SMCR+ View - December 2021

This is our last SMCR+ View of the year (and it's a big one). We haven't got a SMCR+ View festive jingle, but luckily for all of us the FCA have recently released their Anti-Fraud Jingle - if it doesn't have you singing "F-C-Aaaa" under your breath, we don't know what will! We hope that you have a lovely festive period and some well-deserved time off with your loved ones.

1. Delayed Senior Manager applications - FCA

In our November SMCR+ View we provided an update for those of you facing Senior Manager (SM) delays. Well we have another one for you fresh from the FCA this week. As a reminder, the FCA previously provided bi-lateral guidance to firms facing delays as a result of the FCA missing its statutory deadline to approve SM applications. In summary, that guidance stated that, where an application had not been determined by the FCA, the candidate may perform the SMF role applied for until the FCA made a determination if certain conditions are met (e.g. the application is complete, adequate checks conducted, amongst others -- see November SMCR+ View for more detail).   

The above statement was due to expire on 31 December 2021, but the FCA have bi-laterally confirmed with us that they are currently in the process of agreeing a further extension of this statement which should provide those of you still waiting for Senior Manager approvals some comfort. We will provide an update once we have any additional information.

The FCA were keen to remind firms that they should apply for approval in good time but that where the appointment is temporary, or reasonably unforeseen, an individual may perform the SMF without approval for 12 weeks under the 12 week rule.

2. New Consumer Duty consultation paper 2.0 - FCA

The FCA know how to treat us during the festive period, with a mere 243 page consultation paper on the new Consumer Duty (Duty). This paper provides more detail on the FCA's proposals and feedback from the previous consultation paper earlier this year (which we covered in May's SMCR+ View). This paper has specific proposals relating to SMCR which we've outlined below.

• Proposal to introduce a new Individual Conduct Rule (ICR) 6 in COCONrequiring conduct rules staff to act to deliver good outcomes for retail customers, where activities fall within scope of the Duty. Where this rule will apply, the existing ICR 4 will not apply, meaning ICR 6 would apply to conduct relating to retail activity and ICR 4 would apply to non-retail activity. Where ICR 6 applies, CR staff will be required to: act in good faith towards retail customers, avoid foreseeable harm to retail customers, and enable and support retail customers to pursue their financial objectives. Obligations under the ICR 6 would apply proportionately depending on a person's job / seniority (e.g. the more senior they are / the more relevant their role is to the Duty, the more the FCA will expect of them to deliver good outcomes for customers).
• No single SM is to be responsible for compliance with all aspects of the Duty. Each SM must take responsibility for the role that they play in delivering compliance with it.
• There is a proposed requirement that the firm's governing body (e.g. Board) receive a report at least annuallyon compliance with the Duty and to agree any actions required.

If implemented, these proposals will require firms subject to the new Duty (amongst other things) to revisit their conduct rule training and SMCR policies/procedures, and educate Senior Mangers on the new Duty and its implications for their reasonable steps. Feedback on the consultation paper can be provided to the FCA until 15 February 2022. We imagine one key piece of feedback that firms will want to give will be around the short 9 month implementation period that the FCA are proposing... If you only have 5 minutes, this Podcast provides a great summary. Otherwise, click here for a summary on the consultation paper - we also have a longer analysis of the paper which we can share if of interest to you.

If you have any questions, please contact Alex Ainley (Partner), Caroline Hunter-Yeats (Partner) or Charlotte Rendle (Supervising Associate).

3. Temporary Permissions Regime (TPR) and SMCR

The FCA and PRA have spent the latter part of this year allocating "landing slots" to EU firms in the TPR. These are 3 month windows during which firms must confirm how they intend to continue business in the UK.We have been very busy supporting our clients who have been allocated TPR landing slots this side of Christmas and have successfully submitted a number of applications. One of the key sticking points for these applications seems to be the application of the SMCR, as this applies differently to (i) UK branches of EEA firms, (ii) UK branches of third country firms, and (iii) UK subsidiaries. Typically, UK branches of third country firms and UK subsidiaries require more SMFs. Given both regulators expect high quality applications that demonstrate the applicant is "ready, willing and organised", we would strongly recommend that firms have identified their Senior Managers well in advance of their allocated landing slot.

