SM&CR extension on the cards

The FCA recently published its 2020/2021 “Perimeter Report”. The document acknowledges the lack of perimeter clarity i.e. what is formally under the auspices of FCA regulation and what is subject to monitoring and guidance. The FCA’s remit is broad, covering directly regulated entities with a wider view to general consumer protection- its “perimeter” is accordingly diffuse. The report delineates the current state of play as to the regulatory border, the extent of the “no-man’s land” and plans to extend both. It goes to some pains (in page length) to emphasise that as a Regulator, their powers are necessarily limited to regulated activities- unregulated firms provide no reports. Rapid technological advance has created a myriad of new “cryptoasset” classes, new ways of lending such as “Buy Now Pay Later” and Employee Salary Advance Schemes, as well as new and disparate ESG ratings in the wholesale market. The report focuses on a number of specific areas where the FCA aims to provide greater clarity on its in-scope perimeter, these include but are not limited to:

  • Business models. Concerns regarding activities of unregulated lead generators and potentially biases advice
  • Financial promotion. Concerns that unauthorised persons are increasingly relying on exemptions in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005/1529) (FPO) relating to high net worth and sophisticated investors to market high risk investments. The FCA believes that these exemptions are no longer fit for purpose in respect of thresholds and consumer self-certification.
  • Cryptoassets. Basically- watch this space. The FCA will consult and work with HM Treasury to assess.

The report pays particular attention to the Senior Manager and Certification Regime (SM&CR) as a “key part of transforming culture in the financial industry and an important supervisory tool”. It recognises that’s the SM&CR only applies to solo-regulated firms under FSMA, its application is still far from universal, excluding vital financial infrastructure providers such as: Recognised Investment Exchanges (RIEs), Credit Reference Agencies (CRAs), Payments and e-money firms. Each of these entity types are subject to variously applicable regulations, but none under FSMA from which the SM&CR derives its definitions.

“Extending the SM&CR to the payments and e-money sector would enhance individual accountability and governance within firms, and strengthen our ability to supervise such firms by giving us a wider range of tools to drive higher standards and mitigate risks of consumer harm. “

“Extending the regime to RIEs and CRAs would deliver greater accountability and robust oversight of functions that promote market integrity. It would also ensure consistency in relation to our supervisory expectations of individuals discharging key responsibilities.”

Given that these firms constitute the essential mechanisms on which the SM&CR-regulated superstructure relies, it seems clear that their staff should be subject to the same strictures. There is little point in having a boat with a certified Captain and Pilot if the engine room is sub-standard. The report notes that the Treasury is currently consulting on creating an SM&CR for Financial Market Infrastructures (FMIs) supervised by the Bank of England (including CCPs), to closely mirror the  existing SM&CR, which would incorporate a number of these entities.

In summary, an interesting if mainly speculative report, worth reading its 47 pages in full if you have time.

 For the SM&CR take – it’s going to get bigger.

If your business is one of those that could be affected, and you’d like to know more about the SM&CR and what it might entail – why not give us a shout? As thousands of FCA-regulated firms have already learned over the past few years, SM&CR compliance is complex, and a dedicated and organised system for managing your obligations is a necessity.