FCA RULES AND HANDBOOK
Part 9A of the Financial Services and Markets Act 2000 (“FSMA”) provides the Financial Conduct Authority (“FCA”) wide-ranging powers. Under Section 137A the FCA can make legally binding rules for authorised and in some cases, unauthorised firms and individuals. FSMA contains important checks and balances on these powers, including procedures that the FCA must follow.
FCA SENIOR MANAGERS & CERTIFICATION REGIME
Within the FCA Handbook is a section on Senior Management Arrangements, Systems and Controls (“SYSC.”) Firms’ arrangements on certain matters can impinge on FCA functions under FSMA in relation to how the FCA can supervise and enforce its organisational system and control requirements. SYSC is hence a common platform for how directors and senior managers within firms can fulfil their responsibilities when performing any “controlled functions”; i.e. actions in relation to the carrying on of an FCA regulated activity.
Accordingly, to help firms make informed decisions about the fitness and propriety of individuals to whom they intend to assign such responsibility, SYSC 23 contains a Senior Managers & Certification Regime (“SM&CR”). SM&CR brands itself as a catalyst for change; an opportunity for firms to establish healthy cultures and effective governance through greater individual accountability and setting a new standard of personal conduct.
The SM&CR applies to significant risk-taking individuals outside of a firm’s identified senior managers. These individuals do not require approval by the regulators, meaning it is solely for firms to determine their appointment and to then certify annually that they are fit and proper to be undertaking the role. As part of the hiring process (for both senior managers and the aforementioned key risk-taking employees), exchange of employment references containing information on prior conduct, is mandatory. Central to SM&CR, these “Regulatory References” are not limited to any specific type of activity (regulated or otherwise) and SYSC 22.1.3 confirms that there is no territorial limitation on their application.
SM&CR REGULATORY REFERENCES
The purpose of RRs is to prevent the ‘recycling’ between firms of individuals with poor conduct records. The details around RRs are outlined in SYSC 22 and must be sought from all relevant former employers, covering the previous six years of an individual’s employment. Pursuant to feedback regarding challenges that firms are facing when obtaining references as SYSC prescribes, the FCA has clarified some key points:
- a firm should request and respond to requests for RRs promptly. The six weeks mentioned in SYSC 22 should be understood as a limit for them to be provided, and not a target;
- the expectation is for “reasonable steps” to be taken on the part of firms seeking to obtain the RR. Firms experiencing difficulties obtaining RRs from another firm should report this to the FCA;
- to avoid delays during the application assessment, firms that are unable to obtain an RR should set out the steps they took to try and obtain it;
- firms should assess RRs on a case-by-case basis and individuals should not be automatically rejected due to a qualification in their references. Firms should not have a quota for the number of qualified references they will accept; and
- when providing regulatory references, firms should look to and use the template provided in SYSC 22 Annex 1 and should not send it unless it is both complete and accurate.
NEXT STEPS
As the FCA noted in its Regulatory Round Up of January 2022, timely and good quality references are in the interests of everyone. Having the correct checks and balances in place to avoid defective or potentially negligent RRs is an important way that firms can better the reputation of the industry, by ensuring that the right people are carefully hired.
To read the FCA Regulatory Round Up, please see here.
For more information, and any guidance or advice on SM&CR broadly and Regulatory References specifically, Cleveland & Co External in-house counsel™, your specialist outsourced legal team, are here to help.
