SM&CR looms large for FMIs

In Summer 2022, HM Treasury announced its intention to broaden the scope of the Senior Managers & Certification Regime (SM&CR) to Financial Market Infrastructures (FMIs) that are supervised by the Bank of England. FMIs are defined by the Treasury as ‘institutions that underpin the UK’s economy and financial system [and] act as conduits between many of the other types of institution which make up the financial services system.’ The Treasury published a consultation paper in July 2021 with a request for responses. This paper divides the relevant parties into:

• CCPs (Central Counterparties),
• CSDs (Central Securities Depositories),
• ‘Recognised payment systems’ under the Banking Act 2009, and
• Specific Service Providers to those recognised payment systems (these are not listed anywhere, as they are situation-specific, as per this Banking Act order)

The SM&CR itself is made up of three regimes:

• Senior Managers Regime,
• Certification Regime, and
• Conduct rules.

The Senior Managers Regime applies to individuals carrying out Senior Management Functions. This can also apply to overseas-based staff, if they deal with UK customers or clients. The Treasury’s paper sets out that this will give the Bank the power to determine whether key roles in these FMIs are occupied by individuals with the ‘appropriate competence, expertise and probity to carry out their roles’. The Treasury states that a ‘direct, significant influence test’ (i.e., on the FMI’s business in the UK) will be used to see whether the SMR applies to individuals (regardless of geographical location).

The Certification Regime requires individuals in positions that could ‘cause significant harm’ to the FMI or its users to be ‘fit and proper’ and involves annual assessments. This can also be applied to overseas staff if their roles relate to UK business in any way.

The Conduct rules set minimum standards of conduct for all employees when relating to the Bank’s objective of ‘financial stability’. This applies to UK-based staff only. These rules include employees acting with ‘integrity…due skill, care and diligence’ and to be ‘open and cooperative with the FCA, the PRA and other regulators’.

Unlike the current SM&CR under the Financial Services and Markets Act 2000, the Financial Conduct Authority (FCA) will not act as regulator for these institutions – instead, it will be the Bank of England that fulfils that role, as it has the technical expertise and past experience of working with FMIs. The Bank will be empowered to bring in its own rules to regulate accountability and transparency in the financial infrastructure sector, although within the general bounds of regulations already provided by the FCA and the PRA in their sectors. The relatively low number of FMIs (compared to the firms already subject to the FCA-regulated SM&CR) and their diverse operations (with significant differences between clearing houses, payment platforms, etc.) means that the Bank will be allowed significant flexibility in the way in which it implements the new regime.

The Bank’s regulatory powers over the extended SM&CR regime would include sanctions similar to those already contained in FSMA 2000, both against institutions and individuals.

These changes will go ahead once the relevant laws have been passed in Parliament, with the Treasury stating that this will be once time is allocated (when, exactly, this will be is unclear and based on Parliamentary time constraints). While this timetable is not yet concrete, what is clear is that SM&CR compliance will suddenly be relevant to a whole new tranche of firms and institutions, from ATM providers to third-country CCPs, to the London Stock Exchange. It will also apply to service providers (IT companies being the obvious example) to said institutions.

The Treasury’s summary of consultation responses notes that ‘a majority of respondents agreed with the regime in principle and acknowledged the effectiveness of the existing SM&CR’. While there were some concerns over the scope of the proposed regime, and its appropriateness to certain institutions (for practical reasons of cost and disruption), the government sees nothing in the responses to dissuade the overall move. It appreciates the diversity of FMIs and ‘intends to provide sufficient flexibility’ to allow the Bank to regulate effectively.

The list of infrastructure institutions to which the extension applies is found below, compiled from the Bank of England’s lists. Some have thousands of employees based in the UK or dealing with British clients and customers. Others, especially third-country CCPs, may have few or zero UK-based employees to which the SM&CR applies, but may have overseas employees carrying out roles that impact the UK’s financial security.

UK-based CSDs (BoE list)

Third-country CSDs registered in the UK (BoE list)

UK-based CCPs (BoE list)

Third-country CCPs registered in the UK (BoE list) (These are allowed to offer clearing services in the UK until the end of 2023 under the Transitional Regime)

Recognised payment systems

SM&CR is meant to engender true cultural change within organisations.  However, firms on that journey quickly realised that it is also a large-scale exercise in record-keeping and audit trail management, for which tactical solutions (often based on Excel) are wholly unsuited.  If you have responsibility for the implementation of SM&CR within an FMI, avoid the bear-traps of the past – think strategically from the outset.

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Time is money.  Corterum can save you both.  If you are interested in learning more, drop us a line and we’ll show you how.