As if they did not have enough to concern themselves about, another recent piece of legislation brought out in the wake of the 2008 financial crisis is a regulatory regime for senior managers. This article examines implications for wealth managers.

The Senior Managers and Certification Regime (SMCR) is a momentous and far-reaching piece of regulation, designed to increase personal accountability amongst key individuals.  It currently applies to banks, building societies, large investment houses and insurers - those entities which are prudentially supervised by the Prudential Regulation Authority, the UK organisation. In the following article, Jacqui Hatfield, partner at international law firm Reed Smith, looks at the regime and what firms in sectors such as wealth management need to do. We are grateful for these insights; the editors don’t necessarily endorse all the views of guest contributors and invite responses. Readers can contact tom.burroughes@wealthbriefing.com

In 2018, the regime will be extended to apply to all authorised firms, including wealth managers. We are still awaiting further details on the extension of the regime and are expecting these in the second quarter of this year. From experience, from assisting banks with their SMCR implementation projects, it is important that wealth management firms start looking at the implications of the regime now, even before the further details are published.  

The SMCR can roughly be broken down into three major pillars - the senior managers’ regime, the certification regime and the application of conduct rules. Wealth managers will need to allocate and map out prescribed responsibilities amongst the senior managers, grandfather those who can be, and will need to update role profiles and job descriptions to make it sufficiently clear what the senior manager is responsible for and will need to clearly document their procedures.  

Senior managers are those key individuals such as board members and key non-executive directors, who ultimately run the firm. They will still be registered and vetted by the Financial Conduct Authority and will be required to accept individual responsibility for certain prescribed responsibilities. Amongst the responsibilities to be assigned to a senior manager will be a responsibility to implement the SMCR itself.

If the current SMCR is applied to wealth managers, senior managers, certification staff and those carrying out other functions for the firm (other than services such as cleaning services) will need to comply with conduct requirements. These include the need to act with integrity, act in the interests of customers, and act with due skill, care and diligence. In addition, senior managers will need to comply with conduct requirements specific to them and will be accountable for any misconduct falling under their areas of responsibility.  Senior managers will subject to disciplinary action by the FCA, including potentially losing their ability to be a senior manager in an authorised firm, where they have been incompetent or negligent in relation to their responsibility, by not taking steps the FCA believes are reasonable in spotting, dealing with and minimising issues in their area of responsibility, when they arise.  In comparison, breaches by certified staff and other employees subject to the conduct requirements, will be dealt with by the wealth management firm itself. 

While all three pillars of the SMCR represent a significant change and will incur operation and resourcing cost, from a risk perspective, it will be the certification regime that will or should keep wealth managers up at night. 

The Certification Regime covers all employees who can cause “significant harm” to the firm or its customers. This means that it will include all customer facing functions, including individuals advising clients to purchase, sell or hold investments, dealing and managing client investments. Currently, responsibility for approving those carrying out customer facing functions at asset managers falls with the FCA under the Approved Persons Regime. Firms complete an application form in respect of the individual, submit the application to the FCA and the FCA reviews the application and decides whether to approve the individual based on a suitability assessment. The FCA vetting process provides a certain level of comfort for authorised firms in respect of the individual. It is seen as a way to prevent “cowboys” from getting through the net and is a particular comfort for wealth managers as personal advice and wealth management is susceptible to mis-selling issues.

When the SMCR is extended to all authorised firms, all FCA regulated wealth managers will be required to self-certify their own advisors and managers and review it on an annual basis by applying the ‘fit and proper test’, as well as notify the FCA if there are grounds to remove this certification. This will include a review of the extent to which certified individuals have complied with conduct rules relevant to them.

Not only does this represent a significant resourcing issue, it raises difficult questions as to how firms assess propriety fairly and consistently. There may be conflict between what the regulator would like from firms, and responsibilities that firms have to their staff.

Interestingly, from experience advising those firms already subject to the SMCR, firms have tended to be more conservative about taking on employees within scope of the certification regime where they suspect there may be an issue, as a result of the onus being on firms to self-certify their staff. In the past, firms would only withdraw applications if the PRA/FCA had any concerns with the individual in question. With the responsibility for certification having swapped around, this is now a different prospect. It is likely that the wealth managers will be more conservative when employing new advisors and managers which may in itself be helpful in preventing cowboys from slipping through the net. 

Usefully the requirement to take references has recently been bolstered. Generally, under the approved persons’ regime, if an individual was asked to leave a firm or resigns during an investigation, an explanation would be required on the application form but it would ultimately be quite anodyne. This has meant that whilst the FCA has access to the individual register and information on it and access to any disciplinary action taken against the individual (all of which the firm can see as it is on a public register on the FCA website), it would not have much more information on the suitability of an individual than the firm itself. Therefore comfort from the regulator as a vetting process may in fact have been misplaced.

Under the approved persons regime, there is a requirement to provide information on the last 10 years’ work experience but no formal requirements relating to the taking up of references from those employers. Under the new reference requirements which came into force in March this year for those subject to the SMCR, there is now a list of prescribed questions which employers over the 6 years are required to complete, including those which are not authorised. Where the appointment is for an SMF, firms need to obtain references before submitting the application to the PRA/FCA for approval. For those roles requiring certification, the reference should be obtained before a certificate is issued. The questions are designed to prevent the anodyne responses previously provided and will need to be updated where an employer has already provided a reference but has become aware of information which would have resulted in the reference being altered. When the SMCR is extended to all authorised firms in 2018, these reference requirements should provide some comfort to wealth management firms needing to self-certify their advisors and managers.

Ultimately however it is inevitable that there will be misselling issues relating to employees judged suitable by the firm. Given that the rules require a senior manager to be personally accountable for the SMCR and certification regime, it will be vital that the right procedures and proper audit trails are in place so that there are no repercussions on the senior manager.