Private equity firms and venture capital funds must, from December 2019, comply with the new Senior Managers and Certification Regime ("SMCR"). SMCR replaces the Financial Conduct Authority's ("FCA") existing Approved Persons Regime. Whilst SMCR will not require firms to change their governance structure or to hire people to fulfil new roles, it will be necessary to allocate specific responsibilities (some prescribed by the FCA, others defined by the firm as appropriate) to relevant members of the firm’s senior management. This means that firms may need to amend their governance materials, HR procedures and processes and compliance procedures in order to comply with the new regime.
The new regime comprises of four components:
- Senior Managers Regime ("SMR")
- Prescribed Responsibilities
- Certification Regime ("CR")
- Conduct Rules
Senior Managers Regime
Senior Management Function
The SMR introduces a new type of controlled function called the "Senior Management Function" or "SMF". Anyone who performs an SMF must be approved by the FCA. Unlike the current regime (which requires all partners/directors of a firm to be an Approved Person), only those persons carrying out an SMF are required to be approved.
Individuals who are currently Approved Persons will not have to apply for re-approval where there is an equivalent function under SMR. Several existing functions won't be automatically converted (for example CF30 – Customer Function) as these roles will not require approval by the FCA (although they may require certification – please see below). Persons who are currently Approved Persons but are not performing an SMF are not required to be approved.
Statement of Responsibilities
The SMR focusses on enhanced individual accountability as compared to the current regime. Firms will need to maintain a Statement of Responsibilities ("SoR") for each person who performs an SMF. The SoR must be submitted to the FCA when seeking approval for a Senior Manager. The SoR must clearly identify the areas of a firm's regulated activities for which the relevant Senior Manager is responsible and accountable for. Firms will need to consider the Senior Managers and the SoRs carefully – both as to the nature of the responsibilities and as to the suitability of the Senior Manager.
SoRs will need to be kept up-to-date and resubmitted to the FCA if a Senior Manager's responsibilities change.
Many private equity and venture capital fund managers are set-up as partnerships or use a partnership vehicle as the fund manager. Where a partner performs an SMF, their responsibilities need to be clearly set out in their SoR (so, for example the operating partner or managing partner would have a different SoR as compared to a junior partner). Where responsibility is shared between partners, this will need to be shown in each partner's SoR.
Prescribed Responsibilities ("PR") are specific responsibilities defined by the FCA which must be allocated to a Senior Manager (for example, responsibility for the firm’s policies and procedures for countering the risk that the firm may be used to further financial crime).
Each SoR must set out which PR has been allocated to the relevant Senior Manager. Responsibility for a PR cannot normally be divided or shared between Senior Managers (so an operating partner cannot necessarily be allocated all of the PRs).
As stated above, the SMR focusses on enhanced individual accountability. If a firm breaches one of the requirements of the SMCR, the Senior Manager responsible for that area (as set out in that person’s SoR) can be held accountable if they didn’t take reasonable steps to prevent or stop the breach.
Employees of a firm who are not Senior Managers but are employed in positions where they can have a significant impact on customers or the firm (for example, roles concerning the client dealing function) are required to be certificated. The FCA has specified a list of functions that will be caught (each a "Certification Function").
Where a role meets the definition of a Certification Function, the firm must prepare a certificate indicating that it is satisfied that the person is fit and proper for such role.
The certificate must also set out the aspects of the affairs of the firm in which the person will be involved in performing the function. This certification must be done annually, and the relevant individuals will need to be reassessed regularly. When assessing fitness and propriety, the firm must consider the person's qualifications, the training the person has had or is receiving, and the person's competence and personal characteristics in respect of the role.
A person can perform more than one Certification Function, but in that event the firm must certify that the person is fit and proper to carry out each of the functions. Equally, if a Senior Manager is performing a Certification Function that is very different from his role as a Senior Manager, such person will need to be certified in relation to that function.
Although SMCR will mean that fewer people in private equity and venture capital firms will need to be formally approved by the FCA, the Certification Regime will likely include all current Approved Persons (particularly those who are at present only approved for CF30 Customer purposes) and may also cover individuals who are not currently Approved Persons.
Firms will need to consider which of their employees will require certification and update their HR and compliance processes to take account of the certification process.
SMCR has also introduced new Conduct Roles which will apply to all employees within a firm. The new Conduct Rules are intended to improve standards of individual behaviour in fund managers and other financial services firms. Firms will be required to provide training to relevant staff on the application of the Conduct Rules and will also be required to notify the FCA if disciplinary action is taken by a firm against a person for a breach of the Conduct Rules. Following the introduction of the new Conduct Rules, it may be necessary to update compliance processes, employment policies and/or employee handbooks.
Things to consider
SMCR will require potentially significant changes to the allocation of responsibilities and performance of functions within private equity and venture capital fund managers. Like GDPR, firms will need to set aside sufficient resource to ensure that they are compliant. Firms should, if they have not started already, look to:
- Develop an implementation plan for SMCR
- Complete a mapping exercise to:
- identify existing SMFs and any new SMFs
- identify if any existing approvals need to be amended
- allocate the Prescribed Responsibilities
- Identify roles with a Certification Function
- Develop Statements of Responsibilities (including Prescribed Responsibilities) for those performing SMF’s
- Review internal controls and processes
- Review existing HR, recruitment, regulatory reference and training policies
Ashfords can advise you on the interpretation and implementation of SMCR, together with advice on employment law and regulatory enforcement matters. Please contact us if you would like details of how we can help you implement SMCR.