SMCR+ View - November 2021

1. Delayed Senior Manager applications - FCA

Hooray - we finally have a helpful update for many of you facing Senior Manager application delays! In our September 2021 SMCR View we noted the FCA's confirmation that Senior Manager applications still faced delays. We've now seen a helpful bi-lateral communication from the FCA to firms who have contacted them about outstanding applications which haven't been approved or are unlikely to be approved within the FCA's statutory deadline.

The FCA have (helpfully) said that that if a firm's application has not been determined by the FCA, the candidate may perform the SMF role applied for until the FCA determines the application assuming the following conditions are met: (1) the firm must have submitted a complete application for the candidate to perform the SMF role (including supplying all required information) in advance of the candidate taking up that SMF role, (2) conducted adequate checks on the candidate and determined them as fit and proper to perform the SMF role applied for, (3) the candidate will be subject to the Senior Manager Conduct Rules (in addition to the Individual Conduct Rules), and (4) where possible, prescribed responsibilities should be allocated to an approved Senior Manager. This approach will cease where the application is determined and if an application is withdrawn or rejected the candidate cannot continue to perform the SMF role.

The FCA have said that this statement will apply until 31 December 2021. Do let us know if you'd like to discuss further or for any assistance with SMF applications (we have templates!).

2. Numerous MLROs - FCA

The FCA has emailed the CEO's of firms who have had three or more MLROs (SMF 17s) in the last three years asking them to conduct an assessmentof the underlying causes of their high MLRO turnover considering (1) particular reasons for the high turnover (e.g. culture related issues, lack of resources, or lack of support), (2) level of autonomy and seniority of the MLRO and (3) recruitment and hiring practices of the MLRO. The FCA has suggested that in some firms this turnover has compromised effective oversight and been detrimental to wider anti-money laundering frameworks. Whilst the FCA don't want to see output they've asked for confirmation from firms that the email has been received and that the assessment will be conducted. And they have warned that if they ask a firm to demonstrate the steps taken and they deem them inadequate, they will consider whether regulatory intervention is needed.

Whilst this relates to the SMF 17 we think there is the scope for read across for firms with high turnovers in other positions, particularly the FCA's clear interest in whether Senior Manager attrition is, in part, due to poor culture and their desire for firms to assess this and take steps to remedy any identified issues. Do let us know if you'd like to discuss further.

3. Hybrid or remote working - FCA

Hybrid / remote working is clearly here to stay and as you will no doubt have seen the FCA has finally made a statement about it given many firms are now operating hybrid wording policies (including the FCA itself) - a link to a recording of our 15 minute webinar last week is here. A few key takeaways:

• Opaquely the FCA has said that "any material changes to how your firm intends to operate may require you to notify us first" under Principle 11 - this is obviously a question of fact for each firm to consider, but clearly the FCA does not want all firms they supervise to notify them of the fact they are operating a hybrid model which is why they have built in a materiality threshold. At a minimum we would suggest firms document that they have acknowledged this guidance and the decision taken on whether to notify the FCA.

• Some firms are using this as an opportunity for Senior Managers to look afresh at hybrid working models and ensure that they have considered it from all angles (employment, culture, regulatory, IT etc) and in the context of their reasonable steps obligations and framework. The FCA's guidance states that firms need to periodically review hybrid working practice to identify new risks, ensure there is appropriate governance and oversight by Senior Managers and the Board (including non-executive directors where applicable), ensure there is an appropriate culture in place that can be maintained, and control functions can conduct their activities unaffected (amongst many other things in their list).  We have been talking to a number of clients about refreshing their reasonable steps frameworks at this time.

The statement includes information on firms applying for authorisation, amongst other things, and we suggest reading it in full. This FCA statement includes a reference to issues that may arise when individuals want to work remotely from overseas. This aligns with what we are seeing in any event in the market as organisations are reflecting on employees' wish for more flexibility in terms of where they work. Our broader Future of Work project is helping clients look at the feasibility for employees to work from other jurisdictions from an employment, regulatory, tax, etc perspective. Please contact Charlotte Stalin (Partner), Andrea Finn (Partner) or Olly Jones (Partner) for more information.  

