SMCR+ View - December 2023

With the festive season upon us, we want to extend our warmest holiday wishes for a lovely break with good food, beverages and company, before delving into this comprehensive edition of SMCR+ View, our most extensive issue to date! In this edition, we have a number of updates on Diversity & Inclusion (D&I) and culture, updates on the SMCR Review, as well as some interesting ESG governance takeaways from the FCA and the introduction of the Individual Accountability Framework in Ireland.

As always, if you have any feedback on how these could be made more helpful then please do let us know.

1. FCA and PRA - Diversity & Inclusion (with some NFM and culture thrown in there too)

And just like that, the submission deadline for responses to the FCA and PRA's Consultation Papers ("CPs") on D&I has passed. Thank you to all of those who engaged with us on our response to the regulators - if you would like to see it, we are happy to send it. And if you're still catching up - we have provided a summary note and webinar (both accessible here), the FCA did a webinar on the CPs there, a summary of which we can share...(rhyme intended). Do get in touch if you'd like to discuss. In terms of next steps, the FCA suggested it is likely to publish its Policy Statement and final rules in H2 2024 with the rules coming in post-April 2025.

Other developments since the CPs were published include the Treasury Committee taking oral evidence from different industry bodies (UK Finance, AIMA, the IA and ABI) as part of its inquiry into Sexism in the City. The Treasury Committee opened with a statement that the evidence so far has indicated a "unanimous view" that since 2018 nothing has changed and things have flatlined, meaning that it can be a struggle for women to progress within financial services. The industry bodies acknowledged that there is more the industry should do, but disagreed with the assertion that nothing has changed since 2018. There was discussion of the D&I CPs and the industry bodies broadly aligned that there was support for the underlying aims of the CPs and that was welcomed. However, there are clearly areas where further clarification was needed (e.g. non-financial misconduct ("NFM")) guidance, and points to be carefully ironed out (e.g. data collection). It's a good read with some interesting industry stats thrown in - some of which are supported by the IA (Investment Association)'s report on Equity, Diversity & Inclusion (November 2023) covering investment managers, highlighting data collection practices.

Culture was brought up a lot during the oral evidence and this was also touched on in two FCA speeches: How to flex your organisation's power through culture and conduct (Speech 1)and Building firm foundations for healthy cultures (Speech 2). There were three common themes:

(1) First, the view that D&I plays an important role in improving internal governance, decision making and risk management, by reducing group think. The FCA described their D&I proposals as setting "flexible" minimum standards (insert a wry smile, particularly given the FCA's suggestion the impact on firms of their proposals is "low" here) to move the industry forward from paying "lip service" to D&I to making real progress.

(2) Second, is that open and inclusive cultures where employees are encouraged to speak up and employers are attentive, is crucial for a healthy firm culture and effective risk management.

(3) Lastly, both speeches emphasise the role of the second and third lines in supporting SMFs and senior management in terms of overseeing business activities and holding them to account.

In Speech 2 the FCA stressed that having a plan in place for culture, the risks faced and what controls are needed to manage these is just as vital as having an ideology and purpose. There is an interesting section where the FCA outline that financial pressures should not lead to lowered standards or risk management and that maintaining high ethical and professional standards is essential, even in challenging economic times.

If you have any questions, please contact Andrea Finn (Partner), Fiona Bolton (Partner) and Amy Sumaria (Managing Associate).

2. FCA/PRA/Treasury - SMCR Review

The latest version of the Regulatory Grid is here. A helpful read for many reasons, but one is the update on the SMCR Review - it indicates that formal engagement is planned for H1 2024 (likely Q2 of 2024) (the impact of which is currently classified as "unknown"). What is also interesting is that there appear to be key milestones in Q4 2023 (and the FCA has suggested we will get a public update in this quarter, but we've not seen it yet) and Q1 2024 - whether this covers the D&I and NFM proposals, or whether we will see something else (Thematic Review maybe?) is not clear.

We have had some indications from the PRA of what we might see from the SMCR Review in this speech, which seems to be (as we predicted) not wholesale change but tweaks around the edges - they refer to the regime as a "cherished tool" in their supervisory toolbox so it's unlikely to be overhauled. In particular, the PRA stated that they have identified areas for "targeted improvements" in relation the effectiveness and efficiency of the SMCR – e.g. taking a risk based approach to SMF applications. When we spoke to firms earlier this year there were mixed views about the SMF 7 (Group Entity Senior Manager) role and, particularly, some felt it went too far in its extra-territorial scope. The PRA seem to suggest that the SMF 7 role is here to stay - they highlight its importance as an effective bridge between the group and the UK entity, and appear to even praise it. So perhaps this speech is a window into the changes (or lack of) we might see in due course.

