What has happened?
The UK Financial Conduct Authority (FCA) is consulting on the extension of its senior managers regime (SMR) to benchmark administrators that do not undertake any other regulated activity. The SMR applies to them from 7 December 2020. Under the FCA proposals, all benchmark administrators will have to comply with the SMR and the FCA's related Conduct Rules.
What does this mean?
Following its roll-out to banks, insurers and systemically important investment firms, the SMR is extended to most FCA solo-regulated firms from 9 December 2019.
The SMR aims to improve culture, governance and accountability among financial services firms.
In addition, it should make it easier for the regulators to identify misconduct, who is responsible, and take out enforcement action against those individuals.
Benchmark administrators are a new category of authorised firms introduced by the EU Benchmarks Regulation.
Given the importance of consulting on sector-specific considerations, HM Treasury previously agreed with the FCA to implement the SMR at a later date for benchmark administrators that are not already carrying on another regulated activity.
Benchmark administrators that undertake other regulated activities will be subject to the wider application of the senior managers and certification regime already.
How will this work?
The FCA already applies the SMR in three tiers. The most stringent requirements apply to:
- "Enhanced" firms which are large or complex;
- a lighter touch approach applies to "Limited Scope" firms; and
- the remainder of firms fall under the middle category of "Core" firms.
The FCA proposes that all benchmark administrators are classified, by default, as Core firms.
The FCA says that this categorisation reflects the importance of the services of benchmark administrators to the financial markets and the real economy, and the potential for harm if unhealthy cultures and poor standards of personal conduct develop.
However, benchmark administrators are able to use the FCA's existing waiver process to apply, if appropriate, for a Limited Scope categorisation. The FCA considers this waiver option generally would be met by:
- small benchmark administrators with simple business models, the organisational structure of which would not support applying the Core regime; and
- large firms which principally carry on non-regulated activities and where the senior management team is far removed from the regulated activity, and which do not administer benchmarks that have a significant impact on UK market integrity or UK consumers.
Where they meet the relevant tests, the FCA envisages that Annex II administrators (that is, administrators of commodity benchmarks, such as "price reporting agencies" subject to the Annex II regime under the Benchmarks Regulation) may apply for a waiver to be classified as a Limited Scope firm.
What are the SMR requirements?
A Core firm benchmark administrator may be required to allocate up to four senior manager functions (SMFs) if there are currently staff in those roles. The SMFs are the chair, partner, CEO and executive directors (senior managers).
In relation to these senior manager appointments:
- firms must allocate three specific "prescribed responsibilities" to senior managers, to ensure there is accountability for key conduct and prudential risks;
- each senior manager will be required to complete a statement of responsibilities that clearly sets out their areas of responsibility;
- senior managers require FCA approval to perform their roles;
- firms must confirm that the senior managers are fit and proper to perform their roles, and this assessment must be confirmed annually;
- firms are required to conduct a criminal records check for each senior manager as part of their due diligence in making the fit and proper assessment; and
- firms are required to request and provide regulatory references in relation to senior managers.
For a Limited Scope firm, only one SMF need be allocated, the "Limited Scope Function", which is tailored for benchmark administrators as the most senior person with day-to-day responsibility for benchmark administration activities. In addition, Limited Scope firms do not have to allocate any prescribed responsibilities.
What about the Certification Regime?
The FCA does not propose applying the Certification Regime to pure benchmark administrators.
This is because the Benchmarks Regulation aims to create a harmonised regime for benchmark administrators and it already requires that benchmark administrators ensure their employees are fit and proper.
The FCA considers this achieves a similar result to the Certification Regime.
Application of the Conduct Rules
The FCA Conduct Rules are basic standards of good personal conduct, against which the FCA intends to hold most staff to account (except ancillary staff, for example, cleaners, receptionists, catering staff, etc.).
They are intended to improve standards of individual behaviour from the top down and the bottom up, and apply to any regulated or unregulated financial services activities, including any related ancillary activities, that relevant employees undertake.
The FCA proposes to apply the Conduct Rules to the majority of employees at benchmark administrators.
However, for Annex II administrators, the FCA proposes that most of the Conduct Rules will apply only to their regulated benchmark activities and any activities that might reasonably be regarded as having a negative effect on the integrity of the UK financial system or a firm's financial resources.
Some Conduct Rules apply only to senior managers and these will apply from 7 December 2020. For other staff, firms will have 12 months from 7 December 2020 to train them on the relevant Conduct Rules.
Breaches of the conduct rules by senior managers must be notified to the FCA within seven business days, and breaches by other staff must be notified to it annually.
What happens now?
Until the SMR applies, the FCA's approved persons regime will continue to apply to benchmark administrators. Firms are not required to alter their existing governance structure nor appoint new staff.
Benchmark administrators should consider the FCA's consultation, the potential impact on them, and respond, if appropriate, before the consultation closes on 28 February 2019.
Hogan Lovells can help you assess the impact of the FCA's proposals. Our team has experience advising a range of authorised firms on governance matters, including on the application of the senior managers and certification regime (SMCR) across the broad spectrum of financial institutions. We have also advised on implementation of the Benchmark Regulation and, therefore, are well-placed to advise benchmark administrators.
We can flexibly support you to reflect your firm’s business needs: from running your entire SMR implementation project using a mix of our legal and consulting offering, providing legal advice on the key requirements for you to implement, or via our SMCR Toolkit to help you implement your own project. Please contact us for more information on how we can help, or visit our SMCR Toolkit.
Authored by Michael Thomas, Anahita Patwardhan and Yvonne Clapham