The document provides an overview of the new Senior Managers and Certification Regime and Conduct Rules that will extend individual accountability across the UK financial services industry. Key points: - The new regime aims to increase personal responsibility of senior individuals through prescribed responsibilities, conduct rules, and regulatory references. - Senior managers will be subject to specific conduct rules and responsibilities. Other individuals whose roles could significantly harm the firm are subject to annual certification. - All staff except ancillary workers must follow new conduct rules focused on integrity, skill/care, cooperation, customer interests, and market conduct. Senior managers have four additional rules. - Firms must have processes to assess individuals' fitness and propriety and provide regulatory

1. Regulatory Update
An introduction to the extended Senior
Managers and Certification Regime and
the new Conduct Rules
• 28 September 2017
• Gregory Brandman, Partner
• Simon Collins, Managing Director – Regulatory,
ES Consulting

2. 2
What we will cover
 Background to the proposed new regime - What is it and what will changed
• Overview of the new requirements
• Senior managers
• Certification regime
• Conduct rules
 Implementing the regime
• Key Supervisory areas
• Delegation
• Regulatory References
 What does it all mean - practical matters?
 Next Steps

3. 3
FCA Business Plan :
To drive a cultural change in the
industry that puts consumers and
market integrity at the heart of the
way firms do business, we must
ensure that senior individuals in
positions of responsibility are held
personally accountable for how their
firm operates, and for the
consequences of misconduct.
Why a new regime?
• Post-financial crisis – re-building trust
and changing culture in banking
• Increasing personal accountability
• Improving standards across the industry
• New regime effective for banks and
PRA-regulated investment firms since
March 2016
3

4. 4
Individual Accountability and Collective Responsibility
• Focus in the UK on increased individual accountability – does not detract
from collective responsibility
• The UK regulators’ view is that the principles of both should complement
each other
• For example… maintaining an appropriate culture is the collective
responsibility of the Board but requires the Chairman to lead the
development of the firm’s culture and standards of the board as a whole.
4

5. Eversheds Sutherland | 9 May 2017 |
.
Timeline
5
7 March 2017 –
certified population
assessed, Conduct
Rules applicable to
all
SMCR JOURNEY
7 March 2016 –
SMR started
7 March 2016 –
Certification Regime
started
Regulatory
Publications
•Various CPs and PSs
published
•July 2015 near final
rules
•HMT paper October
2015
Work to date
•SMFs identified
•Individuals subject to
the Certification
Regime identified
•Preparation of SoRs
and RM
•Updating of policies
and procedures
Late 2018 onwards extended regime
across the rest of the financial
services industry
Sept 2016 – Reg references
position clarified
September 2016 –
whistleblowing rules became
active
Q3 2017 – Legal
function clarity –
Extension
consultations –
summer/autumn 2017

6. 6
What is going to change under the new proposals to extend the regime ?
• A new Senior Managers Regime for the most senior members of the firm
• A new Certification Regime for those who can cause significant harm to a firm, its customers, or market
integrity
• New Conduct Rules for all non-ancillary staff (including an additional 4 conduct rules applying only to
Senior Managers)
• SMCR has applied to banks and PRA-regulated investment firms since March 2016
o FCA proposes to apply the same regime taking a “proportionate and flexible” approach (driven by firm complexity
and size) to the rest of the UK financial services sector
o The consultation closes on 3 November 2017
6

7. 7
Senior Managers Regime
• Senior Management Functions (SMFs) to replace Significant Influence Functions (SIFs)
• Applies to individuals who have responsibility for significant business units and other individuals who
hold key roles
• Senior Managers will be subject to four specific conduct rules (in addition to the 5 baseline conduct
rules) and a statutory duty of responsibility
o firms must notify the FCA of conduct rule breaches by senior managers within 7 days, where the breach results in
disciplinary action
• Senior managers to be allocated specific “Prescribed Responsibilities” (PRs) and business activities
linked to role to be covered by a “Statement of Responsibility” (SoR)
o but no PRs for Senior Managers at Limited Scope firms or EEA branches
• Pre-approval by the regulator for Senior Managers
o Each Senior Manager must have a Statement of Responsibilities which must be submitted to the regulator with
their application for approval. The SoR must be resubmitted in the event of significant changes.
• No ‘territorial limitation’ and SMFs are bound by the new Conduct Rules regardless of whether or not
they are located within the UK
7

8. 8
Prescribed Responsibilities for Senior Managers
PR1: performance by the firm of its obligations under SMR (including implementation and oversight)
PR2: performance by the firm of its obligations under the Certification Regime
PR3: performance by the firm of its obligations in respect of notifications and training of the Conduct Rules
PR4: responsibility for the firm’s policies and procedures for countering the risk that the firm might be used
to further financial crime
PR5: responsibility for the firm’s compliance with CASS (if applicable)
PR6: responsibility for ensuring the governing body is informed of its legal and regulatory obligations
PR7: (Authorised Fund Managers only): responsibility for an AFM’s value for money assessments,
independent director representation and acting in investors’ best interests
Core Regime firms
6 Prescribed Responsibilities must be allocated by core firms to senior managers
8

