The Senior Managers and Certification Regime replaced the old approved persons regime, and R01 questions on it are precise. Candidates who learned the CF and IF function codes from older material will get these questions wrong, because the vocabulary changed entirely. The regime is also a favourite because it links neatly to the FCA operational objectives and to Consumer Duty.
Why the regime exists
SM&CR came out of the parliamentary review that followed the financial crisis and the LIBOR scandal. The finding was that responsibility inside large firms was diffuse enough that no individual could be held to account. The regime answers that by naming who is responsible for what, in writing, and by making the firm rather than the regulator responsible for vetting the wider population of staff.
The FCA states three aims: to encourage staff to take personal responsibility, to improve conduct at every level, and to make it easier to hold individuals to account where things go wrong.
Pillar one, the senior managers regime
The most senior individuals hold senior management functions and need FCA approval before they start. Common ones in an advice firm are:
| Function | Role |
|---|---|
| SMF1 | Chief executive |
| SMF3 | Executive director |
| SMF16 | Compliance oversight |
| SMF17 | Money laundering reporting officer |
| SMF27 | Partner |
Each senior manager receives a statement of responsibilities, a short document setting out precisely what they are accountable for, which must be resubmitted whenever it changes materially. Larger firms also maintain a responsibilities map and allocate a list of prescribed responsibilities so that no regulatory duty is left unowned.
The duty of responsibility is the sharp end. Where a breach happens in a senior manager area, the FCA can act against them personally unless they took reasonable steps to prevent it. The burden of proving the breach sits with the regulator, and the manager must be able to evidence the steps taken.
Pillar two, the certification regime
Certification covers staff who are not senior managers but whose role could cause significant harm to the firm or its customers. In a financial planning firm that includes:
- Anyone giving advice on retail investment products
- Client dealing functions
- Algorithmic trading
- Material risk takers
- Managers of certified staff
Three points that carry marks:
- The FCA does not approve certified staff. The firm assesses them and issues a certificate.
- Certification must be renewed at least annually.
- Certified staff are not on the Financial Services Register in the same way as senior managers, and firms must instead publish details of their advisers via the directory.
Pillar three, the conduct rules
The conduct rules apply to almost all employees, not just the regulated population. The first tier applies to everyone in scope:
- Act with integrity
- Act with due skill, care and diligence
- Be open and cooperative with the FCA, the PRA and other regulators
- Pay due regard to the interests of customers and treat them fairly
- Observe proper standards of market conduct
- Act to deliver good outcomes for retail customers
Rule six was added with Consumer Duty and sits alongside the others rather than replacing rule four. The second tier applies only to senior managers and covers effective control of the business area, compliance within it, appropriate delegation and disclosure to the regulator.
Firms must train staff on the rules and notify the FCA of breaches using form REP008 annually, and must report disciplinary action against senior managers within seven business days.
Fitness and propriety
The assessment considers three things: honesty, integrity and reputation, competence and capability, and financial soundness. It applies to senior managers and certified staff, is repeated at least annually, and is supported by criminal record checks for senior managers and by credit and regulatory reference checks.
Regulatory references must be requested from all employers over the past six years and given in a prescribed format, and firms must keep records for six years and update a reference if new information comes to light. That six year figure appears in exam questions regularly.
How SM&CR links to the rest of the syllabus
- To the FCA objectives, particularly consumer protection and market integrity
- To Training and Competence, since competence supports certification
- To Consumer Duty, where the individual conduct rule six makes the duty personal
- To whistleblowing, where larger firms must appoint a whistleblowers champion, usually a non executive director
The traps
| Trap | The correct position |
|---|---|
| Thinking the FCA approves certified staff | The firm certifies them |
| Using old CF numbers | The functions are SMFs now |
| Assuming conduct rules apply only to advisers | They apply to almost all employees |
| Confusing statements of responsibilities with the responsibilities map | The statement covers one individual, the map covers the whole firm |
| Believing certification is a one off | It is at least annual |
How to revise it
Learn the six first tier conduct rules in order, the five common SMFs, the three limbs of fitness and propriety and the six year reference period. Then write one sentence explaining each of the three pillars in plain language. Almost every SM&CR question in R01 is answered by one of those four blocks of knowledge.