SMCR+ View - March 2023

With Spring (hopefully) just around the corner, it looks like it will bring with it the promised SMCR Call for Evidence (part of the Edinburgh Reforms) following Treasury's confirmation last week that it is committed to publishing it by the end of Q1 2023. This will be published alongside a separate joint discussion paper by the PRA and FCA. We are closely monitoring this, and once published we will provide a special SMCR+ View outlining the proposals and key takeaways.

Events of the last couple of weeks will inevitably result in further scrutiny of the SMCR regime by the PRA and the FCA and we'll continue to keep you updated.

To keep you busy in the meantime, this month's SMCR+ View includes FCA feedback to certain sectors on improvements to their governance, including payment firms and fast-growing firms, interesting findings on Diversity & Inclusion from the Parker Review and further remuneration rules updates.

As always, please do reach out to us with any feedback or questions.

1. FCA - Dear CEO letter on priorities for payments firms

The FCA published a Dear CEO letter to Payments Firms (including EMIs and RAISPs), which includes interesting points on leadership, oversight and governance which the FCA sees as one of the three cross-cutting priorities (alongside operational resilience and regulatory reporting). It should be noted that the FCA consider it to be the responsibility of the firm's Board and executive committee to consider the letter, to take action to address any risks where necessary, and be able to explain such actions if requested. 

Starkly, the FCA states that they continue to see significant governance, oversight and leadership issues in this sector (despite its 2020 portfolio letter). Some of the key issues flagged include the lack of appropriately knowledgeable and experienced personnel (especially within key compliance and MLRO roles); poor governance arrangements and risk procedures/controls which aren't tailored to the nature, scale and complexity of the firm; lack of appropriate Board oversight in some cases; and inadequate onboarding due diligence and ongoing monitoring of agents and distributors. Alongside reminding firms of their responsibilities in respect of using agents and distributors, the FCA:

• Expects firms to satisfy themselves that their directors and those providing payment services are fit and proper and have appropriate knowledge and experience (you can see overlap here with the SMCR despite the regime not formally applying to payments firms...yet);
• Expects firms to regularly review their governance arrangements to ensure they are robust and proportionate and continue to consider the three lines of defence governance model and the appointment of NEDs (as an aside, we've increasingly seen the FCA pushing for NEDs to be on firm Boards despite this not always being required by specific rules).
• Highlights its expectation for there to be appropriate governance arrangements in place for more complete/careful consideration of material ESG risks and opportunities.

For further information, please contact Oliver Irons (Partner). Sign up to Payments View here.

2.FCA perimeter report

The FCA published an update to its Perimeter Report webpage on 6 March 2023. One of the updates is a note that although the Treasury has included provisions in the Financial Services and Markets Bill 2022-2023 that could enable HM Treasury to extend the SMCR to Recognised Investment Exchanges and Credit Ratings Agencies (something the FCA is in support of), it doesn't enable the SMCR to be extended to payments and e-money firms. However, the FCA make it clear that it sees value in extending the SMCR to cover such firms as it would strengthen the FCA's ability to supervise them and increase standards/reduce risk of consumer harm. The FCA confirmed that it is exploring options with HM Treasury and we'll keep an eye out for any movements in this space.

For more information please contact Oliver Irons (Partner) or Penny Miller (Partner).

3. FCA - Fast-growing firms (FGFs) multi-firm review

The findings and expectations of the FCA's FGFs review has landed. The review considered the risk management practices, governance arrangements and financial resources adequacy of 25 FCA solo-regulated firms (including wealth managers, contract for differences providers and payment services firms) which have experienced fast growth over a 3-year period.

It's an interesting read for any fast growing business, even if not solo-regulated, and key findings including that FGFs risk management and governance arrangements often had not evolved to support the growing business meaning there was inadequate resourcing and a greater risk of poor consumer outcomes (particularly during unexpected stress events). FGFs were generally seen to be unaware of the full range of regulatory requirements applicable to them, and had not considered upcoming regulatory changes in their forward planning. We have assisted a number of FGFs with reviews of when certain regulatory requirements kick-in given there are certain thresholds whereby additional rules may apply (e.g. directorship limits) and we can also provide tailored horizon scanning products for clients.

The FCA highlighted evidence of internal documents not being reviewed regularly, and often the three lines of defence model being poorly implemented. Specifically, the FCA noted that for many firms the risk management function was also seen to be more of a compliance function, and failed to adequately challenge the first line on risks thus resulting in poor conduct and outcomes. The FCA wants firms to ensure the risk and governance arrangements are proportionate and fit for purpose and that the second and third line functions are appropriately resourced. Relatedly, the FCA also reminds firms that poor regulatory data submissions could mean they are in breach of their SMCR responsibilities and that accurate and complete data is required in regulatory submissions.

Amongst other things, the FCA also touches on intragroup dependencies and outsourcing arrangements and the impact of this on matters such as wind down planning. 

For more information please contact Penny Miller (Partner), Oli Irons (Partner) and Amy Sumaria (Supervising Associate).