9. 9
Certification Regime
• Applies to staff who are not senior managers but whose functions can cause ‘significant harm’ to a firm
or its customers or to market integrity
• Certification is role specific and, if multiple functions are performed by an individual, the employer must
assess against each function
• Firms must assess and certify that individuals within the regime are fit and proper on an ongoing basis
and at least annually
• Prospective employers will be required to seek a “regulatory reference” before hiring a senior manager
or certified employee
• Regulators cannot intervene in individual certification decisions but may challenge the overall
effectiveness of a firm’s process
• A Senior Manager must be designated to oversee the Certification Regime
A firm must take “reasonable care” that no individual is certified without being demonstrably fit
and proper
9

10. 10
The Certification Regime
• Significant Management Function (based on current CF29)
• Proprietary Trader (also covered by CF29)
• CASS oversight (current CF10a)
• Functions subject to qualification requirements
• Client dealing roles (wider than CF30)
• Algorithmic trading
• Material risk takers (aka Remuneration Code Staff)
• Staff who supervise/manage those performing the above functions
“Certification Functions”
In scope roles:
10

11. 11
Fit and Proper Assessments and Regulatory References
• FIT sets out the factors which the FCA considers when assessing people as fit and proper under APER
• FIT will apply to all senior managers, certified staff and NEDs within the extended regime
• New evidence of FIT will need to be collected under the new regime
o criminal records checks for senior managers and NEDs (but not certified staff)
o regulatory references must be requested from the past employers of senior manager and certification
function candidates and NEDs who are not senior managers
o references to be requested from all previous employers in the past 6 years
o standard template for the reference
o certain information must be disclosed going back 6 years
o records of disciplinary and FIT findings will need to be retained for 6 years
o obligation to update references when new information comes to light
Required for Senior Managers, Certified Staff and NEDs
11

12. 12
The New Conduct Rules - Overview
• These will replace the existing APER principles and guidance (which currently only apply to Approved
Persons)
• New rules to be contained in a new code of conduct sourcebook: COCON
o 5 baseline conduct rules
o 4 additional conduct rules that will apply to senior managers only
• The 5 baseline conduct rules will apply to all non-ancillary staff, i.e. to:
o Senior Managers
o persons within the Certification Regime
o NEDs who are not senior managers
o “all individuals within relevant firms who are in a position to have an impact on the FCA’s statutory objectives”
• Firms will need to train their staff so they know how the conduct rules will apply to them in their day-to-day
roles
• Firms must notify the FCA when they have taken disciplinary action against a person for breaching a
conduct rule
12

13. Eversheds Sutherland | 9 May 2017 |
Conduct Rules – all colleagues (bar those explicitly
excluded)
Apply to individuals based in the UK
1. You must act with integrity
2. You must act with due skill, care and diligence
3. You must be open and cooperative with the FCA, PRA
and other regulators
4. You must pay due regard to the interests of customers
and treat them fairly
5. You must observe proper standards of market conduct
The Conduct Rules
13
Senior Manager Conduct Rules – SMFs only
Apply wherever the Senior Manager is based
1. You must take reasonable steps to ensure that the
business of the firm for which you are responsible is
controlled effectively.
2. You must take reasonable steps to ensure that the
business of the firm for which you are responsible
complies with the relevant requirements and standards
of the regulatory system.
3. You must take reasonable steps to ensure that any
delegation of your responsibilities is to an appropriate
person and that you oversee the discharge of the
delegated responsibility effectively.
4. You must disclose appropriately any information of
which the FCA or PRA would reasonably expect notice.

14. Eversheds Sutherland | 9 May 2017 |
Rule 1 : Failing to act with integrity
 Misleading a client, firm or regulator
 Misuse of confidential information
 Falsifying documents
Rule 2: Failing to act with due skill, care and
diligence
 Failing to inform a customer of material information
 Recommending an unsuitable product
Rule 3: Failing to be open and cooperative with the
regulators
 No duty to report directly to the regulator unless you are one of the
persons responsible however if you take steps to influence the
decision not to inform the regulator
 Failing to attend or answer questions from the regulators or failing
to supply on request appropriate documentation to the regulator
Rule 4: Failing to pay due regard to the interest of
customers and treat them fairly
 Failing to inform a customer of material information or explain the
risks of an investment
 Failing to disclose charges or surrender penalties
 Recommending unsuitable investments or strategies
Rule 5: Failing to observe proper standards of
market conduct
 Failing to comply with the Code of Market Conduct
 Manipulating or attempting to manipulate a market
Conduct Rules (all staff): What could constitute a breach?
14

