Non-executive directors in FCA solo-regulated firms: time to prepare for the Senior Managers and Certification Regime

8 mins

Posted on 01 Aug 2019

company directors having a meeting

Time to prepare for the Senior Managers and Certification Regime

Summary of key changes

  • Conduct Rules - The FCA Conduct Rules will apply to all NEDs (non-executive directors).
  • Training - NEDs will need to be trained and will have to abide by the Conduct Rules from 9 December 2019.
  • Fitness and Propriety - The FCA Handbook requires firms (except Limited Scope firms) to make sure anyone performing a NED role is fit and proper for their role. 
  • Criminal Records Checks – FCA regulated firms need to conduct criminal records checks for NEDs as part of checking they are fit and proper.
  • Regulatory References - The regulatory reference rules require SM&CR firms to share information in respect of NEDs in a standard template.

Non-executive directors (NEDs) often play a significant role in companies, providing independence, oversight and constructive challenge to the board. All NEDs need to be aware of their duties and liabilities and be familiar with the requirements of the UK Corporate Governance Code and the Companies Act 2006. 

NEDs in financial services firms have additional obligations to ensure they and their employer comply with their regulatory obligations. NEDs in firms solely regulated by the FCA need to prepare for changes that will be implemented on 9 December 2019 when the Senior Managers & Certification Regime (SM&CR) is extended. 

What is happening?

The SM&CR is being extended to cover almost all financial services firms. From 9 December 2019, the SM&CR will apply to an additional estimated 47,000 firms that are regulated solely by the FCA and authorised under the Financial Services and Markets Act 2000 (FSMA). The SM&CR sits alongside the statutory and fiduciary duties of directors under UK company law and domestic and international corporate governance standards.

Which non-executive directors does this affect?

FCA solo-regulated firms will be designated as Enhanced firms, Core firms or Limited Scope firms. All NEDs in these firms need to be aware of the changes, although there are different requirements dependent on the type of firm. 

Enhanced firms are significant IFPRU firms, large CASS firms, firms with assets under management of £50 billion or more, firms with annual total intermediary regulated business revenue of £35 million or more and firms with annual revenue generated by regulated consumer credit lending of £100m or more, all calculated as a three year rolling average. Mortgage lenders or administrators (that are not banks) with 10,000 or more regulated mortgages outstanding are also Enhanced firms.

Limited Scope firms are those firms which are currently subject to a limited application of the Approved Persons Regime.

Core Firms are those firms which are currently subject to the Approved Persons Regime and are not Limited Scope or Enhanced firms. 

Pre-approval for non-executive directors roles

NEDs at Enhanced firms have to obtain pre-approval from the FCA if performing the following Senior Manager functions:

  • The Chair;
  • A senior independent director; and
  • The Chair of the risk, audit, remuneration and nominations committees.

At Core and Limited Scope firms, only NEDS performing the role of the Chair (SMF9) have to obtain pre-approval from the FCA. Every Senior Manager needs to have a Statement of Responsibilities that sets out what they are responsible and accountable for. This needs to be submitted to the FCA when a Senior Manager is being approved and when there is a significant change, and has to be kept up to date. 

NEDs in other roles will no longer need to be approved by the FCA and their existing approval will lapse at the start of the new regime. Firms with a non-executive Chair will need to submit a Form K, telling the FCA that they wish to convert an approved NED to the SMF9 Chair function. If they do not do this, the individual’s approval will lapse when the new regime starts. If the individual continues to perform the role without approval, they will be in breach of the FCA rules and liable to sanction.

Conduct Rules

The Conduct Rules apply to all NEDs.  They require NEDs:

  1. To act with integrity;
  2. To act with due care, skill and diligence;
  3. To be open and cooperative with the FCA, the PRA and other regulators;
  4. To pay due regard to the interests of customers and treat them fairly; and
  5. To observe proper standards of market conduct.

In addition all NEDs have to comply with Senior Manager Conduct Rule 4 which requires them to "disclose appropriately any information of which the FCA or PRA would reasonably expect notice.”

NEDs are not normally subject to Senior Manager Conduct rules 1, 2 and 3 which cover control of the business, compliance with the requirements of the regulatory system and delegation of responsibilities.  However, they will be subject to these rules if, as well as being a standard NED, they also fall into one of the other categories of Senior Conduct Rules staff.

The non-executive directors role

Guidance on the role and responsibilities of non-executive directors of SMCR firms is set out in the FCA Handbook at COCON 1 Annex 1.

The role of a NED performing the general NED role is to:

  • Provide effective oversight and challenge; and
  • Help develop proposals on strategy.