Relatedly, in FSMA 2023 the FCA introduced a new SMCR for financial market infrastructures (FMIs), which can be applied to central counterparties (CCPs) and central securities depositories (CSDs) as well as to recognised investment exchanges (RIEs) and credit rating agencies (CRAs) if deemed appropriate (following consultations). Any implementation of the regime would need secondary legislation which isn't going to come from Treasury until it has fully considered the current ongoing SMCR review.

We have done and will be doing a significant amount of work in this area so please contact Penny Miller (Partner) and Amy Sumaria (Managing Associate) if you'd like to discuss further.

3. Ireland - The CBI's implementation of the Individual Accountability Framework

Since we last looked at the Irish Individual Accountability Framework in the April version of SMCR+ View, the CBI have published a feedback statement, together with updated regulations and guidelines, in relation to their consultation paper. The feedback statement confirms the new framework's timelines, and firms have until 29 December 2023 to meet the requirements in relation to the conduct standards and enhancements to the Fitness & Probity Regime. In particular, all Irish regulated firms are required to notify their CFs and PCFs of the conduct standards that apply to them, and to provide those individuals with training on the conduct standards. As previously indicated, the Senior Executive Accountability Regime (SEAR) will enter into force on 1 July 2024, with a new one-year extension for NEDs and INEDs.

We discussed the most important changes to the framework since the publication of the Consultation paper, and what these changes will mean for Irish firms in this webinar. If you have any questions, please reach out to Derek Lawlor (Partner).

4. FCA - Dear SMF Letters

We have two to report on this issue:

(1) Dear RemCo Chair (SMF 12) letter - Banks, building societies and PRA designated investment firms: This Dear RemCo Chair letter is one to flag to your SMF 12s as it sets out the FCA's approach to remuneration for 2023/2024. The letter reiterates previous messaging from the FCA, particularly relating to the FCA's expectation that remuneration links to positive customer-focused outcomes and achievement of ESG goals. It covers (i) Consumer Duty (including how remuneration adjustments might be made if progress for embedding the Duty falls short), (ii) culture and accountability (emphasis of creating healthy cultures, taking robust and prompt action in the case of NFM and ensuring a clear evidenced link between behaviour and remuneration outcomes), and (iii) D&I (it references persistently large pay gaps, the expectation that firms maintain gender neutral pay policies and that variable remuneration doesn't discriminate on the basis of any protected characteristic), and (iv) sustainability in finance (a note that sustainability related objectives should link to the firms strategy, governance and remuneration structures appropriately).

If you have any questions, please contact Tair Hussain (Partner) and Colleen Cassidy (Supervising Associate).

(2) Dear CEO (SMF 1) letter - investment platforms and SIPP operators: This Dear CEO letter covers the retention of interest earned on customers' cash balances and sets out the FCA's expectations of firms in respect of these under the Consumer Duty. They note that they have serious concerns around firms who both retain interest and take an account charge or fee on customers' cash (i.e. double dipping). The FCA requires firms to take a number of actions including reviewing their approaches and confirm that (and other matters) to the FCA - e.g. the firm has ceased double dipping etc by 31 January 2024 and to have made the relevant changes by 29 February 2024. There's a lot in here, so it is one to get cracking on if relevant.

If you have any questions on this, or Consumer Duty more broadly, please contact Penny Miller (Partner) and Amy Sumaria (Managing Associate). You can also sign up to Consumer Duty View here.

5. FCA metrics on authorisations

The FCA has published an operating metrics update that continues to show an improving trend in the time taken to process Approved Person applications. For July to September 2023, the FCA determined 97.2% of applications within the statutory time period (3 months), with the median determination time being 40 days. We're getting closer to that golden 100%...Note there are other stats in there that might be helpful (e.g. around change in control / variation of permissions etc).

We assist a lot of firms with their Senior Manager applications and particularly in responding to the FCA's queries on particular applications - if you'd like to discuss or need any assistance, please contact Penny Miller (Partner) or Amy Sumaria (Managing Associate).