4. Consumer Duty - c. 4 months to go...

With 4 months to the implementation deadline, and one month to go before the much talked about information exchange from Manufacturers to Distributors, Consumer Duty remains in the spotlight. We have set out below some of the key SMCR-related updates, but please do have a look at our Consumer Duty View for further details:

• FCA speech on the implementation of Consumer Duty: Mr Sheldon Mills confirms much of what the FCA stated in its Consumer Duty findings from February (and which we covered in the last SMCR+ View). Broadly, the FCA have seen issues in relation to governance with some firms not having clear plans in place for delivering staff training, changing the culture or reviewing rewards. The FCA want someone at Board level to take ownership for championing the Duty, and they don't want the Champion role to be shared by the Board. 
• Portfolio Letters: Following the publication of the first batch of letters, a second and third batch of portfolio letters have been published by the FCA, addressed to the CEOs and management of Credit brokers, Credit unions, Debt advice, Debt purchasing, debt collecting and debt administration services firms; Mortgage intermediaries, Motor finance providers, Retail finance providers; and payment services and e-money firms. Our summaries of the letters can be found here. SMF 1s (CEOs) and SMF 3s (Executive directors) of firms covered by a Portfolio Letter should ensure they are aware of their contents and the FCA's expectations of the implementation of the Duty as relevant to their firm.

Please do get in touch with Penny Miller (Partner), Caroline Hunter-Yeats (Partner), or Rosie Davies (Supervising Associate) if you have questions on the intersection of the SMCR and the Consumer Duty, or if we can assist you with your Consumer Duty implementation more broadly. Please also sign up for Consumer Duty View here.

5. Diversity & Inclusion: Parker Review 2023 and FCA speech on Equity

"Improving the Ethnic Diversity of UK Business" - the Parker Review Committee's updated 2023 report has indicated that there have been improvements in representation at Board level of larger FTSE listed companies. As at 31 December 2022, 96 of FTSE 100 companies met the Parker Review target of at least one director from an ethnically diverse background on their Board (up from 89 last year and representing approx. 18% of the total FTSE 100 director roles), and FTSE 250 companies were making progress to meeting this same target (now at 67% and up from 55%). New targets for December 2027 have been launched including each FTSE 350 company being asked to set a percentage target by December 2023 for senior management positions (i.e. members of the Executive Committee and senior managers who report directly to them) that will be occupied by ethnic minority executives by December 2027. The Parker Review Committee consider it the right time to be setting targets for senior management positions, not just Board positions. Given there cannot be a 'one size fits all' approach, the Parker Review Committee has suggested firms setting their own targets and strongly encourages companies to describe in their annual reports the management development plans they have in place to create a diverse and inclusive pipeline of talent. Previous reports can be found here.

It's also not just public companies that the Parker Review Committee is looking at. In particular, it considers there to be compelling logic to set targets for inclusion of ethnic minorities within large private companies. This means 50 of the UK's largest private companies will be asked to provide data from December 2023 and a target of at least one ethnic minority director on the main Board by December 2027 will be set, amongst other things.

This has come at a time where we don't have the FCA/PRA's long awaited D&I Consultation Paper although we are expecting it very soon! The PRA has published a letter dated 10 January 2023 setting out the priorities for the year for international banks active in the UK. Amongst other topics, D&I is highlighted as "an important focus" that the PRA expect(s) firms to continue to embed in their cultures.

Similarly, we have the FCA echoing the importance of D&I in the context of financial services. The FCA is keen to reinforce the importance of diversity and inclusion in promoting equity, a healthy firm culture and better outcomes for consumers and markets. The FCA highlight their previous quote: "change starts from the top. But it must not stop at the top and must continue with all of us" - this is perhaps a good time to remind the Board and senior management of their role to play, but also staff more generally particularly as firms look to roll out refresher SMCR training this year.

For more on DEI and to learn more about our D&I Toolkit, please contact Andrea Finn (Partner), Lauren Dickinson (Supervising Associate) or Fiona Bolton. You can also sign up to D&I View here.

6. FCA Primary Market Bulletin - D&I disclosure requirements for listed companies

The FCA published Primary Market Bulletin 44 which addresses disclosure requirements relevant to companies subject to the listing rules relating to D&I on Boards and within executive management. It confirms that under the recently introduced rules, relevant companies are required to make annual D&I disclosures in their financial report on a comply or explain basis, and are required to retain records supporting the statements and numerical data. The FCA also confirmed that they will be reviewing annual reports to determine whether listed companies are meeting the D&I disclosure requirements. Should a company fail to disclose the required information, the FCA will request that the company publish this and the FCA confirms it will use its full suite of powers and sanctions where disclosures are false, misleading or omit material facts.

For more on this please contact Fiona Bolton (Partner), Caroline Chambers (Senior Practice Development Lawyer) or Sally Childs (Practice Development Lawyer). You can also read more in our briefing "Diversity at the top of UK companies - good progress, much more to do?".

7. BoE publishes letter to CFOs on preparation for resolution under the Resolvability Assessment Framework (RAF)

The BoE has sent a letter to CFOs of the major UK banks ahead of the second RAF assessment to provide information to assist firm's in planning and enhancing their resolvability. The letter contains guidance to support firms' understanding of parts of the Bank's Statements of Policy and also thematic and generic findings from their review of the PRA's revised operational continuity in resolution policy.

