SMCR practical steps: Conduct rules, employment contracts, policies

Author: Sarah Leslie

In the last in her series of four articles on the extension of the Senior Manager and Certification Regime (SMCR) to all Financial Conduct Authority (FCA) solo-regulated firms, Sarah Leslie looks at what steps firms need to take in relation to the new conduct rules, employment contracts and policies.

Training on conduct rules

The new conduct rules will apply to nearly all employees in the financial services sector, including non-executive directors (NEDs). These employees must:

  • act with integrity;
  • act with due skill, care and diligence;
  • be open and cooperative with the FCA, the Prudential Regulation Authority (PRA) and other regulators;
  • pay due regard to the interests of customers and treat them fairly; and
  • observe proper standards of market conduct.

The only staff exempt from the conduct rules are "ancillary" staff such as cleaners, receptionists, catering and security staff.

Senior managers have additional conduct rules that apply to them. Senior managers must ensure that:

  • they take reasonable steps to ensure that the business of the firm for which they are responsible is controlled effectively;
  • they take reasonable steps to ensure that the business of the firm for which they are responsible complies with the relevant requirements and standards of the regulatory system;
  • they take reasonable steps to ensure that any delegation of their responsibilities is to an appropriate person and that they oversee the discharge of the delegated responsibility effectively;
  • they disclose appropriately any information of which the FCA or PRA would reasonably expect notice; and
  • when exercising their responsibilities, they must pay due regard to the interests of current and potential future policy holders in ensuring the provision by the firm of an appropriate degree of protection for their insured benefits.

NEDs are subject to the fourth senior manager conduct rule in that they must disclose appropriately any information of which the FCA or PRA would reasonably expect notice.

Certified staff (ie employees who must be certified by their employer as fit and proper because, although they are not senior managers, their actions could have a significant impact on the firm or its customers) and senior managers must receive tailored training on the conduct rules by 9 December 2019. Senior Manager training should normally be face to face. Training for certified staff may be face to face, or computer based depending on the individual's role.

All other conduct rules staff must receive training on the rules by 9 December 2020. In most cases, the training for these staff members can be computer based but must still be tailored to their role.

Responsibility for training staff on the conduct rules is a prescribed responsibility under the SMCR, which means that a senior manager will be designated as accountable for ensuring that this training is carried out effectively.

Employment contracts

Employee contracts for all staff (other than ancillary staff, such as cleaners, receptionists, catering and security staff) will need to be updated to meet the requirements of the SMCR. As the changes to the employment contract are due to new regulatory requirements, firms should normally be able to make the amendments unilaterally. However, firms should ask affected staff members to sign their acknowledgement of the contractual changes.

Different types of amendment will need to be made to contracts of employment depending on the employee's role within the business. The main changes that need to be made are, as follows:

  • Conduct rules staff must have a provision explicitly requiring them to comply with the conduct rules. The provision should also state that any breaches of the conduct rules will be reported to the FCA. Also, if they do not have an obligation in their contracts to comply (during or after employment) with any FCA or firm investigations, this is a good opportunity to insert such a term (subject to any necessary consultation with the employees).
  • Certified staff should have the same clauses as conduct rules staff, but in addition they must be contractually obliged to comply with fitness and propriety assessment requirements and to provide prompt details of any changes to their personal circumstances (to allow the firm to update the directory).
  • Senior Managers should have the same clauses as certified staff, but in addition their contracts must include an obligation for them to give a proper handover to their replacement on termination of their senior manager function, and an obligation that they maintain their statements of responsibilities.

If employment contracts have not been reviewed for a number of years, firms should take this opportunity to review all their contracts to ensure that they comply with the SMCR, are suitable for modern practice and are consistent across the board.

It is also a good time to review offer letters for new certified staff, NEDs, and senior managers, which should specify that their appointment is subject to them being assessed by the firm as fit and proper, including receiving satisfactory regulatory references.

Changes to policies

In addition to the introduction of specific policies and processes under the SMCR, such as a fitness and propriety assessment policy and procedure, a breach-reporting policy and a handover policy for senior managers (note: a handover policy is required only for enhanced firms, but may be useful for all firms), the SMCR has an impact on a number of existing policies. The main policies likely to be affected are the following:

  • Disciplinary policy: This should highlight that steps taken under the policy may result in a reconsideration of whether or not the employee is fit and proper to perform their role. It should also state that the outcome of a disciplinary process may need to be disclosed in a regulatory reference, where it is felt to impact on the employee's fitness and propriety. A breach of the conduct rules should be added as a specific example of misconduct.
  • Compliance training policy: This should note that the completion of training on the conduct rules is mandatory, and that timely completion of all compliance training will be a component of the fitness and propriety assessment.
  • Screening/verification policy: This may need to be updated where a firm makes any changes to its checking of criminal records. As the certified staff will not be registered with the FCA as they would have been under the Approved Persons Regime, it will no longer be possible to use the exemption in the Rehabilitation of Offenders Act 1974 (Exceptions) Order 1975 (SI 1975/1023) to continue to carry out "standard" levels of criminal record checks on these staff. Instead, a "basic" check can be conducted where the firm decides this is necessary.
  • Remuneration policy: Firms should consider if any changes are necessary concerning clawback circumstances. The FCA should be alerted under the conduct rules breach-reporting process if any individual has had their remuneration reduced or recovered due to a breach of the conduct rules.