Criminal records checks
The validity period for criminal records checks for a new SMF candidate would be increased to six months (from three months) prior to submission of the application under changes to both the FCA and the PRA rules.
Under the FCA rules, firms would also not be required to obtain a criminal record check for existing SMF holders which are applying for a new Senior Management Function (or to be a non-SMF board director) in the same firm or group. Existing requirements to disclose information would, however, still apply. This should make it easier for firms to carry out internal reorganisations.
Firms have previously raised concerns about the ability to carry out criminal records checks in overseas jurisdictions. The FCA acknowledges that this can be difficult but does not propose to relax the rules.
12-week rule to cover absences
Some adjustments to the operation of the 12-week rule have also been proposed. This applies in the case of a temporary or reasonably unforeseen absence of an SMF and allows firms to appoint an individual to cover that role, without being approved, for up to 12 weeks.
This was generally felt to be too short a period to allow firms to appoint, and obtain approval for, a replacement SMF. The FCA has therefore proposed changing the rule so that firms have 12 weeks to submit an application rather than get a decision on an application (effectively extending the period for which a role could be performed without approval). The applicant could continue to perform the role until the application is determined (including temporarily from abroad if necessary). The FCA has also clarified that any person providing such coverage will be a member of the conduct rules staff of the firm.
However, the FCA expects that firms use the 12-week rule on a limited basis and only when appropriate. Firms should also submit a good quality application as soon as possible and make sure that the relevant individual is fit and proper. The relevant individual would also be subject to the Senior Manager Conduct Rules during the 12-week period and until the SMF application is determined.
Finally, firms would also not need to submit updated SoRs to the FCA until (and if) the absence reaches 12 weeks.
The PRA is also proposing similar rule changes.
Enhanced scope SMCR firms
To reflect the impact of inflation, the FCA also proposes increasing certain of the thresholds for being an enhanced scope SMCR firm by around 30%. This would mean that fewer firms (estimated by the FCA to be around 20 to 30 firms) would be subject to the additional requirements for enhanced scope SMCR firms such as the additional SMF of Other Overall Responsibility and the requirement for a Management Responsibilities Map. The concept of enhanced scope SMCR firm is also relevant for the FCA's operational resilience requirements.
If adopted, the new thresholds would be:
- Assets under management: £65bn (currently £50bn)
- Total intermediary regulated business revenue: £45m (currently £35m)
- Annual revenue generated by regulated consumer credit lending: £130m (currently £100m)
There would also be a mechanism to adjust the thresholds every five years in line with inflation.
Irrespective of these changes, if a firm has chosen to opt up to enhanced scope status, it will remain an enhanced scope firm unless it chooses to opt down.
Statements of responsibilities – reporting updates
In an effort to streamline the reporting requirements, firms would be able to submit updated SoRs on a bulk basis periodically provided that this is no later than six months after the last submission.
The FCA would also allow solo-regulated firms to gather all SoRs that had changed across the previous six months and submit only the latest version of each. Dual regulated firms, however, would still have to submit all the relevant versions.
Further changes to SoRs and also Management Responsibilities Maps may be considered in Phase 2.
Certification Regime
As discussed in Phase 2 below, HM Treasury is considering far-reaching changes to the Certification Regime. However, even if taken forward, any such changes will not take place in the short term. Therefore, as an interim measure, the FCA is proposing to simplify certain (relatively minor) aspects of the Certification Regime including:
- The ability to provide a certificate digitally (e.g. by email) rather than in hard copy.
- The ability to carry out re-certification as part of existing processes such as annual appraisals (which may reflect existing practice) and to conduct a less detailed certification process when there are no changes from the previous year.
- Removal of the requirement for separate certification in certain cases of duplication, including:
- as a senior manager where the individual is already a certified FCA Material Risk Taker at the same firm; and
- as the manager of a certification employee where the individual is already certified for another certification function at the same firm.
- New (largely confirmatory) guidance that senior managers may need to be separately certified for a certification function if this is distinct from their SMF role e.g. certain roles which involve advising customers.
The PRA has also proposed some simplification measures for the process under the PRA Certification Regime.
Directory
The FCA also proposes some changes to the deadlines for submitting information to it including allowing firms 20 business days (rather than seven) to update information except in the case of staff departures which will remain seven working days.
In Phase 2, the FCA will explore further changes which could potentially include replacing the Directory in its entirety with an alternative source of information.
Regulatory references
The feedback on the regulatory reference process was mixed but a majority of respondents thought that it took too long to obtain regulatory references and delayed recruitment of key personnel. However, some firms considered that the current six-week period for providing a reference can be difficult to meet.
The FCA is planning to amend its guidance so that firms are expected to provide regulatory references within four weeks of request. This should allow firms to receive regulatory references more quickly but will also require an individual's previous firm to ensure it can meet the shorter deadline.
The PRA does not intend to make a similar change to its rules.
The FCA has also suggested some additional guidance including on:
- when a firm may need to disclose suspected misconduct where the employee leaves before the firm completes its investigations; and
- obtaining references from an overseas employer where there are difficulties in doing so – this could include providing the FCA with evidence of legal constraints such as correspondence with the employer or a legal opinion.
Conduct Rules
The FCA has included, in the consultation, some additional examples of behaviour which could be a breach of senior manager conduct rules such as:
- Failing to take reasonable steps to ensure that the firm complies with its notification obligations to the FCA, including under Principle 11, for the relevant business area.
- Failing to take reasonable steps to ensure that all staff (including agents and contractors) in the relevant business area report internally matters requiring notification to the FCA.
The FCA also proposes additional guidance on the treatment of Conduct Rule breaches limiting the circumstances in which these would need to be disclosed.
This includes clarification that only Conduct Rule breaches resulting in disciplinary action would need to be notified to the FCA as a breach of COCON (although other, separate, notification obligations may continue to apply). Similarly, a breach of the Conduct Rules would not be required to be included in a regulatory reference if the firm decides not to take disciplinary action and believes that the breach is not relevant to any assessment of fitness and propriety.
Where an individual's remuneration is reduced or adjusted, this would only need to be notified to the FCA where this is done as a sanction for a Conduct Rule breach.
Finally, the FCA proposes extending one of the factors under the Fit and Proper test relevant to honesty, integrity and reputation to include whether the relevant person has been the subject of adverse findings in an official investigation or public inquiry.
Other changes
The FCA has already made some changes to streamline the application process, including updating Form A and providing more guidance.
The FCA also proposes to issue guidance on when SMF7 (Group entity senior manager) and SMF18 (Other overall responsibility) would apply.
It has also drafted additional guidance on sharing a particular prescribed senior management responsibility between more than one person as well as the combinations of prescribed senior management responsibilities that the FCA would (and would not) find it appropriate for a particular SMF to hold (although firms are not expected to reconsider their existing allocations)
The PRA is consulting on whether its own version of SMF7 for dual-regulated firms should also be extended to include certain controllers with significant involvement in the day-to-day management of a PRA-authorised firm.