From an SMCR perspective, the BoE confirms that Boards and senior management are responsible for the firm's resolvability outcomes on an ongoing basis and therefore firms should address previously identified issues as a priority ahead of the second RAF assessment (and maintain, test and improve capabilities so they're fit and ready to use). The BoE confirms that outstanding issues will continue to be a significant focus and firms' Boards and senior management should continue to make these a significant priority.

There's a lot more information in the 10 pages than we can cover here (we hear your sigh of relief...) but do flag it to relevant senior managers and for further information, please contact Alex Ainley (Partner).

8. PRA - Consultation Paper on Remuneration and enhancing proportionality for small firms

There has also been a lot happening in the remuneration world and continuing with the UK regulators post-Brexit CRD V amendments, the PRA have published CP 5/23 which proposes changes to the current rules to enhance proportionality for smaller firms and reduce their regulatory burden by removing the need to comply with specific remuneration rules. This is relevant to banks, building societies and PRA-designated investment firms categorised as small CRR firms. The PRA propose the following:

• Redefining small CRR firms in line with the "Simpler-regime" size threshold, as set out in the PRA's Strong and Simple framework ("small remuneration firms"). In order to benefit from the small firm remuneration regime, firms will broadly need to have average total assets at or under £4 billion; or average total assets over £4 billion and at or under £20 billion (up from the current threshold of £13 billion) and which meet certain other specified Simpler-regime criteria. A further condition is that firms must not be part of a group containing another firm that is subject to the Remuneration Part of the PRA Rulebook on an individual basis and has average total assets exceeding £20 billion.
• The requirements relating to performance adjustment (malus and clawback) and buyouts would cease to apply.
• Providing greater clarity on how disclosure requirements apply for all proportionality levels.

Note, the bonus cap which small CRR firms are currently subject to is being consulted on separately (see CP15/22 which we discussed in the January's SMCR+ View). The proposed rules are anticipated to come into force for Q4 2023 and the consultation closes Tuesday 30 May 2023. Comments/enquiries should be sent to: CP5_23@bankofengland.co.uk. For more information, please contact Tair Hussain (Partner).

9. FCA - Training and Competence Sourcebook

A minor update relevant to firms subject to the Training and Competence Sourcebook (broadly, those carrying on certain retail activities). The FCA has confirmed in its Handbook Notice that (amongst other changes) it has amended the list of accredited bodies in the Glossary of definitions to reflect that The London Institute of Banking and Finance is no longer recognised as an accredited body and The London Institute of Banking and Finance Limited will be added as an accredited body. These changes have also been reflected in the qualifications table at TC Appendix 4 with updates to the qualifications table. It's unclear if this will mean consequential changes to forms such as those completed forcertified persons holding the "Functions requiring qualifications" on the FCA Directory. 

The instrument comes into force on 31 March 2023.

10. FCA - Dear CEO letter - ESG Benchmarks Review

We wanted to briefly flag this Dear CEO letter addressed to benchmark administrators which follows from the September 2022 portfolio letter sent to such firms (and covered in September 2022's SMCR+ View). Since then the FCA has completed a preliminary review of ESG benchmarks which assessed the quality of disclosures made by a sample of UK benchmark administrators. The findings? Generally, poor quality disclosures with insufficient detail and description of ESG factors considered. The FCA have provided an annex of the risk observed and issues identified by their review. They expect the CEO, the Board and senior leadership to carefully consider the messages in the letter (as relevant to their business) and ensure there are appropriate strategies in place to address them and explain such strategies to the FCA if required.

For more information please contact Sonali Siriwardena (Partner).

11. FCA - IFPR implementation observations

Coming in at 8 pages, we'll keep our summary of this brief. At the end of February the FCA published its multi-firm review of firms' IFPR implementation (which came into force on 1 January 2022). Whilst it doesn't change FCA policy, firms should consider whether to apply any observations to their processes. One observation is that, in relation to ICARA process assessments, there were different degrees of engagement by the Board and delegated committees in the ICARA process. Some Boards and committees did not provide sufficient challenge and oversight over key elements of the ICARA process. The FCA outlined that best practices included firms aiding senior executives and Boards providing in-depth training on IFPR which set out fundamentals of the regime enabling them to provide suitable challenge.

The FCA reminds firms that having adequate support and the exercise of appropriate diligence are fundamental requirements under the SMCR.

For more information, please contact Penny Miller (Partner).

12. FCA - Warning Notice in relation to two individuals

The FCA has issued this Warning Notice in relation to two individuals working as partners whilst approved persons at a FCA authorised firm. It notes the FCA decided to issue warning notices because the FCA considers them to have engaged in reckless conduct demonstrating a lack of integrity, including permitting the firm to operate a "seriously flawed advice model" and failure to respond to warning signs received in respect of obvious deficiencies, amongst other things. The conduct took place between October 2015 and 31 July 2016.

We act for a range of firms and individuals facing enforcement action, including on appeal to the RDC and the Upper Tribunal. For more information on this please contact Emma Sutcliffe (Partner) or Richard Sims (Partner).