SMCR+ View – August 2022 – Update

1. Significant SYSC firms – FCA

Background

• In a pre-IFPR world, where there were IFPRU investment firms, BIPRU firms, exempt CAD firms (you get the picture), the SMCR borrowed the significant IFPRU firm definition to determine which firms would be categorised as Enhanced under the regime. There were also governance requirements that applied to significant IFPRU firms – e.g. limits on the number of other directorships Board directors could hold - and there remain regulatory requirements that are triggered by being categorised as ‘Enhanced’ under the SMCR – e.g. operational resilience rules.
• When IFPR scrapped the IFPRU regime on 1 January 2022, the FCA decided to retain the significant IFPRU firm concept but rename it "significant SYSC firm". The quantitative thresholds that underpinned the concept did not change, but what did change is there was no ‘gateway’ requirement that a firm should have been an IFPRU investment firm under the old regime for the significant SYSC firm criteria to be relevant.
• Therefore, whilst naturally all firms who had previously been significant IFPRU firms transitioned to being significant SYSC firms and remained Enhanced firms for SMCR purposes, the change also had the unintended consequence (as now accepted by the FCA) of capturing firms who had not previously been significant IFPRU firms but who now met the significant SYSC firm criteria. This meant a number of firms being newly categorised as Enhanced SMCR firms (with effect from the end of March 2023) and being subject to other additional requirements outlined above.
• The annual revenue threshold (£160million), in particular, had the effect of bringing a material number of buy side firms into the regime and had the de facto impact of lowering the AUM threshold for Enhanced firm status under the SMCR from the (deliberately high) original level of £50 billion to around £10.5 billion, based on an average annual management fee of around 1.5%. If performance fees are added into the mix, the de facto AUM threshold potentially becomes significantly lower still.

Our successful advocacy

• Having identified the issue and discussed it with various affected clients, we (working alongside AIMA) drew this issue to the FCA’s attention and have successfully advocated for change.
• This week the FCA published this statement announcing that it is going to consult to make changes to clarify that only firms that would have been both significant IFPRU firms and IFPRU investment firms under the pre-IFPR arrangements fall within the new definition of significant SYSC firm for the purposes of the SMCR regime and classifying such firms as Enhanced.
• The FCA has said that, in the meantime, firms that have unintentionally become Enhanced firms by virtue of being the significant SYSC firm thresholds, need take no action.

Points still requiring clarity

• Whilst this FCA news clearly relates to the application of the Enhanced SMCR rules to firms (and, therefore, would mean that the impacted firms also fall outside of additional rules triggered by being categorised as Enhanced under the SMCR, including the operational resilience rules), it isn’t clear whether the proposed changes will exempt such firms from the definition of a significant SYSC firm entirely (and, therefore, also from the limit on the number of directorships that members of the management body can hold).

For more information please contact Darren Fox (Partner) and Amy Sumaria (Supervising Associate).

2. Dear CEO Letter – Alternatives Supervisory Strategy – FCA

This new, 6 page, Dear CEO letter outlines the FCA’s priorities for alternatives firms. It covers putting customer needs first, conflicts of interest, market integrity and disruption, market abuse, culture, and ESG.

Regarding culture, the FCA say (again) that they view culture as having a direct influence on business practices and that healthy cultures are critical for consumer protection and well-functioning markets. They specifically call out speak-up cultures, diversity and inclusion and remuneration/incentives – i.e. inappropriately incentivised employees can create conflicts of interest and potential for harm.

This supervisory cycle the FCA will look at how senior managers and firm policies (likely to include remuneration and whistleblowing policies) influence firm culture. They are also interested to understand how healthy cultures are embedded in firms where founders or other senior individuals occupy a dominant role. We have a wealth of experience of the FCA asking questions related to these things where there have been instances of misconduct and so firms need to consider this carefully.

A governance point, but the letter states expressly that the CEO should discuss the letter with the Board/Executive Committee and consider which of the risks outlined are applicable (and which areas the firm / its assurance functions should focus on) and whether there are appropriate strategies in place to address them. Firms should take actions necessary to mitigate risks and ensure they meet their requirements.

For more information please get in touch with Emma Sutcliffe (Partner).

3. Whistleblowing reports

You may have seen in the press that (based on a freedom of information request quoted in the articles) the FCA has assessed less than 1 in 4 (i.e. only 238) of the 1,025 whistleblowing reports received in 2021, and is still assessing 438 reports from 2019 and 2020. This follows the FCA’s reports on the number of whistleblowing reports made in Q1 2022 which we mentioned in our previous SMCR+ View.

To discuss this further please contact Richard Sims (Partner).