Cs" received by the FCA in respect of individuals holding SMF roles (over double received in 2019) which are required to be submitted if the firm believes the information contained affects the individuals F&P, or the SM is dismissed or suspended by the firm, or the individual resigns whilst under investigation by the firm or regulatory body, amongst other specific circumstances. There is also more enforcement data included in this FOI request.

• This one has interesting diversity information on the number of male and females holding different SMF roles as of particular dates. As of 30 September 2020, there were 449 female SMF 1s (CEO) and 5,293 male SMF 1s (CEO) (i.e. c. 8% of SMF 1s were female). Of the population of SMF 1s, SMF 3s, SMF 9s and SMF 27s on 30 September 2020, 7,552 were female and 43,087 were male (i.e. of these positions only c.15% are held by women). These reflect an ongoing recognition that firms need to continue to work to increase the number of women in senior positions in financial services firms.

6. SMCR Toolkit (solo regulated firms)

We have recently refreshed the SMCR Toolkit for solo-regulated firms. We have updated it with new FCA guidance and included some additional, practical documents to help firms navigate their ongoing SMCR compliance. In particular, we are seeing a number of firms approaching the "Enhanced firm" thresholds. Our Toolkit will be very helpful for firms making this transition and is a cost-effective way of accessing practical documents to assist compliance with additional SMCR obligations that come with being an Enhanced firm. Have a look at our short overview here and/or get in touch with the SMCR Team to find out more.

7. SEAR is coming!

We've mentioned in previous SMCR View's that the Senior Executive Accountability Regime (SEAR) will be enacted soon in Ireland. Yesterday we hosted a well-attended panel discussion (watch on demand here) on the SEAR regime including representatives from the Irish Banking Culture Board, the Central Bank of Ireland and Bank of Ireland. SEAR has many of the same features as the SMCR regime and we are currently developing our SEAR Toolkit (tailoring our SMCR Toolkit) and materials to assist firms in their implementation. Please do get in touch with us if you would like to discuss further.