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FCA – Extending Senior Managers and Certification Regime to all FCA firms

Response to the consultation - Proposals for extending the regime to solo-regulated firms

We appreciate the opportunity to respond to this consultation.  Credit unions have been subject to the Senior Management and Certification Regime (SM&CR) since it was first introduced for all dual-regulated firms in March 2016.  We appreciate the efforts that were taken at that time to minimise the burden of the regime on credit unions and to make it more proportionate for them in application.  This came from a recognition that, though the regime was to apply to all deposit-takers, the bad practices and financial instability that the regime was originally designed to address was in no way connected to the practices in the credit union sector.

By way of summary, the regulatory proportionality that was introduced for credit unions comprised:

  • A catch-all Senior Management Function (SM8) for credit union senior managers
  • A stated expectation that simplified documentation, such as the responsibilities map, would be acceptable for credit unions
  • An expectation that the prescribed responsibilities under the regime would be the only ones for which allocation to senior managers would be mandatory
  • A simplified definition of “significant risk taker” for the PRA regime in relation to the application of the certification function

While we appreciate these changes and flexibilities and they are valuable to our membership, the process for transitioning to the SM&CR from the Approved Persons Regime has not been without difficulty.  Due to some unfortunate miscommunication of the expectations around the allocation and sharing of SMF functions and the application of the prescribed responsibilities and overall responsibilities, a number of credit unions have found themselves subject to retrospective unpicking of previously-approved applications.  This is unfortunate as it has undermined the efforts taken by FCA to make the regime responsive to the needs of smaller firms.

It is encouraging that in the proposals for the extended regime, a clear recognition of the shortcomings of the approach in relation to smaller dual-regulated firms seems to have informed an even-more-flexible approach to the regime in respect of the “core” firms as proposed.  In essence, this limits the application of the regime to only those areas that are expressly required by the legislation and does not apply any of those requirements which were added by the regulatory authorities to complement and strengthen the regime for dual-regulated firms. 

Key elements of the “full” regime that are missing from the “core” regime are:

  • The requirement for a responsibilities map
  • The requirement to allocate “overall responsibilities”
  • The requirement to allocate “additional prescribed responsibilities”
  • The requirement to conduct handover procedures in a regulated process

We believe firmly that the logic for applying these four requirements only to the very largest 1% of firms under FCA regulation holds just as well in respect of credit unions and other small dual-regulated firms as it does in relation to the vast majority of smaller FCA-regulated firms.  Credit unions are small firms for which many of the concepts and responsibilities set out in the prescribed lists or to be allocated in a responsibilities map are simply not relevant and requiring credit unions to navigate them and make sense of how they apply in this alien context creates bureaucracy without adding any clear value to the FCA in the day-to-day supervision of the credit union sector. 

As such we would like to strongly argue that the FCA consider whether it might extend the proposed exclusions for the core SM&CR to credit unions and other smaller deposit-takers.  We agree strongly with the proportionality rationale that underpins these proposals but do not think that it is fair or consistent to apply this in the case of small solo-regulated firms but not for credit unions. 

We appreciate that there is a practical difficulty in achieving consensus on any such move with the PRA given the shared ownership of SM&CR for dual-regulated firms.  However, we believe that these changes could be made for the FCA regime in isolation from the PRA regime with material benefits.

The PRA has adopted a more flexible and responsive approach to their oversight of SM&CR for the vast majority of credit unions and in this context we feel that even were requirements around a responsibilities map or allocation of overall responsibilities to still apply in respect of the PRA, their absence under the FCA regime would still materially benefit the proportionality of the regime’s application to credit unions. 

Proposals in relation to banking firms

In relation to the proposals for reform to the regime as it applies to banking firms – banks, building societies and credit unions – we appreciate the clarification in relation to the 12 week rule and overall responsibilities.  In respect of the Partner SMF we have no objection but do not anticipate any impact in the credit union sector given the availability of SMF8 – Credit Union Senior Manager.

We are concerned, however, at the proposal to create a new Prescribed Responsibility for ensuring compliance with the Conduct Rules.  Since the Conduct Rules are an element of the SM&CR and there already exists a Prescribed Responsibility to ensure compliance with the regime, we do not feel that it is necessary to add a specific new PR in relation to this question.  In all likelihood, the PR will reside with the same SMF holder as the SM&CR compliance requirement and we do not see the case for creating ever more granular PRs.   This is likely to create further regulatory burden without adding any obvious value or accountability over the regime as it is currently designed.

We would be delighted to provide any further information should you require it and to meet to discuss the matters raised in this submission in more detail.

3 November 2017

The PDF version of this response is downloadable on the right-hand side