4. Can the FCA really turn up at our employees' home?

We want to draw specific attention to this. In the FCA's statement about hybrid working, they said that they have the ability to "visit any location where work is performed, business is carried out and employees are based (including residential addresses) for any regulatory purposes" (emphasis added). Use of "residential addresses" has caused some concern and so we did a short client call on this matter - recording available here. In summary, whilst the FCA has said it has the power to visit residential addresses, we consider that this is highly unlikely to take place in practice given the limitations on its jurisdiction to do so which ordinarily requires a warrant issued by the court and firms should tell staff that, in the unlikely event that the FCA did arrive at their home without notice and without a warrant, then they should direct them to contact the firm in the first instance instead. Some firms are considering building this into their policies/procedures and the education/messaging around this for employees.

Please do get in touch with Emma Sutcliffe (Partner) or Richard Sims (Partner) if you have any questions.  

5. A further extension of the SMCR? Something for payment and e-money firms / FMIs and CCPs amongst others to watch

SMCR does not currently apply universally to all regulated firms - i.e. it does not apply to Recognised Investment Exchanges (RIEs), Credit Ratings Agencies (CRAs) or payments and e-money firms as they are not authorised under FSMA, and are instead subject to a separate process of recognition (RIEs), registration (CRAs), or authorisation and regulation (payment and e-money firms). The FCA's perimeter report clearly shows the FCA sees merit in extending SMCR to these entities (which isn't new news) and they have said that they are working with HM Treasury on this. We note there was nothing on SMCR being extended to these firms in the most recent regulatory grid (more on this below). This is also a great opportunity to introduce our new Payments Partner, Oliver Irons, who is following this closely. If you have any payments related questions to not hesitate to reach out to Oliver.

However, and in addition, HM Treasury (with input from BoE) closed their consultation on 22 October 2021 on extending the SMCR to Financial Market Infrastructures (FMIs), including CCPs. This looked at how applying the SMCR to FMIs will enhance the accountability of senior managers and improve governance arrangements at these systemically important firms. The government is due to respond to this and this matter did feature in the latest regulatory grid.

6. Regulatory Grid - FCA/PRA

The FCA have produced their November 2021 regulatory grid which provides us with an update on the following:

• Diversity & Inclusion - public companies: In July the FCA consulted on proposals requiring greater transparency on the diversity of public company boards and executive management teams, including comply or explain targets on gender and ethnic diversity and standardised data to be disclosed on an annual basis. The FCA are looking to publish a policy statement in Q1 2022. For more on the proposals please see our article here or do let us know if you have any questions.

• Diversity & Inclusion in financial services: There has been a lot recently from the PRA, BoE and FCA about wanting to move the dial in the financial sector in relation to D&I. You will remember from our July SMCR View that the FCA and PRA issued a Joint Discussion Paper on D&I (summary details here) amongst other papers. They also issued a pilot data survey in October 2021 which you may have been a part of. The grid suggests that in H1 2022 the regulators will publish a consultation paper and in Q3 2022 publish a policy statement on the same. We drafted a response on behalf of clients to the Discussion Paper - if you would be interested in discussing this please let Fiona Bolton (Partner) know. Relatedly, we are creating a D&I Toolkit to assist firms with D&I matters - if this would be of interest then please contact Fiona Bolton (Partner).

• PRA Evaluation of the SMCR: the previous regulatory grid said that in Q2 2021 the PRA may publish feedback comments arising from the December 2020 SMCR Evaluation report. In the latest grid this seems to have fallen off the agenda as this line item now sits in the 'initiatives completed/stopped' annex. There were some interesting findings in the report around things like modest conduct rule breach reporting and regulatory references being used unnecessarily punitive which we hope the regulators will provide more clarity on in the future. 

7. IFPR - the new UK prudential regime for MiFID investment firms

We know that IFPR is high on the agenda for many and precipitating, in some circumstances, significant changes (and we're sure headaches...). We are doing a lot of work on this, particularly following the final rules being published, and wanted to put a reminder below of some of the key governance and SMCR related matters:

• Significant SYSC and Enhanced firm status - as covered in the September 2021 SMCR View the SMCR borrowed the 'significant IFPRU' definition to determine which firms would be categorised as enhanced. The definition of 'significant IFPRU' has now been renamed 'significant SYSC' with the substantive thresholds underpinning the definition remaining the same. This means (1) all current significant IFPRU firms will be significant SYSC firms and thus remain Enhanced firms, and (2) and more significantly, once the different UK classifications of MiFID firm (IFPRU, BIPRU, Exempt CAD etc.) are abolished on 1 January 2022, if such firms meet the 'significant SYSC' thresholds they too will become Enhanced firms. It is therefore important that firms are aware of the thresholds as this may have a material impact on the SMCR requirements applicable to firms.

