What is SMCR?

10 December 2018

The new Senior Managers and Certification Regime (SMCR) in General Insurance.

The Senior Managers and Certificate Regime (SMCR)

The Senior Managers and Certificate Regime (SMCR) is not new for the financial services sector. A Parliamentary Committee report in 2016, prioritised banks and lenders as concerns were raised that extending the recommendations to all financial services firms at that time would delay implementation. Two years on, the regime will now be extended to all regulated firms, no matter what sector they operate in. 
We have already seen a number of consultation papers from the Financial Conduct Authority running to several thousand pages, which gives you an idea of the size of this topic (not to mention its complexity).
The FCA plans through this regime to reduce harm to consumers and strengthen market integrity by making individuals more accountable for their conduct and competence. SMCR aims to:
  • Encourage a culture of staff at all levels taking personal responsibility for their actions
  • Make sure firms and staff clearly understand and can demonstrate where responsibility lies.
This new regime will affect all firms in some way, no matter what sector or size. 
Given the breadth of the new rules and requirements, we can only set out the most high level of detail here and all firms should start considering what actions they may need to take and planning resources and budgets needed.

How will it affect you?

How it affects you will depend on what classification you fall into
  • Limited – for example, sole traders and Ancillary Insurance Intermediaries.
  • Core – this will capture almost all regulated firms
  • Enhanced – about the top 100 biggest regulated firms. 

The three basic elements of SMCR

The Senior Managers regime
This focuses on what are currently Approved Persons. The FCA rules will define which roles are ‘Senior Management Functions’ (SMF) depending on the type of firm involved. Anyone who holds a Senior Management Function needs to be approved by the regulator before they start their role. 
Firms also need to make sure that Senior Managers are fit & proper, competent and suitable to do their jobs.  All senior Managers will need a formal Statement of Responsibilities by which they will be judged. All new Senior Managers will have to have a DBS check as part of the recruitment and FCA approval process.
There is a new rule based “Duty of Responsibility” for all senior managers and when considering if any enforcement action is to be taken against an individual, then their actions will be judged against this duty.
It is worth noting that Non-Executive Directors will fall outside of this aspect.
The Certification regime
This covers people who are not Senior Managers, but whose jobs mean they can have a big impact on customers, markets or the firm. The FCA will not approve these people, but firms will need to check and confirm (‘certify’) that they are suitable to do their job at least once a year. At this stage, it is not clear who will be caught by this regime.
Any new candidate for a senior manager or certification role will have to be able to provide much more detailed “regulatory references”.
Conduct Rules
The FCA is proposing new, high-level standards of behaviour that will apply to almost all employees who work in general insurance. The Conduct Rules are about improving the behaviour of all staff in financial services firms.
Firms must be able to demonstrate that all staff involved have been trained in these codes and also trained in how they specifically apply to that firm.
If there is a breach of these rules by anybody, and that results in disciplinary action, it must be reported to the FCA no matter how junior or senior the person involved.

What about Appointed Representatives (ARs)?

The SMCR does not apply to ARs and the FCA will consult in the future as to how this regime may be extended to those entities.
So, as you can start to see, this is going to be a complex area for all firms with some significant changes being made to authorisation processes and firms will need to examine very closely all their recruitment, training, competence assessment, HR (inc. contracts), disciplinary, compliance, GDPR and governance policies and procedures.
This new regime is one of the biggest shifts in the regulatory landscape since January 2005 and all insurance brokers need to start considering this now.
The FCA expect to publish a Policy Statement with draft rules in the summer of 2018 with some additional consultations.
The effective date will be set by H M Treasury and at this stage we have no indicator of when this may be but is unlikely to be in 2018.
This document is provided for information purposes and is general and educational in nature. Nothing in this article constitutes legal advice. You are free to choose whether or not to use it and it should not be considered a substitute for seeking professional legal help in specific circumstances.