If you have any questions, please contact Catherine Weeks (Partner), Alex Ainley (Partner), and Millie Jessel (Supervising Associate)

4. Dear CEO letter - global equity finance businesses (EFBs) - PRA and FCA

There are many interesting elements to this Dear CEO letter of which your relevant Senior Managers should be aware. First, the background - the FCA and PRA conducted a review of global equity finance businesses (EFBs) after the default of Archegos which lead to $10bn in reported losses earlier this year. The review identified cross-firm deficiencies in four key areas (1) business strategy/organisation; (2) onboarding/reputational risk; (3) financial risk management controls/governance; and (4) liquidation/close-out. The regulators outlined that certain shortcomings are symptoms of a broader root cause - poor risk culture. Specifically: there is often a risk culture where frontline business executives fail to take accountability for ownership of risk in their organisation; where the independent risk function lacks standing; and where senior management incentives do not promote safe, sound, and sustainable outcomes for the firm. The regulators require the following actions:

• By end of Q1 2022 relevant firms must conduct a review and report the findings to the regulators (including detailed plans for remediation (if relevant)) - the regulators want a systematic review of firms' EFBs and risk management practices/controls, but they also want it to be broader - i.e. cover all major prime brokerage activity and sales and trading businesses, as well as address the regulators' broader observations on risk culture.
• Remuneration - consider the progress of the remediation programme when setting relevant senior executives' variable remuneration. This is a clear example of the regulators showing how they expect firms to use variable remuneration to promote safe, sound, and sustainable outcomes.
• Senior Manager (SM) responsibility - designate responsibility to one or more SMs (where applicable) for responding to this letter (and the remediation plan, if relevant). Firms may consider updating the SMs' statements of responsibilities. More broadly, this letter highlights the critical role of senior management in establishing/reinforcing an effective and appropriate internal risk culture which firms across the market should consider.

5. Changes and updates to the Appointed Representative (AR) regime - FCA

The FCA launched a consultation on their proposals for increasing principals' oversight of ARs and the amount of information principal firms must provide the FCA regarding their ARs. Of course, ARs themselves are not subject to the SMCR, but they still apply to the Approved Persons Regime (APR). The FCA's proposals include:

• The managing body (e.g. Board) of the principal to annually review the AR's senior management's fitness and propriety (F&P);
• Providing specific guidance on how principals should be conducting F&P assessments and meeting the FCA expectations, including (1) verifying that information provided by the AR is accurate, sufficiently detailed and up to date, (2) discussing with the AR any omissions or concerns proactively, and (3) being on top of changes, such as to the AR's senior management, which may affect the quality or integrity of the information provided.
• Providing specific guidance for principals on how to assess the competence and capability of key personnel at the ARs performing roles under the APR. This will include guidance on whether the senior management at the AR are appropriately experienced and trained for the activities they conduct, whether they have the necessary time to do their role and whether they have the requisite knowledge and skills. 

Responses to the consultation are due by 3 March 2022. Do let us know if you have any questions on the above or on the broader consultation.

6. Updated Code Recognition - FCA

In relation to Individual Conduct Rule 5 (you must observe proper standards of market conduct), COCON 4.1.15G already states that a general consideration about whether a person's conduct complies with the relevant requirements and standards of the market is whether they, or the firm, comply with relevant market codes, and that compliance with relevant market codes will tend to show compliance with ICR 5.

With this backdrop, the FCA has confirmed that it is recognising the FX Global Code (FX Code) and the global Precious Metals Code (PM Code), which set out principles promoting the integrity and effective functioning of the wholesale FX market and global precious metals market, respectively. Both voluntary codes are written and owned by the industry. 

In their statement, the FCA has said that individuals subject to the SMCR need to meet the requirements for market conduct for both regulated and unregulated activities. As above, behaviour that accords with an FCA recognised code will tend to indicate meeting the obligation to observe proper standards of market conduct in relation to unregulated markets (FSMA, UK legislation and FCA rules and guidance outline proper standards of conduct in regulated markets). The FCA expects firms and individuals to consider both the spirit and letter of code provisions.

7. The future of Artificial Intelligence and Machine Learning in Financial Services - FCA and BoE

The Artificial Intelligence Public-Private Forum (AIPPF) (it doesn't roll off the tongue!), a joint forum of firms and academics amongst others, led by the Bank of England and the FCA, met recently to discuss the future role of governance as Artificial Intelligence (AI) and Machine Learning (ML) become more and more integrated with Financial Services.  

There were some interesting points raised with potential SMCR implications which we've highlighted below. Discussions between members of the AIPPF should not be taken as an indication of future policy, but they should inform the development of best practices by any firms using AI and ML.

• Whether responsibility for AI sits with a single senior manager (e.g. Chief AI Officer) or numerous senior managers will depend on the level of maturity of AI in a firm and the skillsets of senior managers.
• Business areas should also be responsible for the governance/outputs of AI models in use, which will involve appointing an accountable executive for each relevant business area.
• There are, of course, additional points which will be interesting to senior managers in firms using AI / ML, including the discussion around governance processes and frameworks, ethics frameworks, transparency and communication with customers and remediation issues, amongst other things.

Our market-leading AI team have produced a very helpful short note on this here and the full minutes are here. Please contact Minesh Tanna (Managing Associate) or Angus Brown (Associate) if you have any questions.

