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Brokers brace for SM&CR as date gets set

With a date finally set for the roll-out to brokers of the Senior Managers & Certification Regime (SM&CR), the sector remains fearful that the conduct and governance requirements will prove onerous for smaller intermediaries.

The Financial Conduct Authority (FCA) set a 9 December 2019 date earlier this month for brokers and most of the other 58,000 firms it regulates to fall in with the new framework. Insurers must comply by 10 December this year, with the larger carriers which already fall under the Senior Insurance Managers Regime having to switch over. 

The FCA’s 412-page “near-final” guidelines funnel solo-regulated firms transitioning to the SM&CR from the existing Approved Persons regime into limited scope, core or enhanced versions of the framework.

The latter will apply to brokers with at least £35mn ($46.3mn) in broking revenue, though the FCA rejected a call from the London & International Insurance Brokers’ Association (Liiba) to apply a headcount criterion for categorisation as an enhanced SM&CR company alongside the crude revenue measure.

DAC Beachcroft partner David Sims noted that the certification requirement – an annual internal exercise in vetting key employees’ fitness and propriety to do their jobs - will be more onerous for brokers than for insurers because of the far greater numbers involved.

“Brokers will have a lot more people that are dealing with customers, so the certification regime will become more significant and they will have to give more thought to fitness and propriety, related disciplinary processes and regulatory notification processes,” he said.

Others noted that some of the rules clash with normal market practice, for example by putting paid to behind-the-scenes compromise agreements between companies and exiting employees.

Liiba CEO Christopher Croft said: “Our concern around SM&CR remains that this is a solution devised for banks to resolve their issues that is being imposed on the insurance sector without much appreciation that we aren’t banks.

“For larger members, there won’t be an enormous difference from the Approved Persons regime but there are additional administrative burdens such as exit interviews and the creation of job specs.

“However, for smaller firms, these things will have to fit into the already busy schedules of individual members of staff.” 

One concession the FCA made in the guidelines was the ability for core firms to opt into the enhanced regime. While that may sound like a counter-intuitive move, the stricter regime spreads senior management responsibilities among a greater number of people.

DAC Beachcroft’s Sims said: “There will be some firms where it wouldn’t work to place all the responsibility for regulated activity on such a small number of people.”

However, Sims added that the “all or nothing” nature of the opt-in was the downside of the concession. Firms choosing to be regulated under the enhanced SM&CR requirements will have to abide by extra rules.

Sole traders will fall under the “limited scope” regime.

Chartered Insurance Institute policy director Matthew Connell warned that subtle differences between the Approved Persons regime and SM&CR could prove confusing.

“The challenge is to make clear what the small differences are and, for example, to make people 100 percent aware of why they have been asked to be senior managers and what they need to do. The duty of responsibility is a lot more explicit,” he said.

One element of the regime which the FCA left open is where the head of legal will sit within the new structure.

The FCA’s guidelines included that legal senior manager role in the “other overall responsibility” category.

However, the regulator said that following industry feedback it would hold a further consultation on where the legal function sits before the 9 December 2019 start date of SM&CR for solo-regulated firms.

Legal industry representatives are concerned that legal chiefs’ disclosure obligations under SM&CR would clash with their duty of confidentiality to clients.

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