Alert August 29, 2017

Senior Managers and Certification Regime: Implications for Fund Managers

Summary

The UK Government and the Financial Conduct Authority (FCA) have decided to replace the existing Approved Persons Regime with a new Senior Managers and Certification Regime. This will have significant implications for all UK authorised firms. This client alert considers the effects on UK fund managers.

Background

Under the existing approved persons regime, all persons based in the UK carrying on investment management activities for UK managers or Alternative Investment Fund Managers (AIFMs) and all directors of such companies wherever they are established must be approved by the FCA before carrying out their functions. These individuals are then subject to FCA requirements set out in the APER section of the FCA Handbook.

The FCA proposes dividing all authorised firms into three categories: the majority of firms will be “core” firms, although a small number of “enhanced” firms will be subject to additional requirements. For the purposes of the fund management industry, an enhanced firm will be one of the following:

  • firms that are significant investment IFPRU firms;
  • firms that are CASS large firms; or
  • managers with at least £5 billion under management.

The FCA believes that only about 1% of firms will be enhanced firms.

In addition, there will be a lighter regime for what the FCA calls “limited scope firms,” although no fund manager will qualify for this, with the exception of self-managed AIFs.

Registration of senior managers

Unlike under the existing approved persons regime, only a small number of senior managers will need to be registered with, and receive prior approval from, the FCA. These people will be the following:

  • SMF1 – chief executive
  • SMF3 – executive director
  • SMF9 – chairman
  • SMF27 – partner
  • SMF16 – compliance oversight
  • SMF17 – money laundering reporting officer

The significant change to the regime for senior management is that firms must produce a statement of responsibility for each holder of a senior management function and must submit that statement of responsibility to the FCA both as part of the original application and whenever there is any material change. The general background to this is that the regulators have historically found it difficult to hold individuals to account in the event of firm failures, especially in the event of large firm failures where many separate individuals are involved. When drafting statements of responsibility, this should be borne in mind.

Certification regime

Unlike under the existing approved persons regime, employees will generally not require registration with the FCA. Instead, firms will need to satisfy themselves regarding the fitness and propriety of their employees to certify this annually.

In addition, in relation to senior managers, many of these background checks that are currently undertaken by the FCA will need to be undertaken by the firms themselves. This will include:

  • undertaking criminal record checks; and
  • obtaining regulatory references from previous employers in standard form.

The FCA is not, however, proposing additional rules regarding the assessment of fitness and propriety of individuals.

Timing

The consultation process closes on 3 November 2017, and the new regime will come into effect during the course of 2018.