8. Operational Resilience and Operational Continuity in Resolution - CRR firms, Solvency II firms and Financial Holding Companies**

This consultation paper from the PRA outlines their proposal to apply the group provisions of the operational resilience parts of the PRA Rulebook relevant to CRR firms to holding companies. There is a 14 January 2022 deadline for responses. The PRA considers that relevant firms' senior management would not incur any additional responsibilities as a result of this proposal.

9. Decisions around Senior Managers

We want to highlight some key FCA decisions, where there are some interesting takeaways for firms:

• The FCA announced that it was removing the permission granted to Marvell Enterprises Ltd for several regulated activities. Within the investigation, attention was drawn to one SMF holder where there were purported differences in the CV given to the FCA and their website CV - notably, differences around their university, academic qualifications and previous employment. There is an important point here for firms putting in applications for Senior Managers (and something we have always advocated) which is to ensure that all information being submitted to the FCA in relation to Senior Managers aligns with the information available publicly.
• Servicesport Finance Limited (SFL) had their SMF 29 (Limited Scope Function) application for Jonathon Peter Mounteney refused. The FCA focussed on two elements of the FIT test. The FCA noted that he was not able to meet FIT 2.1 (honesty, integrity and reputation) and FIT 2.2 (competence and capability). The FCA noted four main markers for this decision. These included the fact that he had failed to disclose relevant disciplinary matters (i.e. an investigation by the SRA in 2018), his approach to communication with the FCA (i.e. not being consistently helpful), his availability to perform the function (it was said he would dedicate 15 mins a month to the role (!!)) and his employment at SFL.

10. Policy Statement - Issuing statutory notices - FCA

In September's SMCR+ View we spoke about the FCA's proposals on issuing statutory notices which we said, if implemented, might significantly erode the Regulatory Decisions Committee's (RDC) role in authorisation and supervisory decisions. The FCA has now published its Policy Statement and the headline (to paraphrase the 85 page statement) is that they are implementing what they proposed, meaning most feedback challenging their proposals has not been taken into account. The implementation date was 26 November 2021.

Under the new proposals, certain matters which previously were decided by the RDC may now be considered by FCA executive teams and by committees of two people (rather than three, and only one of which needs to be independent). Whilst this will mean that the FCA is able to be more responsive (and, they say, more accountable), it also means (in summary) that these executive committees will make decisions about the commencement of criminal and civil proceedings, they will use the same FCA lawyers as those involved during the investigation of the matter and they won't disclose the communications between staff recommending the decision and those responsible for the decision to give a statutory notice. The FCA will monitor the impact of these changes and set out certain safeguards to ensure independence and consistency in decision-making, such as training for Executive Decision Makers, quality assurance testing and process maps.

If you would like to know more about the implications of this please contact Emma Sutcliffe (Partner) for further information.

11. FCA's Annual Public Meeting 2021 - unanswered questions

The FCA has published responses to questions it received at the annual public meeting which it was not able to answer at the time. We've included some interesting points below:

• The FCA currently have 38 investigations ongoing which concern either SMCR or breaches of individual conduct rules. These focus on a variety of different types of suspected misconduct, including a lack of honesty and integrity, poor management of conflicts, failures in relation to pension advice and non-financial misconduct. Interestingly, the FCA hasn't mentioned the Senior Manager Conduct Rules which might suggest it will be some time until we get any guidance on what amounts to a breach of those.

• The FCA has promised to undertake a survey of whistleblowers to obtain feedback on their experiences (this was delayed because of COVID). An online questionnaire will launch shortly and the FCA will publish any key findings which lead to changes in their approach to whistleblowing.

• A question was asked about the FCA providing more SMCR templates, but they have said that they and the PRA provide a regulatory reference template and that they don't plan to issue others. Instead, firms should consider and understand the requirements and adopt approaches that meet their needs.

• The FCA see a strong regulatory case for diversity and inclusion (as per their (and the PRA/BoE's) Discussion Papers which we covered in July's SMCR+ View). The FCA highlight that some research shows a correlation between diversity, particularly gender diversity, and positive business outcomes. Causation, for a number of reasons, is more difficult to demonstrate and this is an area where more research is being conducted.

12. Applying the Senior Managers Regime (SMR) to the FCA

Whilst technically not subject to the SMR, the Treasury Select Committee recommended (see para 184) that the FCA and PRA draw up and publish a 'Responsibilities Map' (MRM) allocating responsibilities to individuals within the relevant organisations and that it should, as far as possible, be compliant with the SMR applicable to banks.

Here is the FCA's most recent MRM (published this December). By way of reminder, here is the BoE's version (updated in Feb 2021). The regulators have always maintained that these are not guidance for firms in how to comply the regime, but they are nonetheless very helpful to see the level of detail the regulators include and how they apportion responsibilities.