Mark Hamilton: FCA-regulated firms need to ensure they are prepared for their new challenges

Mark Hamilton is a partner in the employment team at Dentons.

With hundreds of smaller financial firms coming under a new regulatory regime governing staff responsibilities next year, employers and managers face a series of immediate challenges – from training the teams to marking out senior job roles.

Under the new Senior Managers and Certification Regime (SM&CR) – which until now applied only to banks, building societies, credit unions and certain investment firms – all firms regulated by the Financial Conduct Authority (FCA) will have to certify their own employees as ‘fit and proper’.

With senior individuals in regulated firms personally responsible – and liable – for regulatory compliance and the behaviour of their teams, precise job descriptions and disciplined commitment to job roles will be critical.

At the heart of the rules is a raft of key ‘Prescribed Responsibilities’ which will have to be clearly allocated to designated senior managers – who will still need to be pre-approved by the FCA. If something goes wrong there is meant to be no wriggle room allowing these individuals to avoid being held responsible, so the careful drafting of contracts and job roles with the bigger picture in mind is essential.

This will require firms to identify their senior managers – and the sooner the better. But identifying a firm’s senior managers and publicising their status may be a fraught exercise: some senior individuals may be unhappy about not being made senior managers – leading to a different set of problems.

In addition to dealing with senior managers, a potentially substantial group of employees will need to be certified by the firm as being ‘fit and proper’ to carry out the key elements of their roles. While many of these employees will currently be approved persons, it seems likely that many more will require to be certified in the future.

While it is likely the SM&CR will not come into force for new firms until next autumn, at the earliest, preparatory work needs to be done in advance to minimise the pain. The recruitment and promotions process should take the need for training and certification into account, along with the requirement for regulatory references covering six years.

Now is also the time to review how the appraisal processes will fit in with re-certifying staff as fit and proper. Given that appraisals are usually intended to be a positive experience and most managers dislike difficult conversations, it is all too easy to envisage circumstances where concerns about fitness are raised for the first time on annual re-certification, without having been previously raised at appraisal. .

Even if an employee is neither a senior manager as defined by SM&CR, nor Certification-level staff, the vast majority will become subject to new conduct rules. Most of these employees will never have been subject to FCA regulation before so management cannot simply direct employees to review the FCA website to read the conduct rules. One of their prescribed responsibilities is to ensure individuals are made aware of and receive appropriate training relating to the Conduct Rules.

As a minimum checklist, FCA-regulated firms must:

Identify Senior Managers and their Prescribed Responsibilities;

Review compliance governance arrangements;

Identify Certified Staff;

Review contracts and procedures;

Update insurance arrangements; and

Develop training on the Conduct Rules.

With a year to go until the wider SM&CR comes into force, FCA-regulated firms need to step up their employee engagement, and ensure that all senior managers are fully prepared for their new responsibilities.

Mark Hamilton is a partner in the employment team at Dentons