SMCR practical steps: Statements of responsibilities, fitness and propriety, regulatory references

Author: Sarah Leslie

In the third 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 statements of responsibilities, assessing fitness and propriety, and regulatory references.

Statements of responsibilities for senior managers

Every senior manager will need to have a statement that sets out the responsibilities that they are to perform, and how these responsibilities fit in with their firm's overall governance and management arrangements. Where an individual performs a senior management function on behalf of more than one firm within a group, they must prepare a statement of responsibilities for each firm.

The statement should be written using clear and simple language. The statement must be self-contained, and clearly describe the senior manager's actual responsibilities and accountabilities, without unnecessary detail. The FCA has published useful guidance on preparing statements of responsibilities, which also gives examples of best practice.

Senior managers will be legally responsible for maintaining and updating their own statements. However, firms should coordinate and supervise the preparation of these statements to ensure that there are no gaps or uncertainties when all the statements are considered together.

Firms must consider how to:

  • communicate the importance of maintaining and updating these statements to senior managers; and
  • ensure that relevant prescribed responsibilities are distributed among the firm's senior managers.

Assessing fitness and propriety

The SMCR brings a level of formality to a firm's assessment of whether or not their employees are fit to do their job. The assessment should be tailored to the individual's role. For example, the knowledge and competencies required of a compliance officer will be different to those of a chair.

There are three types of fitness and propriety assessment that firms will need to undertake for all certified staff, non-executive directors and senior managers:

  • Initial: When an individual is recruited or promoted to the role, firms will need to assess their qualifications, competence (based on their interview and/or application form), fitness in terms of a criminal record/credit check, and regulatory references from any past firms.
  • Annual: Firms should look at the individual's performance appraisal and other documents, such as their training records, and their self-declaration that they have behaved in a fit and proper manner and commit to upholding high standards of behaviour and competence. Employers should also check if the individual has had any cumulative minor conduct rule breaches that would not have triggered an ad-hoc fitness and propriety assessment in and of themselves.
  • Ad hoc: An additional ad-hoc fitness and propriety assessment may be triggered in circumstances where it is necessary for a firm to reconsider if an employee is fit and proper to perform their regulated role. For instance, this could happen where:
    • the employee has failed a required exam;
    • the employee returns from an extended absence, such as long-term sickness or family leave;
    • it is necessary as part of a disciplinary or other breach-reporting process; or
    • the firm has received an updated regulatory reference concerning the employee.

Certification

Certified staff must be issued with a certificate stating that they have been certified by their firm as fit and proper to carry out their role. This certificate can be valid for up to one year. Most firms will have an annual fitness and propriety assessment process. However, in some circumstances, it may be necessary for firms to issue a time-limited certificate with another review of the employee's fitness and propriety scheduled after a few months (for example, if an employee needs to complete a qualification, or if they are moving from being supervised to operating without supervision).

Although certificates are not needed for senior managers, firms may find it useful to issue a certificate anyway for record-keeping purposes.

A key point for firms to consider is what route of appeal will be open to employees in the event of an adverse fitness and propriety finding, and how this will tie in with a firm's existing internal appeal process.

Regulatory references

Regulatory references are one of the key elements of the SMCR. They apply to senior managers, certified staff, and all non-executive directors. Under the regulatory reference rules, firms must obtain references that cover the last six years of a prospective new employee's employment history. The aim is to avoid "bad apples" rolling from one firm to another.

All FCA- and Prudential Regulation Authority- (PRA) regulated firms are obliged to provide these references. They must follow a standard format, with an answer given to each question. They must set out what regulated role the individual held, and whether or not the firm concluded that the individual was fit and proper to perform their role. If something negative is disclosed, the firm must consider if it is appropriate in the circumstances to withdraw the offer.

Firms may encounter difficulties when an employee has come from an overseas firm or from a non-regulated role in a different industry. Good practice in such circumstances is to accompany a request for a regulatory reference with an explanation of why this information has been sought.

Firms should also reflect on the process they have in place for giving references. As with all employment references, the references must be true, accurate and fair. Fairness normally requires that an employee has the opportunity to comment on the information included in a reference. This is especially true where a disciplinary process was concluded before the introduction of the SMCR, in circumstances where the employee did not know that it would be mentioned in a regulatory reference in future.

If adverse information comes to light after a reference has been given that would have an impact on the employee's fitness and propriety, the firm must make contact with the recipient of the reference and update it (after giving the former employee the opportunity to comment, if they have not had such an opportunity as part of the investigation).