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Private equity firms and venture capital fund managers regulated by the UK Financial Conduct Authority (“FCA”) must, from 9 December 2019, comply with the new Senior Managers and Certification Regime ("SMCR"). SMCR replaces the current FCA approved persons regime (“APR”).
The level of rules and transitional requirements to be applied to a firm will depend on whether the type of firm is classified as core, enhanced or limited scope. Firms with assets under management (AMU) of £50 billion or more as a 3 year rolling average will be subject to the rules for enhanced firms. The calculation will be expected to base on total capital commitments in the case of private equity firms and venture capital managers. It is anticipated that most firms will fall under the “core” category.
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
- 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 a SMF (whether the individual is based in the UK or overseas) must be approved by the FCA. Such individual are called “Senior Managers” as they are the most senior people in a firm with the greatest potential to cause harm to the firm and market integrity in general. Unlike the APR (which requires all partners/directors of a firm to be an “Approved Person”), only those persons carrying out a 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 the SMR. Several existing functions won't be automatically converted (for example, the CF30 – Customer Function) as these roles will not require approval by the FCA (although they may require certification by the firm itself – see “Certification Regime” below). Persons who are currently Approved Persons but are not performing a SMF are not required to be approved.
Information on Senior Managers will continue to be made available to the public on the existing Financial Services Register but data on other staff who are subject to the Certification Regime will be available on the new Directory (see “Certification Regime” below)
Statement of Responsibilities
The SMR focusses on enhanced individual accountability as compared to the APR. Firms must submit a Statement of Responsibilities (“SoR”) to the FCA when seeking approval for a Senior Manager and they will need to maintain the SoR for each person who performs a SMF. 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.
All SoRs will need to be kept up-to-date and resubmitted to the FCA if there is a significant change to the Senior Manager's responsibilities, including, for instance, situations where a prescribed responsibility is added/removed from a Senior Manager’s responsibilities or where there is a change in responsibility sharing between Senior Managers
Many private equity firm and venture capital fund managers are set-up as partnerships or use a partnership vehicle as the fund manager. Where a partner performs a 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, firms need to explain how this works 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, amongst others, the 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 most relevant Senior Manager responsible for that activity with an appropriate level of knowledge and competence to properly discharge the responsibility. 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 a particular 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 (including contractors) of a firm who are not Senior Managers but are employed in positions where they can have a significant impact on customers, the firm and/or market integrity (for example, roles concerning the client dealing function) are required to be certified by the firm. The FCA has specified a list of functions that will be caught under such certification regime (each a "Certification Function").
Where a role meets the definition of a Certification Function, the firm must prepare a certificate stating that it is satisfied that the person is fit and proper for such role. 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.
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 carried out annually, and the relevant individuals will need to be reassessed regularly.
A person may 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 Function 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, as well as maintaining a record of each employee that has been issued a certificate by the firm.
UK firms will only need to certify those of its employees performing a Certification Function who are either based in the UK or who have dealing/contact with UK clients if the employees are based overseas. The Certification Regime will not apply to employees of UK firms who are based overseas but do not have dealing/contact with UK clients.
UK branches of an overseas firm will only have to certify employees based in the UK branches.
Firms have until 9 December 2020 to submit data of their certified employees and non-Senior Manager directors (both executive and non-executive) to the “Directory” – FCA’s new public directory and user interface that is scheduled to be made public in December 2020.
SMCR has also introduced new Conduct Rules which will apply to all employees (except ancillary staff such as receptionists, print-room and facilities staff and security guard etc.) within a firm. The new Conduct Rules are intended to improve standards of individual behaviour in fund managers and other financial services firms.
The FCA has specified two tiers of Conduct Rules applying to all firms – The first tier being a set of general rules applicable to most employees and directors while the rules in the second tier only apply to Senior Managers. One of the second-tier rules – the appropriate disclosure of any information that the FCA would reasonable expect notice – applies also to all non-executive and executive directors.
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. In particular, firms are required to notify Conduct Rules breaches by Senior Managers within 7 business days of the conclusion of disciplinary action. Following the introduction of the new Conduct Rules, it may be necessary to update compliance processes, employment policies and/or employee handbooks.
UK firms must apply the Conduct Rules to activities carried out from the UK as well as activities carried out from outside the UK that involve dealing/having contact with UK clients.
However, Conduct Rules will only apply to the conduct of a person in the UK branch of an oversea firm.
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:
- Confirm FCA’s classification of the firm under SMRC (i.e. core, enhanced or limited scope) and consider if the category is appropriate for the firm
- Develop an implementation plan for SMCR including considering leadership for the plan and the necessary source for implementation
- 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 and putting in place processes to certify, monitor and assess the fitness and propriety of staff
- Develop (including Prescribed Responsibilities) for those performing SMFs
- Review internal controls and processes
- Review existing HR, recruitment, regulatory reference and training policies
- Setting up arrangements for submitting data to the Directory and any related GDPR considerations
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.
This article was written by Stuart Fleet.