The PRA recently published a Policy Statement confirming amendments and optimisations to the current Senior Managers Regime (SMR) which applies to banks, building societies, credit unions and PRA-designated investment firms (referred to as Relevant Authorised Persons – RAPs) and to the current Senior Insurers Managers Regime (SIMR).
In light of this Policy Statement and the impending extension of the SMR to the rest of the financial services industry in 2018, we have set out below the key questions for firms to consider and the timescales for implementing the changes and optimisations contained in the latest Policy Statement.
1. Chief Operations SMF
The PRA has confirmed for RAPs:
- The creation of an additional Chief Operations Senior Management Function (SMF24), for RAPs, including branches of Non-EEA firms. This function will have responsibility for the internal operations and technology of these firms. These firms should note that they will only be required to have a Chief Operations SMF if they have someone performing that function.
- SMF24 is the exception to the general expectation that SMFs can be shared but not split. The PRA has stated that SMF24s may be split among two or more individuals (for example between the Chief Operating Officer and the Chief Information and Technology Officer) provided that the split accurately reflects the firm’s organisational structure and that responsibility for operations and technology is not undermined.
- A corresponding Prescribed Responsibility (PR) for “for the firm’s performance of its obligations under the Outsourcing part of the Rulebook”. This must be allocated to an SMF, even in cases where the SMF24 role has not been allocated.
Key Questions: Does the structure of your firm require the SMF24 to be split between two or more individuals? If the Operations function within your firm is split between multiple individuals, how will this split be justified and articulated to ensure coverage of operations and technology but avoid overlapping responsibilities?
2. Application of certain Conduct Rules / Conduct Standards to Notified NEDs
The PRA has confirmed that:
- The three Individual Conduct Rules/Standards from the current SMR and SIMR (outlined below) will in future also apply to Notified NEDs.
- One of the Conduct Rules/Standards which applies to SMFs/SIMFs and requires them to “disclose appropriately any information of which the FCA or PRA would reasonably expect notice” will in future apply to all Notified NEDs.
- One of the Conduct Standards which applies to SIMF roles and requires them to pay due regard to the interests of policyholders in ensuring an appropriate degree of protection for their insured benefits will in future apply to Notified NEDs.
- Firms are required to notify the PRA and FCA of internal disciplinary action against Notified NEDs linked to breaches of the Conduct Rules.
Key Question: Have you informed your firm’s notified NEDs of the upcoming application of the Conduct Rules? Are there any corresponding new training needs?
3. Head of Key Business Area function (SMF6)
The PRA was conscious that the current criteria for designating a SMF6 potentially exclude some business lines which would still be considered capable of having an impact on the safety and soundness of a firm on account of their commercial or strategic importance. Consequently, the PRA has added further qualitative criteria to the definition of the SMF6 as outlined below.
The Head of Key Business Area function (SMF6) is the function of having responsibility for management of a business area or division of a firm (other than a third country CRR firm) where:
1. Both of the following existing criteria are met:
- The relevant business area or division of the firm has over £10 billion in gross total assets; and
- The relevant business area or division of the firm accounts for 20% or more of the firm’s gross revenues;
2. The relevant business area or division of the firm meets one of the above criteria and performs a ‘critical function’ relevant to a business area or division of the firm.
Key Question: Do any of your business units now meet the criteria for allocating a SMF6? Does this bring new Senior Managers into scope of the SMR?
4. A prospective SIMF24 and SIMF6 within the SIMR
The PRA has confirmed that it intends to consult on the inclusion of a new SIMF 24 and a new SIMF 6 with corresponding new PR for insurers. These will be included in the forthcoming consultation on the extension of the SMR to the whole of the financial services industry.
Key Question for insurers: Have you considered which individuals may be most appropriately placed to take on these new SIMF roles? What additional support and training may be required?
5. Expectation of Statements of Responsibilities (SoRs) and Management Responsibilities Maps (MRMs)
The PRA has emphasised that these documents should promote clarity and transparency as to the individual responsibilities of each Senior Manager and a firm’s (and, where relevant, Group’s) management and governance arrangements. The PRA has reiterated its expectations, including:
- SoRs and MRMs should be used by firms to aid the clarification, documentation, embedding and review of their internal corporate governance arrangements, such as succession planning and induction of new SMFs.
- SoRs should be more than a “tick-box” allocation of PRs, especially for large, complex firms; the PRA expects SoRs (and MRMs) to reflect how the business model, complexity, risk profile and size of each firm affect each Senior Manager’s responsibilities.
- Information about an SMF’s responsibilities (including any relevant free text) should be set out principally in the SoR, which is the mandatory regulatory return, even if this information is duplicated or supplemented in a role profile.
- SoRs should specifically indicate whether the SMF has overall responsibility for any business areas, activities, or management functions of the firm not otherwise covered under the Prescribed or Overall Responsibilities and/or any Additional Responsibilities not covered in the Prescribed or Overall Responsibilities.
- Any ad hoc, firm-specific action or regulatory deliverable should be sufficiently material, both in terms of significance and duration before it has to be included in a SoR.
- The PRA expects firms to ‘cleanse’ SoRs periodically or whenever any Additional Responsibilities are either deemed satisfactorily completed by the relevant firm and the PRA or become less significant.
Key Question: Have you reviewed your MRM and/or SoRs to check that they align with the PRA’s guidance? Do any of your firm’s SoRs require updating to include further information about Additional Responsibilities?
- The application of the Conduct Rules to Notified NEDs will become effective on Monday 3 July 2017 and will apply to breaches identified on or after that date.
- The new Chief Operations SMF (SMF24), accompanying PR and the new criteria for SMF 6s will come into force for RAPs on 12 November 2017.
- The PRA is due to publish a further Consultation Paper which will set out how the SMR will be extended to cover the rest of the FS industry.