SMCR+ View – December 2022

1. Edinburgh Reforms - SMCR "overhaul"?

Whilst not insignificant, it's clear that an "overhaul" of the SMCR is not guaranteed. You may also have seen recent statements in the financial press from Andrew Bailey saying he doesn't agree with the notion that we don't need post-financial crisis regulation. There's actually very little detail from Jeremy Hunt's statement except that there will be a Call for Evidence in Q1 2023 where information will be gathered on the effectiveness of the regime, the legislative framework, its scope and proportionality, and also to seek views on potential improvements and reforms. Key initial takeaways for firms are:

• There is a general sense in the market that this is likely going to be more about reviewing and tweaking the SMCR rather than scrapping it all together, or looking to weaken standards. For now though, it's status quo but, clearly, it is something to watch in 2023.

• It may potentially slow down other FCA initiatives relating to the SMCR - for example, the FCA's long awaited guidance on non-financial misconduct which they suggested they may provide as part of their 2023 D&I consultation paper - until there is clarity over what revisions to the regime might look like.

The Edinburgh Reforms included a whole raft of other matters - there are old initiatives (ring-fencing and consumer credit review), new chapters (digital currency, payments), borrowed items (prospectuses, securitisation, consolidated tape) amongst others. We held a webinar on the Edinburgh Reforms and what it means for firms - to listen to the recording click here. We also have Edinburgh Reform View which will have helpful insights into these matters as they develop over the coming year(...s). To sign up to future editions click here.

To discuss this further please contact Penny Miller (Partner).

2. Investigations and Enforcement Freedom of Information (FOI) Request - FCA

Buried away is this FOI request, which outlines information on enforcement under the SMCR which also covers non-financial misconduct (NFM) (our favourite topic of late!).

• Specifically it highlights that (as of June 2022) there were 63 open enforcement investigations under the SMCR - 39 relating to individuals linked to retail firms and 24 relating to individuals linked to wholesale firms. This FOI request suggests 47 relate to Senior Managers (SMs) and 16 to other SMCR staff. The FCA stated that 4 were related to NFM connected to the workplace (and 2 remained open). The FCA have also opened 10 further investigations into NFM via the Thresholds Conditions Team (TCT) and 4 remain ongoing - these cases relate to conduct outside of the office for which individuals have either been prosecuted or sanctioned by other authorities.
• This FOI request shows there have been 120 cases opened under the SMCR since 2016 when the SMCR came in for banks and until the end of March 2022. Of these, 71 relate to SMs and 49 to non-SMs. 57 of 120 have been closed with no further formal enforcement action - e.g. either there wasn't sufficient evidence or alternative action was taken such as supervisory action. 5 have resulted in either a financial penalty, public censure, prohibition or an undertaking from the firm or individual that they will do (or refrain from doing) a particular thing.

As always, we have to read these FOIs with a pinch of salt, but it can be a helpful snapshot of what is happening with the FCA.

To discuss this and/or potential misconduct issues please contact Emma Sutcliffe (Partner) or Penny Miller (Partner).

3. SMCR on the cards for pensions dashboard service firms?

CP 22/25 contains the FCA's proposed regulatory framework for pensions dashboard service ("PDS") firms. One such proposal is to extend the SMCR to PDS firms (those that are PDS-only firms and PDS firms carrying on other regulated activities). Proposals include that PDS-only firms will be Limited Scope firms for SMCR purposes. Any firm that is currently a Limited Scope firm and varies its permission to add the new permission to offer pensions dashboard services will become a Core firm. This means key elements of the Senior Managers Regime, the Certification Regime and the Conduct Rules, together with FIT and COCON, would all apply to relevant firms.

The FCA has asked for feedback on their proposals by 16 February 2023. For more information please contact Penny Miller (Partner).

4. Introducing a gateway for firms who approve financial promotions - FCA

CP 22/27 sets out how the FCA's plan to operationalise the regulatory gateway for firms to approve financial promotions as set out in the Financial Services and Markets Bill. In relation to Senior Managers, the FCA highlights that it will be the responsibility of the relevant senior manager(s) to ensure that their firm complies with the proposed rules, having regard to their responsibilities under the SMCR.

The FCA is asking for feedback on these proposals by 7 February 2023. For more information please contact Penny Miller (Partner).

5. Broadening access to financial advice for mainstream investments - FCA

CP 22/24 sets out the FCA's proposals for a new core investment advice regime, with the aim to provide consumers with greater access to investment advice. There is a whole chapter on the SMCR (Chapter 9) and how the FCA propose it applies to firms and advisors using the core investment advice regime. For firms with permission for 'advising on investments' (i.e. providing holistic financial advice), SMCR will continue to apply and individuals already identified as certification staff will not need to be re-certified or approved to offer core investment advice (just reassessed as part of the normal annual cycle). However, those certified as new advisers for core investment advice only must be assessed by the firm and the firm must hold a record of them, but the FCA propose giving firms a year from the date of implementation of the regime before the firm should report the certification via Connect (thus giving the FCA time to build the form).