6. FCA - Updates to SMCR Forms

The Handbook Administration Instrument 2023 outlines minor changes to the Form C (required for SMFs ceasing their SMF role) and Form D (required for SMFs where there are changes to their details/fitness and propriety/a breach of the Conduct Rules) to include reference to the new Consumer Duty Individual Conduct Rule 6: You must act to deliver good outcomes for retail customers.

7. FCA - Multi-firm reviews: IFPR implementation and observations

The FCA's observations on firms' implementation of the Internal Capital Adequacy and Risk Assessment (ICARA) process requirements and reporting under the Investment Firms Prudential Regime (IFPR) are applicable to MIFIDPRU investment firms and UK parent entities of investment firm groups in scope of IFPR. The observations are designed to help firms understand existing FCA policy. Some key parts from a governance/SMCR perspective:

(1) Plans should consider how firms may address the fact that, in a group wind-down scenario, changes to the roles performed by senior managers and the Board of each individual firm may be required - e.g. decisions may potentially be made at group level. If firms plan how to address these changes it will give them greater assurance that their wind-down will be orderly.

(2) The FCA said some firms did not consider the involvement required from group governance in the context of a wind-down which could delay or accelerate wind-down processes. These considerations are important for a comprehensive assessment of the resources required for a wind-down.

(3) Examples of good practice observed in relation to group ICARA processes included there being a clear delineation within the ICARA document of the assessment and participation of each MIFIDPRU entity, how the legal entity Boards have challenged the overall document and where the group had taken responsibility for the collation and calculation of the group element.

Please contact Amy Sumaria (Managing Associate) if you'd like to discuss further.

8. FCA - CP 23/26 - Overseas Funds Regime

The FCA finally published its Consultation Paper on Implementing the Overseas Funds Regime (CP 23/26) which sets out its proposal for how EEA UCITS can access the overseas funds regime. This will enable EEA UCITS to market their funds to UK retail clients after the temporary marketing permissions regime ends. You can watch a recording of our webinar on thishere.

Whilst the impact on UK authorised firms will be limited, the FCA confirmed in the CP that it will be the responsibility of relevant Senior Managers to ensure that their firm complies with the rules the FCA is proposing. We assume that this is a reference to the distribution and financial promotion approval activities undertaken by the UK authorised firm in respect of any EEA UCITS marketed to UK investors, although it's not entirely clear. Comments on this CP should be submitted to the FCA by 12 February 2024.

Please contact Catherine Weeks (Partner) and Camilla Jessel (Managing Associate) if you'd like to discuss further.

9. FCA - CP 23/28: Market Money Funds

Updating the regime for Money Market Funds (MMFs) is the catchy name for this Consultation Paper which outlines the FCA's proposals to enhance the resilience of MMFs domiciled in the UK, addressing vulnerabilities identified in the 2020 'dash for cash' and other times of market stress. The FCA has asked for feedback by 8 March 2024. In it, the FCA outline that it will be the responsibility of relevant Senior Managers (for example, in MMF managers) to ensure that their firms comply with the rules changes that the FCA is proposing, if made.

Please contact Catherine Weeks (Partner) and Camilla Jessel (Managing Associate) if you'd like to discuss further.

10. PRA, Bank of England and FCA - CP 26/23 - Operational resilience

This CP 26/23 covers critical third parties to the UK financial sector and it sets out proposed rules and expectations for critical third parties (CTPs) as designated by HMT in statute. The CP's proposals aim to manage potential risks to the stability of, or confidence in, the UK financial system that may arise due to a failure in, or disruption to, the services that a CTP provides to one or more firms, relevant service providers, and/or FMIs.

While the proposals focus on CTPs, regulators are clear that the proposals in this CP do not blur, eliminate or reduce the accountability and responsibility of firms, FMIs, their boards, and senior management (including individuals performing SMFs) for their regulatory obligations on operational resilience, and outsourcing and third-party risk management. The regulators consider the governance provisions in the proposals to support these SMF and other responsibilities in firms or FMIs.

Comments on the CP must be provided by 24 March 2024 and if you require any more information, please contact Rosali Pretorius (Partner).