• Significant SYSC and directorship limits - significant SYSC firms will become subject to specific limits on the number of directorships directors of the firm may hold at any one time. We have been helping a number of firms with modifications relating to this provision.

• Committees - where on- and off-balance sheet assets over the preceding 4 year period amount to a rolling average of £300m or more the firm should put in place the following committees at the UK entity level (unless it has a modification / waiver in pace): Risk committee, Remuneration committee, and Nominations committee. These should comprise 50% non-executive directors (unless the firm cannot have non-executives solely because of its legal structure e.g. an LLP).

For any questions on the above or broader IFPR questions please contact Alex Ainley (Partner) or Louise Tudor-Edwards (Managing Associate). For remuneration related matters (including questions about the finalised guidance on the application of ex-post risk adjustments to variable remuneration which has lots of links to misconduct contact Lucy Boyle (Managing Associate).

8. New authorised fund regime for investing in long-term assets - FCA

We first mentioned this in our May 2021 SMCR View, and the FCA have now published their policy statement with their responses to feedback on its consultation paper CP21/12 and the final rules for a new authorised fund vehicle, the Long Term Asset Fund (LTAF). These rules come into effect from 15 November 2021. From a governance perspective, a Senior Manager must be allocated the prescribed responsibility for overseeing that the LTAF is managed in the best interests of the LTAF, the investors and the integrity of the market. This may require some internal reorganisation of senior personnel, particularly where the LTAF is being managed by a firm that traditionally has only managed authorised funds investing in liquid assets. The FCA have accordingly adjusted the definition of PR(za) so that it now includes reference to this requirement under COLL 15.7.24R.

More information on the final rules is available in our article here and if you would like to discuss this or any other matters relating to LTAFs further, please contact Neil Simmonds (Partner), David Williams (Partner) or John Dooley (Managing Associate).

9. Final notices (a very brief summary) - FCA

• Dishonesty and lack of integrity - the FCA have banned Mr. Bermingham from working in financial services due to his conduct demonstrating clear and serious dishonesty and a lack of integrity such that he is not fit and proper to perform functions in relation to regulated activities. Mr. Bermingham was convicted on 28 March 2019 of one count of conspiracy to defraud relating to EURIBOR submissions made at Barclays under his supervision and was sentenced to 5 years in prison. 

• Dishonesty and lack of integrity - whilst the relevant period relating to the Mr. George matter falls out of scope of the SMCR (i.e. relates to matters from Jan 2015-May 2019) there is read across. Here the FCA found Mr. George to not be fit and proper because his conduct lacked honesty and integrity. The facts? Well, Mr. George had deliberately submitted false information to HMRC relating to his self-assessment tax returns (he was the sole owner and approved person for 4Life Financial Planning Limited) and also knowingly provided false information to the FCA during a compelled interview.  

• Failing to act with integrity - again, not under the SMCR, but the Mr. Hussein matter found him to have breached the Code of Practice for Approved Persons Chapter of the Authority's Handbook ("APER") by failing to act with integrity amongst other things. The facts? Mr. Hussein advised customers to switch their existing pensions to a new SIPP which the FCA considered unsuitable advice given some of the high-risk investments the SIPPs had made, unnecessary and not in their best interests.

10. SMCR related forms in the FCA Handbook - FCA

The FCA are consulting on moving some of the SMCR Forms (and others) out of the FCA Handbook so that they can be more easily, proactively and quickly changed by the FCA. Rather than being in the Handbook the forms would be available on the relevant FCA portals and on the FCA's website. Do let us know if you have any questions.

11. Modern Slavery in the financial sector

We are so pleased to be joined by the UK Independent Anti-Slavery Commissioner, Dame Sara Thornton, for an upcoming virtual event on 23 November (10-10.45am GMT).

During this session, Penny Miller will talk to the Commissioner about the report released in early 2021, Preventing Modern Slavery and Human Trafficking: an agenda for action across the financial sector.

We will hear about the steps that firms and their senior managers should be taking to address the risks posed by Modern Slavery and the challenges they face in doing so.

Register here for this event.