With so much bandwidth being absorbed by the gravitational pull of Brexit, hedge fund managers could be forgiven for paying short shrift to the Senior Managers and Certification Regime, which formally comes into effect on 9 December 2019.
Set to replace the existing UK Approved Persons Regime (APR), it is a relatively straightforward regulation, intellectually speaking, and nowhere near as daunting as the 7,000 page tome of MiFID II, but even so managers are advised not to leave it too late to ensure senior managers have been properly trained and made aware of their roles and responsibilities.
As Robert Quinn (pictured), Founder and Managing Director of eponymous Robert Quinn Consulting, a leading boutique financial regulatory services firm, tells Hedgeweek: “With regards to SMCR, it is one thing understanding senior manager roles have to be properly assigned, it’s quite another undertaking the gap analysis and getting over the finishing line.”
The rationale behind SMCR was borne out of the global financial crash a decade ago. The UK parliament enacted legislation that instructed the FCA to come up with a corporate governance regime of personal accountability. SMCR creates a framework for senior managers and material risk takers (i.e. front-office trading teams) globally within UK financial institutions and gives the Financial Conduct Authority the leverage to request burden of proof that all reasonable steps are being taken by senior managers in their respective roles.
The aim of this is to hold firms more responsible and accountable for their conduct, actions and competence. The regime shifts the responsibility of activities within a firm onto senior managers and brings into scope Non-Executive Directors.
As mentioned, although not a devilishly difficult regime to comply with, there are several steps involved which could prove to be quite time consuming. Managers don’t need teams of legal experts to guide them through the process; many will cope doing it internally. But three or four steps in, depending on the size of the fund management entity, they might it is slightly more complicated and time consuming than first thought.
End-to-end solution
To address this, Robert Quinn Consulting has developed an end-to-end solution to guide clients through the process from start to finish. Each client is guided through a series of modules that begin with an SMCR mapping exercise, followed by background checks, policies and procedures and finally SMCR training.
“We have tailored toolkits to help hold our clients’ hands through the process to completion,” says Quinn.
The core objectives of SMCR are to restore confidence in the financial services industry, increase senior management accountability, and to evoke cultural change within firms whereby internal teams take personal responsibility for their actions. It is, in many ways, a response to the ‘casino banking’ chaos that led to the market collapse in 2008.
Senior Managers and Certification Staff (those who carry out ‘certified functions’) must be identified and trained by 9th December. The Conduct Rules will apply to them from that date onwards.
“For senior managers, they will need pre-approval from the FCA,” says Quinn. “However, in addition, the regulator will also ask for a number of documents related to a formal training programme, which may come as a surprise to some firms. As part of this senior manager pre-approval process, the FCA will ask, for example, what the induction training has been for the senior manager.
“This is one of the areas of SMCR that could surprise people, in relation to the process of appointing senior managers.”
The FCA divides managers into three groups of firms: enhanced managers – the largest firms with an AUM of GBP50 billion or more – core firms (most hedge funds will fall into this category) and limited scope firms (i.e. payment and services firms, consumer credit firms etc.).
SMCR mapping
Within the core regime, hedge fund managers will likely need to do a mapping exercise to determine who is a senior manager.
Quinn points out that the FCA will not allow junior partners in hedge fund firms to conduct CF4 Partner functions because in the eyes of HMRC, these are not senior partners directing the firm.
“I think we might see a collision course between HMRC and some hedge funds in this respect,” adds Quinn.
Each senior manager will have a statement of responsibilities that stipulate their role. The goal is to cover all areas of the business, where each senior manager is responsible for a specific area. That could include regulated activity and unregulated activity, it could be external or internal responsibilities, and more importantly, it applies to senior managers located anywhere in the world.
Certification regime
The Certification Regime applies to anyone within a financial institution who is not a Senior Manager but whose role could cause significant harm to the firm and/or its investors.
“These are your material risk takers,” explains Quinn. “Those performing client dealing functions, proprietary trading, algorithmic trading and so on. This impacts anybody in the world who undertakes a material risk taking role as well as those individuals interacting on behalf of UK clients. Assigning those roles could potentially become a time consuming exercise. You may have traders in New York who don’t want to fall under the certification regime.”
Quinn expects SMCR to become a priority for firms in Q2 and Q3.
As he points out: “All of a sudden, your legal, HR and compliance departments are going to be figuring out how best to implement the senior managers and certification regime and get the required training programmes in place.
“We provide a road map and have created a suite of policies and procedures for managers to take on board, operational procedures, training programmes: basically all the templates needed to comply with SMCR ahead of the deadline. Background checks on new senior managers and certified employees have to be done initially and annually.
“Any conduct breaches will have to be reported to the FCA. If a senior manager is new or changes his or her role, this will need to be pre-approved by the FCA, so there is a lot more administration and bureaucracy involved than people might have realized.”
There could be quite a bit of political wrangling in some of the larger buy-side firms, as they complete all necessary steps for SMCR and the roles of senior managers are codified.
“What we are saying to clients is, ‘Here are all the documents you need to be compliant. Here are all the training modules you need to give to your senior managers so that you can demonstrate (to the FCA) that the right steps have been taken to appoint them as senior managers,” concludes Quinn.
As with any new regulation, there are several moving parts to SMCR that could catch hedge funds out. But help is at hand, should they need it.
To find out more about Robert Quinn Consulting and its SMCR platform solution, go to smcrcompliance.com and https://robertquinnconsulting.com/services/smcr/
