SMCR View - July 2021 (2.0)

1. Certification of Senior Managers - FCA

The FCA has clarified to us their position on when Senior Managers should also be certified. A short summary is below, but for a full brief, please see this insight on our website.

Existing FCA guidance states that a Senior Manager must be certified if they are performing a Certification Function that is very different to what they are doing as a Senior Manager. This guidance has led to mixed approaches in the market in terms of whether to certify a Senior Manager who 'does' the work of the area/function that they oversee/manage as an SMF (e.g. a Senior Manager with responsibility for the Portfolio Management Function who is also a portfolio manager). The FCA has confirmed their expectation that where a Senior Manager does the work of the area that they manage, and (in that role) they meet the definition of a certification function, they should be certified for that role. We note that this only relates to non-management related function (e.g. the client dealing function and function requiring qualifications). Firms have until 31 July 2021 to assess whether they have any Senior Managers who should also be certified as per the FCA guidance and, if they do, assess them as fit and proper to perform that certified role (if that hasn't already been done as part of their annual Senior Manager F&P process), issue them a certificate and upload their details to the Directory via Connect. Failure to do this by the deadline may result in late fees.

We would be very happy to discuss this in more detail with you.

2. Diversity and Inclusion papers

We didn't just get one paper on Diversity & Inclusion (D&I) on Wednesday last week, we got three! The FCA, PRA and the Bank of England issued their Joint Discussion Paper and then the PRA and FCA issued a Working Paper (Gender, age and nationality diversity in UK banks) and Research Paper (Review of research literature that provides evidence of the impact of D&I in the workplace), respectively.

There is a lot to digest and we have produced a longer summary document on our website which also calls out the SMCR related points in the paper. However, by way of headlines, you may be interested to note that the Regulators are considering:

• Senior Management Function ("SMF") approval: collecting diversity data as part of SMF applications in order to scrutinise diversity within firms.
• Fitness & propriety ("F&P")/Conduct Rules: how adverse findings in relation to an individual's D&I conduct could affect future F&P and Conduct Rule breach assessments, including by providing specific guidance on the topic of what constitutes non-financial misconduct, including evidence of sexual harassment, bullying and discrimination on the basis of someone's protected characteristic. (We think such guidance would be generally welcome.)
• SMF 13 (Chair of the Nomination Committee): for firms with a Nominations Committee and an SMF 13, the PRA/FCA propose the SMF 13 would also be responsible for ensuring that the committee consider D&I in succession planning. Many firms and SMF 13s may already do this.
• SMF 12 (Chair of the Remuneration Committee): oversight of how obstacles that give rise to pay gaps and other adverse D&I outcomes are being managed in their firms.
• Dual regulated firms - PRs for culture (PR (I) and PR (H): making the link between D&I being part of culture even clearer would clarify that these PRs encompass responsibility for the implementation and execution of the firm's D&I strategy.
• Solo-regulated firms - responsibility for D&I: allocating express responsibility for elements of the D&I policies to Senior Managers, rather than including them in their general wider responsibilities.
• Governance: many firms will already have Board and firm diversity policies, but the regulators are suggesting that Boards should set a D&I strategy and hold management to account for it. Firms can expect D&I to be a regular part of the Regulators' engagement with senior management and the Boards.

We would be delighted to discuss these papers with you. The deadline to provide feedback is the 30 September 2021.

3. Upper Tribunal decision - Forsyth

Last but not least, the decision of the Upper Tribunal published last week on Forsyth is worth being aware of. The Decision is on a reference by a Mr Forsyth - CEO of a small insurer, in relation to PRA and FCA Decision Notices, which made findings of lack of integrity and related prohibition orders. The Upper Tribunal allowed the references, on the basis that the facts as the Upper Tribunal found them did not support the findings of any lack of integrity on his part. The allegations were that he had overpaid his wife for work she allegedly didn't do and forging minutes of the firm's Remuneration Committee to disguise this - allegations from the FCA and PRA. This is the first Upper Trnal case to consider (and reject) allegations by the FCA and PRA of breaching Individual Conduct Rule 1 specifically. It does also underline how difficult assessments these are for organisations undertaking fitness and propriety assessments and Conduct Rule breach determinations.