11. FCA / PRA - Policy and Supervisory Statement and Final Guidance on remuneration - Dual regulated firms

The FCA and PRA clearly think more is more when it comes to Policy and Supervisory Statements and Final Guidance on remuneration this December. We have the following: (i) PRA PS 16/23: Remuneration: enhancing proportionality for small firms (and commensurate release: FCA PS23/17: Remuneration: enhancing proportionality for small firms); (ii) FCA FG23/4: Dual-regulated firms Remuneration Code (SYSC 19D) - Frequently Asked Questions; (iii) FCA FG23/5: General Guidance on Proportionality - the Dual-regulated  firms Remuneration Code (SYSC 19D); (iv) FCA FG23/6: General guidance on the application of ex-post risk adjustment to variable remuneration; and (v) PRA SS2/17 (December 2023): Remuneration. These releases reflect amendments to the application of proportionality. As a result of these amendments, some firms may no longer be subject to malus and clawback rules (but will continue to be subject to the other rules on ex-post risk adjustment).

Please contact Tair Hussain (Partner) and Colleen Cassidy (Supervising Associate).

12. FCA - ESG and PS 23/16 - Sustainability Disclosure Requirements

Following the publication of its Dear AFM letter on its Guiding Principles on the design, delivery and disclosure of ESG-related information in communications back in 2021, the FCA has published feedback of its multi-firm review of the implementation of these Principles into the fund disclosures of asset managers. The feedback includes a specific section on governance, with the FCA, finding that asset managers need to refine their existing oversight and controls, as they found that governance records and management information were often lacking, meaning it was difficult to evidence key decisions (and the rationale behind them) and challenge. The FCA has examples of good governance practices including that risks relating to ESG should be identified, monitored, and reported within the product governance framework and through governance structures.

We've also had the recent publication of the FCA's final rules for its Sustainable Disclosure Regime and accompanying Guidance Consultation on the new anti-greenwashing rule (our briefing note can be found here and our deeper dive webinar series is available here), we expect Senior Managers within asset management firms to focus on this area. For now, the rules will only apply to UK authorised AIFMs and UCITS Management Companies with UK funds. However, the FCA plans to consult on extending the regime in due course to portfolio management services, pension products and overseas funds. The rules impose requirements on relevant firms to have appropriate resources, governance, and organisational arrangements. These must align with the delivery of the sustainability objective, for which Senior Managers and the governing body will likely be responsible.

If you have any questions, please reach out to Nick Colston (Partner), Louise-Tudor Edwards (Partner), or Tristram Lawton (Managing Associate).

13. FCA - Decision Notices and Final Notices

Just a few for this edition:

(1) First, we have a Decision Notice against Ian Slinger, cancelling his Part 4A permission to carry out a number of regulated activities as a result of his failure to submit certain regulatory returns, including the Directory Persons Attestation to the FCA within the relevant period. A warning that the FCA does take notice if your Directory Returns are not completed...

(2) Second...more fallout from the British Steel Pension Scheme advice scandal, with a number of individuals being fined and/or banned. The Final Notice regarding Mr. Armin resulted in a ban from performing any SMF role, and he would have been fined nearly £1.5 million; however, he was required to pay into the Financial Services Compensation Scheme (FSCS) instead. Mr. Lewis's Final Notice saw him banned from performing a SMF role in the future and he was fined £26,800. The FCA determined that the individuals had provided unsuitable pension transfer advice (or "seriously incompetent"  in the FCA's words in Mr. Armin's Final Notice) which was not in the best interests of the customers. The conduct of both individuals was found to be particularly serious because they may have caused detriment to a large number of potentially vulnerable customers and obtained substantial financial benefits as a result. Additionally, they were aware of the deficiencies in the advice.

(3) Third we have the Final Notice in respect of Ms. Jones who acted without due skill, care and diligence in giving unsuitable pension transfer advice to customers. The FCA has banned Ms Jones from carrying out regulated functions and they would have fined Ms Jones £64,614 for a breach of Statement of Principle 2 (equivalent to Individual Conduct Rule 2 now). Instead she will pay £40,888 to the FSCS The relevant period was pre-SMCR but she held the CF 30 (now client dealing function) under the Approved Persons Regime (APR). Whilst the FCA didn't find that she exploited or sought to exploit customers, the failings were serious because (i) they caused significant risk of loss to customers, and (ii) the advice disproportionately affected those in a vulnerable position.

If you have any questions, please reach out to Richard Sims (Partner) or Emma Sutcliffe (Partner).

