Extension of the Senior Managers Regime to asset manager firms

Alternative Investment Management Association (AIMA) organised a meeting with the Financial Conduct Authority (FCA) on Monday 23 May 2016, which provided some useful insights into the FCA’s current thinking regarding the extension of the Senior Managers Regime/Certification Regime (SMCR) to asset manager firms. There will be an opportunity, through dialogue with the regulator and the formal consultation process, to help shape the adaptation of the SMCR to the full range of regulated firms.

The main points arising from the meeting were as follows:

Timing

• It is currently anticipated the extension will come into force in Q1 2018. However, this timing is in the Treasury’s rather than the FCA’s hands.
• As the relevant legislation is already in place, the FCA anticipates that firms should be starting their internal dialogue now as to how they allocate responsibilities and anything they are likely to need to change to comply with the new regime.
• Although they are currently working on the first consultation paper regarding the details of the extension, the FCA will not commit to any time frame on its publication.
• The consultation response on whether General Counsels (GCs) should become senior managers will be completed this summer.
• The final rules on regulatory references will also be completed this summer.

Senior managers

• Accountability and supervision: The FCA made it clear that it sees the SMCR as primarily being about accountability and not about enforcement. It thinks that some firms will find the process of working out accountability for areas of their business a helpful one.
• Conduct rather than systemic risk: The FCA is considering how it will address the prudential matters dealt with by the Prudential Regulation Authority (PRA) in the SMCR for banks - its primary focus with most asset management firms will be conduct risk rather than the risk of failure.
• Proportionality:
  • The FCA recognises how diverse the industry is. It anticipates that the regime will be applied in a proportionate way - it seeks feedback on how that should work. Should there be categories (large, medium, small) or a different style of proportionality regime? What are the factors which should be taken into account? (eg size, type of business etc)
  • The specification of board level Senior Management Functions (SMFs) for banks reflects a PLC structure and may not be appropriate for asset managers - but there may be some core roles which all firms have in place.
  • The FCA is aware that many asset management firms operate as partnership and is considering how this will work in practice. In some cases, they consider partnerships will run in a very similar way to limited companies/plcs (eg having a board with decision-making responsibilities). In other partnerships, there may just be two or three partners. The FCA does not want to create jobs/functions/allocations which don’t exist - its focus is on allocating responsibilities to make it clear who is responsible and making sure nothing falls through cracks.
• Inconsistencies with EU Directives: The FCA is aware of this risk and asks that firms consider and tell the FCA as part of the consultation process where firms see inconsistencies between other regulations/directives and the new regime.
• AIMA ongoing engagement: AIMA is going to suggest some structures common in the asset manager world for the FCA to consider where the SMs should be.

Certification regime

• The certification regime will take away the FCA register in connection with certified persons and firms are concerned about this.
• Asset manager firms will be aware of recent consultation regarding the extent of firms obligations to provide information in regulatory references to stop “rolling bad apples”. The FCA said that the consultation on regulatory references has been completed and there may be no perfect solution to concerns about balancing the desire for full information and concerns regarding liability towards employees. The FCA is well aware of the issues

Territoriality

• Participants at the meeting said that they felt this was the biggest concern.

• The FCA is aware of the issues around territoriality and interested in considering this with the industry. They do not want to capture global CEOs, their concern is instead to look at risks in the UK. The FCA said that it recognised that this was an ongoing piece of work that they needed to finish, but that they felt with banks there was a discrete regime for branches which recognised the lesser level of involvement.

Next steps

As the relevant legislation is already in place, firms should be starting their internal dialogue now as to how they allocate responsibilities and anything they are likely to need to change to comply with the new regime.

Also helpful was the FCA’s statement that they would actively welcome input during this phase as to:

• how the new regime may apply to the diverse structures common amongst asset manager firms, and

• any inconsistencies firms can see between other regulations/directives and the new regime.

This invitation provides a real opportunity for firms to engage with the FCA with regards to the practicalities of the extension of the new regime to asset manager firms. We will be responding to a consultation in due course and are very happy to discuss firms’ thoughts on how the regimes might affect them and what steps they should take now.