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SM&CR: SMF Holders & Duty of Responsibility

SMF Holders & Duty of Responsibility

7th October 2019

SMCR: Solo-regulated Firms

Individuals that will hold a Senior Managers Function (SMF) when the new Senior Managers & Certification Regime (SM&CR) comes into effect for Solo-Regulated Firms in December must be aware of the Duty of Responsibility that comes with being an SMF holder.

DEPP16 of the FCA Handbook sets out the criteria for using enforcement powers and is where the Senior Managers Regime (SMR) and the regulatory Enforcement Process meet.  With the increased individual accountability under the new SMCR regime, holders of Senior Managers Functions will need to take increased care in documenting their actions as well as the reasoning behind them.

To help SMF holders with this, Firms should prioritise providing the support and establishing the processes to enable the completion of this documentation. In addition, Firms would do well to remember that should the current SMF holder leave their role within the firm, it might become more difficult to find someone else that is willing to take up the mantle if these processes aren’t already in place to support them.

Obligations for SMF Holders

In addition to the five individual Conduct Rules, all SMF Holders will also be subject to the four Senior Managers Conduct Rules and the Duty of Responsibility for Senior Managers.

Thus all SMF Holders must under the Conduct Rules:

• act with integrity
• act with due care, skill and diligence
• observe proper standards of market conduct
• pay due regard to the interests of customer and treat them fairly
• be open and cooperative with the FCA, PRA and other regulators

And, under the Senior Managers Conduct Rules, must:

• [SM1] take reasonable steps to ensure that the business of the firm for which they are responsible is controlled effectively
• [SM2] take reasonable steps to ensure that the business of the firm for which they are responsible complies with relevant requirements and standards of the regulatory regime
• [SM3] take reasonable steps to ensure that any delegation of their responsibilities is to an appropriate person and that they oversee the discharge of the delegated responsibility effectively
• [SM4] Disclose appropriately ay information of which the regulator would reasonably expect notice

Duty of Responsibility for SMF Holders:

Under the Duty of Responsibility (the final rules of which were published in FCA Policy Statement PS18/16) the regulator can take enforcement action against Senior Managers if:

• there was a contravention of a relevant requirement by the Senior Manager’s firm
• at the time of the contravention or during any part of it, the Senior Manager was responsible for the management of any of the firm’s activities in relation to which the contravention occurred
• the Senior Manager did not take such steps as a person in their position could reasonably have been expected to take to avoid the contravention occurring or continuing

In addition, Senior Managers should note that in DEPP 6.2.9-E G(15) the FCA has clarified that the Duty of Responsibility will apply to a senior managers’ individual contributions to collective decisions and their implementation in as much as those contributions are in scope of the senior manager’s responsibilities.

Reasonable Steps and Duty of Responsibility

Of course, it is relatively early days for the new Regime as it was initially implemented for Banks during 2016, then Insurers last year and is only now being extended to encompass all solo-regulated firms. Therefore there is little FCA Enforcement action from which to draw judgement from when dealing with breaches of an SMF holder.

However, as time rolls on and there are a greater number of Enforcement cases from which to draw insight, it will become clearer for Firms to ascertain what the regulator considers to be ‘reasonable steps’.

In the meantime, it would be advisable for firms to consider the importance of each SMF carefully.

In addition, establishing a culture within the firm whereby SMFs try and encourage relevant SMFs to offer help and advice to each other might be beneficial, since for some firms the very nature of ‘individual accountability’ may mean that SMFs wish to remain uninvolved or not wish to pass comment upon areas outside of their direct responsibility for fear that any potential conduct failure occur. This however might create a high chance of poor communication within a firm and that in itself may cause or exacerbate any failure.

Therefore, firms may wish to consider how each SMF Holder may keep other SMF holders informed of relevant interests and the actions and reasons for them, giving them where possible the chance to offer their own comment or advice.

Furthermore, where the details of committee meetings are recorded, firms should be careful to ensure that the reasoning(s) behind any decisions or action points are well recorded as well as the latter so that they can demonstrate what steps were taken and considered before reaching an outcome.

SMCR Support Services

If your firm is currently working towards implementing the new Senior Managers & Certification Regime (SM&CR) and would like any assistance in reviewing the structure or governance of your firm or ensuring your SMFs understand their Duty of Responsibility, our team of regulatory professionals can help.

Our consultants work with clients of all sizes and complexities and can assist your firm by providing practical support, tailored training for the Senior Managers Regime, Certification Regime and Conduct Rules as well as SM&CR document templates.

Simply drop us a line with your enquiry to find out more or call for a no-obligation chat.

SM&CR Related Reading:

• SM&CR: SMF Considerations
• SMCR for Solo-Regulated Firms: Two months to go!
• Information for Solo-Regulated Firms: Changing your SM&CR Categorisation
• SM&CR: Awaiting the Final Rules
• SMCR: Six months to go!
• SMCR Responsibilities: A Comprehensive View & Holisitic Approach
• Starting SM&CR Preparations: What you need to know
• Preparing for SM&CR: Starting Tips
• Finalised Guidance: SM&CR Responsibilities - Statements & Mapping

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