14. FCA - CP 23/27 - Reforming the commodity derivatives regulatory framework

December really has been quite a month - the FCA has published CP 23/27 on reforming the commodity derivatives regulatory framework as part of the wholesale markets review (WMR). This is relevant to trading venues that admit commodity derivatives and to those trading them in the UK. CCPs will also be interested in these proposals. The CP sets out the FCA's proposals for key pillars of the regime, including position limits, the exemptions from those limits, position management controls, the reporting regime and the ancillary activities test.

Given that venue operators (rather than FCA) will be required to set position limits and administer the position limit and position accountability regimes, FCA is proposing rules to strengthen governance at venue operators. In particular, they will have to notify FCA in advance of governance arrangements to be followed for adoption and continuing review of position limit setting, the risk assessment framework, accountability thresholds and market risk analysis, including allocation of senior management responsibility, policies for managing conflicts, systems and controls, and board oversight…

The FCA has asked for feedback by 16 February 2024 and for more information on this please contact Rosali Pretorius (Partner) and Stephen Lock (Supervising Associate).

15. FCA - CP 23/25 - Quarterly Consultation and Credit Unions

One for credit unions - CP 23/25 (December 2023) outlines that the FCA is adding reference to SYSC 22 (regulatory references) to the list of sections of SYSC in CREDS 10.1 given it applies to credit unions currently. The consultation period is 5 weeks and comments should be provided by 8 January 2024.

16. FCA - Consumer Duty related publications

For more complete updates on the Consumer Duty, sign up to Consumer Duty View here. However, just to flag: in addition to the FCA Dear CEO letter above for SIPP operators and investment platforms, there are also the following updates which might be relevant for your Consumer Duty Champion to consider. For example: (i) FCA: Retail banking Consumer Duty multi-firm work, (ii) CP 23/29: Access to Cash (focussed on firms providing current accounts to personal and business customers, businesses involved in the supply of cash access services or operation of cash facilities, amongst others), (iii) FCA Research: Testing what gets consumers engaged with their pension and why, (iv) FCA and HMT DP 23/5: Advice Guidance Boundary Review - proposals for closing the advice gap; (v) FCA Consumer Investments Strategy - 2 Year Update, and (vi) FCA and PRA: Commentary on Mortgage Lending Statistics Q3 2023.

CP 23/29 specifically reminds SMFs of their Duty of Responsibility under the SMCR. The FCA outlines that the proposed rules will require designated entities to set out their policies and procedures relating to cash access assessments in writing and have them approved by its governing body (e.g., Board) or senior personnel. The document also includes a section on governance. Additionally, there is this Narrative Report by London Economics on Costs to Consumers and SMEs of a loss of access to in-person cash and banking services.

If you have any questions on the Consumer Duty, please contact Penny Miller (Partner), Caroline Hunter-Yeats (Partner), Amy Sumaria (Managing Associate), or Rosie MacArthur (Managing Associate).

17. PRA/FCA - CP 25/23 - Prudential assessment of acquisitions and increases in control

This is a PRA CP 25/23 covering Change in Control provisions. The paper covers proposals for a new supervisory statement on prudential assessment of acquisitions and increases in control with new FCA guidance to replace the EU's 3L3 Guidelines. The paper emphasises how crucial the SMCR is when it comes to figuring out if individuals directing the business of a UK authorised firm are the right fit following a change of control. The PRA are making some minor changes to the procedures and forms to be submitted so that, if possible, the firm should submit SMF applications concurrently or soon after chance of control.

The PRA have asked for feedback by 23 February 2024 and for more information on this please contact Penny Miller (Partner) and Amy Sumaria (Managing Associate) if you'd like to discuss further.

18. BoE's - Approach to resolution

We covered resolution in the March 2023 SMCR+ View. The BoE has very recently updated their approach to resolution, focusing on the importance of operational readiness, enhancing readiness and ensuring resolvability. In a recent speech, the BoE also looked back at 2023 as a significant year for the UK's resolution authority, following the failures of Silicon Valley Bank and Credit Suisse in March. It is reiterated in the December 2023 update that, as part of the approach to resolution, senior management's role during a bank's financial distress includes potentially foregoing bonuses and dividends to restore financial resources and participating in recovery measures such as financial restructuring or business sales. The resolution authority has the power to act without senior management's consent, and may remove or replace them if deemed necessary for the firm's stability and continuity. The resolution authority may also make senior management changes to ensure critical functions persist, with the possibility of introducing new senior management during the resolution process.

If you have any questions, please reach out to Alex Ainley (Partner).

If you've got this far - well done - and have a very merry festive period and Happy New Year!