To deliver this, their responsibilities include:

  • Attending and contributing to board and committee meetings and discussions;
  • Taking part in collective board and committee decisions, including voting and providing input and challenge; and 
  • Ensuring they are sufficiently and appropriately informed of the relevant matters prior to taking part in board or committee discussions and decisions.

Other key roles of a NED include:

  • Scrutinising management’s performance in meeting agreed goals and objectives;
  • Monitoring performance reporting;
  • Satisfying themselves on the integrity of financial information;
  • Satisfying themselves that financial controls and systems of risk management are robust and defensible;
  • Scrutinising the design and implementation of the remuneration policy;
  • Providing objective views on resources, appointments and standards of conduct; and
  • Being involved in succession planning.

A NED is neither required nor expected to assume executive responsibilities (COCON 4.2). However, NEDs who perform a Senior Management Function have individual duties under that regime.

The standard of care, skill and diligence that the FCA expects from a NED is the care, skill and diligence that would be exercised by a reasonably diligent person with:

  • The general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the NED in relation to the firm, taking into account the standards in the Handbook (especially COCON and DEPP, the Decision Procedure and Penalties Manual); and
  • The general knowledge, skill and experience that the NED has. (COCON 4.4).

Training for staff

Firms are required to train relevant staff on how the Conduct Rules apply to their role (s.64B FSMA). NEDs will need to be trained before the start of the new regime and to abide by the Conduct Rules once it is in force. Firms will have 12 months to put in place processes to comply with the training and reporting requirements and to train their other staff on the Conduct Rules.

Fitness and propriety

A key feature of the SM&CR is to reinforce that firms need to take responsibility for their staff being fit and proper to do their jobs. The FCA Handbook requires firms to make sure anyone performing a Senior Management Function or a Certification Function is fit and proper for their role. This requirement also applies to NEDs who are not Senior Managers, except in Limited Scope firms.

The FIT section of the FCA Handbook sets out detailed guidance about what a firm should consider as part of assessing a person’s fitness and propriety. This includes: 

  • Honesty, integrity and reputation; 
  • Competence and capability, including whether the person satisfies any relevant FCA training and competence requirements; and 
  • Financial soundness.

Evidence requirements

Under the SM&CR, firms must collect extra evidence when assessing candidates for NED roles. These are set out below.

Criminal Records Checks

Firms (other than Limited Scope firms) must conduct criminal records checks for NEDs as part of checking that they are fit and proper. Firms and candidates need to declare if a candidate has a criminal record (to the maximum extent allowed by law). Firms will have to register with the Disclosure and Barring Service (DBS), and the equivalent agencies in Scotland and Northern Ireland, who run the checks. Smaller firms may need to use an umbrella organisation as an intermediary. Where a candidate has spent a considerable amount of time working or living outside the UK, firms should consider undertaking an equivalent check with the appropriate overseas regulatory body where available.

Regulatory References

The regulatory reference rules require firms to:

  • Request a reference from all previous employers in the past 6 years for people applying for Senior Manager, Certification and non-approved NED roles;
  • Share information between firms in a standard template;
  • Disclose certain information going back 6 years. This includes details of any disciplinary action taken due to breaches of the Conduct Rules and any findings that the person was not fit and proper;
  • Disclose any other information relevant to assessing whether a candidate is fit and proper (e.g. the number of complaints upheld ) covering the previous 6 years. In the case of serious misconduct, there is no time limit. Firms will need to use their judgement when considering what is relevant, on a case-by-case basis;
  • Retain records of disciplinary and fit and proper findings going back 6 years; and
  • Not enter into arrangements that conflict with their disclosure obligations (e.g. non-disclosure agreements).

Firms will also need to update regulatory references where new, significant information comes to light.

There is clearly much for firms and NEDs affected by the changes to consider both before and after the new regime takes effect on 9 December 2019.

Doyle Clayton’s combination of leading employment lawyers and regulatory expertise means we are well placed to support our clients with the changes brought about by the expansion of the Senior Managers and Certification Regime. Please contact Charlie Herbert to discuss how we can help you with preparing for these changes. 

Our financial services solicitors advise businesses and individuals on a broad range of financial issues and disputes. 

Our expert

Charles Herbert

Charlie leads the firm's Regulatory and Financial Services Disputes practice. He joined Doyle Clayton to set up the team having worked as legal counsel in the Enforcement and Litigation Division at the Bank of England. Prior to that, he was a senior solicitor in the Contentious Regulatory and Litigation Teams at Santander UK plc and in the litigation team of a leading national law firm, where he also undertook a secondment in the Barclays Litigation team.

  • Partner & Head of Regulatory and Financial Services Disputes
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