The FCA is asking for feedback on these proposals by 28 February 2023. For more information please contact Penny Miller (Partner).

6. Dear CEO letter - Life Insurers - FCA

The FCA's Dear CEO letter sets out their expectations of life insurers in relation to the cost of living and reiterating the critical role such firms play in helping customers. The letter itself focuses on protection products, customer value, customer support, scams, operational resilience and pensions, long-term savings and retirement income. Whilst CEOs (SMF 1s) of relevant firms should consider the letter, there is also an important consideration for Senior Managers responsible for operational resilience and HR, as well as Senior Managers more broadly when it comes to thinking about the effective running of their business area(s) and effective delegation. Specifically, the FCA state that they expect firms to "respond and support their workforce" recognising that staff may also be directly impacted by increases in the cost of living and experiencing financial hardship, vulnerability or stress themselves - particularly those working in "operationally challenged areas". The FCA have said that where this isn't managed well it may lead to absenteeism and attrition, thus harming effective operational resilience of key business processes.

We have spoken with a number of firms who are still considering cost of living top ups, amongst other things. If this is of interest to you too, then please contact Fiona Bolton (Partner) or Olly Jones (Partner).

7. Dear CEO letter - Contracts for Difference (CFD) Strategy - FCA

In its Dear CEO Letter to CFD providers, both small and large, the FCA outlines its ongoing concerns with these high-risk derivative products. In particular the FCA highlight three core, often concurrent, poor behaviours: (1) scam/churn activities used by firms in the Temporary Permissions Regime, (2) circumvention of the FCA rules by doing things like inappropriately opting up retail consumers to elective professional status or redirecting retail customers to associated CFD providers in other jurisdictions without equivalent consumer protections, and (3) the use by firms of unauthorised affiliate marketers/introducers where their oversight of such affiliates is inadequate and often part of a deliberate, exploitative strategy. The FCA specifically quote the use of influencers. Other areas covered include market abuse and poor systems and controls, conflicts of interest, the Consumer Duty, financial resilience, protection of client assets, operational resilience and more.

By end-January 2023, the FCA expect all CEOs to have discussed this letter with their fellow directors and/or Board and to have agreed actions and/or next steps. In particular, the FCA expect the Board to take steps to assure itself that these issues do not apply to the firm (and, if they do, the behaviours should cease immediately). The FCA specifically call out the CEO and state that they "must take reasonable steps to ensure that [their] firm complies with FCA rules and principles. If [the firm is] not meeting these, [the CEO] must notify the FCA and ensure any breaches are rectified."

In a final warning shot, the FCA have said that firms should be prepared for scrutiny of their responses to this letter and any actions taken.

8. FCA Final Notice - Julius Baer International Limited

The FCA has fined Julius Baer International Limited over £18 million for failing to conduct its business with integrity, failing to take reasonable care to organise and control its affairs and failing to be open and cooperative with the FCA. This was as a result of "uncommercial FX transactions" and "improper commissions" derived from the transactions. Specific issues that the FCA flagged that may be of interest to Senior Managers and the firm's conduct risk framework:

• For a firm to breach Principle 1 it is necessary to show whose actions and state of mind are to be attributed to it. The fact an employee acted without integrity does not necessarily mean the firm did. This is a complex area, but what is interesting in this case is that the FCA concluded that the actions and state of mind of a reasonably junior individual should be attributed to the firm, despite the firm's contention that she was not the firm's "directing mind and will", in relation to the relevant function. There are many interesting points arising from this case but one is around conduct risk and 'tone from within' and ensuring that all those within the firm are upholding proper standard of conduct and, in this case, integrity.
• The company became aware of the risks in 2021 but did not report these issues to the FCA immediately as required under their regulatory obligations which highlights the importance for firms and Senior Managers in considering their disclosure obligations under P11, SUP 15.3 and Senior Manager Conduct Rule 4.

Some of the individuals connected within this matter have referred this matter to the Upper Tribunal (see below) where some of these concepts (albeit under the old APER rules) will be tested so we will keep an eye on these cases.

To discuss this further, please contact Emma Sutcliffe (Partner) or Andrew Williams (Senior Consultant).

9. Many, many, many Decision Notices - FCA

There's a few of these this month...more details below:

1. The FCA fined Mr Arden and Mr Donaldson c. £134k and £223k, respectively for misconduct relating to Metro Bank. The FCA found Mr Donaldson to be negligent (rather than inadvertent) given his position and knowledge of the matter. The FCA found Mr Arden to be knowingly concerned with Metro Bank's publication of inaccurate information provided in a trading update - he played a central role in reviewing, finalising and approving the incorrect statements, and was an influential member of the Disclosure Committee (which was responsible for ensuring the statements were accurate and not misleading). In both Decision Notices, the FCA made assertions that the misconduct of a senior person is more serious than that of a junior person (as reflected in DEPP) and highlighted this as a key aggravating factor. Mr Donaldson and Mr Arden have referred this to the Upper Tribunal.
2. The FCA decided to ban Mr Urra (the desk manager), Mr Gonzalez (a director) and Mr Sheth (an associate) for market abuse, and imposed fines of £395k, and £100k respectively. The FCA considered that the individuals, who were previously bond traders at Mizuho International plc and all of whom were Certified Persons, had knowingly given false and misleading signals and impressions to the market, and had done so in a repeated pattern of deliberate and intentional market manipulation. The FCA concluded that the individuals were dishonest, and commented on the serious nature of the breaches. The individuals have referred the Decision Notices to the Upper Tribunal.
3. Relating to the Julius Bear International Limited Decision Notice above, the FCA banned Thomas Seiler, Head of the Russian and Eastern Europe Desk, Louise Whitestone, who reported to Mr Seiler, and Gustavo Raitzin, who was the line manager of Mr. Seiler, for lacking integrity. Mr Seiler and Mr Raitzin were found to have recklessly failed to have regard to obvious risks arising out of certain transactions. The FCA concluded that the individuals had failed to take appropriate action once they must have been aware of the breaches, and failed to take appropriate action in light of the breaches. All individuals have referred the Notices to the Upper Tribunal.  

To discuss this further, please contact Emma Sutcliffe (Partner) or Richard Sims (Partner).

10. Anti-money laundering (AML) failures - FCA

Of interest to SMF17s and holders of PR(d) in particular, the FCA fined Santander UK plc over £107 million as a result of serious and persistent gaps in its AML controls. Once aware of certain deficiencies, Santander made various changes and made some improvements, but weaknesses persisted and the FCA found that the failure to address such weaknesses in a comprehensive and timely manner led to unacceptable money laundering risks.

The original review conducted by Santander and an external consultant in 2014 identified that senior managers did not receive bespoke AML training, had no AML responsibilities in their role descriptions, had no involvement in AML policies and procedures, did not receive sufficient AML related MI and did not have effective involvement in managing AML risks. The FCA flagged that, as a result of Santander's attempts to remedy these issues, the AML functions had become divided between different teams, or "siloed", and these teams failed to share information, leading to the persistent  failures found. Some food for thought for relevant Senior Managers and their reasonable steps.

To discuss this further, please contact Emma Sutcliffe (Partner) or Richard Sims (Partner).

11. FCA fines three broker firms for failures relating to the detection of market abuse

The FCA fined BGC Brokers LP, GFI Brokers Limited and GFI Securities Limited over £4 million for failing to ensure they had appropriate systems and controls in place to effectively detect market abuse. In relation to senior management oversight, the FCA noted that multiple red flags and deficiencies were raised to the senior management bodies of the companies, including the Risk and Compliance Committee, but these were not properly discussed and evaluated nor were actions recorded by the boards and committees. Of particular issue were the deficiencies in surveillance, and even though an automated system was to be implemented, no manual procedures were implemented in the interim to cover the known gaps. This is an important reminder to firms and Senior Managers alike of the importance of effective governance frameworks and processes, amongst other things.

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

12. Understanding approaches to D&I in financial services - FCA

The FCA has published research as to how financial services firms are designing and embedding their diversity and inclusion strategies. The FCA highlighted some key points (although there is more on this in our latest D&I View (sign up here) including:

• Firms were more focussed on addressing gender representation, with ethnicity starting to see more attention.
• Firms were focussing on improving representation at senior leadership level, with less focus on the junior level. The FCA flagged that this may lead to a risk of a culture where firms attempt to "poach" diverse senior talent rather than develop their own pipelines, which is not, according to the FCA, a sustainable approach.
• Firms are not adequately tracking the effectiveness of measures and initiatives surrounding D&I, which leads to a lack of understanding of which initiatives actually work.
• There was a wide variation in data quality, with poor data quality leading to firms being unable to understand the D&I of the firm, and as a result being unable to design or implement targeted interventions to address these issues. 

For more information, please contact Fiona Bolton (Partner) and Lauren Dickinson (Supervising Associate).

13. Podcast?

We have started a short (6-7 minute) podcast with our highlights of the monthly SMCR+ View. To listen please click here, or you can find it on Spotify or wherever you find your podcasts - just search Simmons & Simmons Legal Updates. Beyond SMCR+ View there's a lot of really interesting content on the channel so do subscribe to keep up with our podcast series.

14. Insurance SPVs - PRA Policy Statement

The PRA have published PS12/22 following on from their consultation back in July covered here in SMCR+ View. In their original proposals, the PRA suggested that for standard applications, one individual could hold more than one SMF role, but for complex applications, the three SMF roles may need to be held by separate individuals. The PRA has clarified that one individual may hold all three SMF roles for standard applications. However, whenever all three SMF roles are held by the same individual, the ISPV should have contingency plans in the event that the individual is not able to continue in the role. The PRA also clarifies that in appointing the SMFs, the firm should consider any potential conflicts of interest and how they shall be addressed. The PRA will maintain the rest of the application proposal as set out in CP10/22. The PRA's proposal on SMF holders does not depend on the type of vehicle (MISPV or ISPV) itself. However, it may be more likely that an MISPV is classified as 'complex' rather than an ISPV, especially if it involves multiple unconnected entities, requiring more than one SMF.