15. Eversheds Sutherland | 9 May 2017 |
What could constitute a breach of the Senior Manager Conduct Rules?
15
Senior Manager Conduct Rules – SMFs only What could constitute a breach?
1. You must take reasonable steps to ensure that the
business of the firm for which you are responsible is
controlled effectively.
 Inadequate resourcing / unclear apportioning of
responsibilities and lack of reporting lines
 inappropriate / out of date policies and procedures
2. You must take reasonable steps to ensure that the
business of the firm for which you are responsible
complies with the relevant requirements and standards of
the regulatory system.
 Failing to implement adequate and appropriate
systems and controls
 Failing to identify and resolved breaches
3. You must take reasonable steps to ensure that any
delegation of your responsibilities is to an appropriate
person and that you oversee the discharge of the
delegated responsibility effectively.
 Failing to take reasonable steps to monitor the
delegate’s progress and ability to undertake the task
 Failing to supervise the delegate
4. You must disclose appropriately any information of
which the FCA or PRA would reasonably expect notice.
 Failing to act promptly when notifying the regulator

16. 16
The Duty of Responsibility for Senior Managers
• All senior managers will be subject to a statutory duty of responsibility, breach of which may give rise to
enforcement action by the FCA
• Scope of the duty
o where the firm breaches a requirement under FSMA (including a rule or a principle for businesses) the senior
manager responsible for the part of the business where the breach occurred will be in breach of the duty of
responsibility if they did not take reasonable steps to prevent the breach occurring or continuing
• The burden of proving the breach lies with the FCA
• The senior manager’s SoR will be the point of departure for the FCA when determining the extent of the
senior manager’s responsibilities
• It is expected that the guidance on enforcing the duty of responsibility in banking firms (PS17/9) will also
apply to other financial services firms, but this will be consulted on later in the year
Overview
16

17. 17
A “proportionate and flexible” approach to implementation
• A baseline of requirements (the “Core Regime”) will apply to every firm
o the Senior Managers Regime
o the Certification Regime
o the Conduct Rules
• Additional requirements will apply to a small number of firms whose size and complexity warrant more
attention (the “Enhanced Regime”)
• Reduced requirements will apply to a group of “Limited Scope” firms
o not all of the core regime will apply to these firms, where financial services activity is secondary to the main
activity, e.g. motor dealers
o such firms will typically need only one senior manager
A tiered approach
17

18. 18
The Tiered Approach
The Core Regime
The FCA is proposing the following Senior Management Functions for all core firms.
Governing Functions
•SMF9 – Chair
•SMF1 – Chief Executive
•SMF3 – Executive Director
•SMF27 – Partner (recognising the variety of differing corporate structures that exist particularly in the asset
management and insurance broking sectors)
Required Functions
•SMF16 – Compliance Oversight
•SMF17 – Money Laundering Reporting Officer
•SMF29 – Limited Scope Function (relevant to some limited scope firms only)
18

19. 19
The Tiered approach
The Enhanced Regime
The FCA recognises that there are a number of significant, larger firms (accounting for fewer than 1% of
regulated firms) which will come within the Enhanced Regime. They will have additional requirements
imposed on them, similar to the existing regime for banks and building societies, such as:
• Responsibilities Maps (a single document that sets out the firm’s management and governance arrangements)
• Handover Procedures (firms must take reasonable steps to ensure incoming SMs have the necessary information to
do their job)
• Additional SMFs and Prescribed Responsibilities
• The FCA will apply the “Overall Responsibility” requirement to all enhanced firms. This means that enhanced firms
must allocate responsibility to a senior manager for all activities, business areas and management functions of the
whole firm (including e.g. Operations, HR and IT and any activities carried out from a branch overseas.)
The types of the firms caught by the Enhanced Regime include:
• Firms that are significant IFPRU firms
• Large CASS firms
• Firms with assets under management of £50 billion or more at any time in the last 3 years
• Firms with a total intermediary regulated business revenue of £35 million or more per annum
• Firms with annual regulated revenue generated by consumer credit lending of £100 million or more per annum
• Mortgage lenders (that are not banks) with 10,000 or more regulated mortgages outstanding
(The Enhanced Regime will not apply to Limited Scope firms, or to EEA and non-EEA branches. So, the
Overall Responsibility requirement will not apply to these firms.)
19

20. 20
The Tiered Approach
• Once a firm meets the relevant criteria, the Enhanced Regime will apply
o but, firms can seek a waiver (if appropriate)
o firms need to monitor whether and how the criteria apply to them on an ongoing basis
o firms newly falling within the criteria will be given 6 months to comply with the Enhanced Regime
o firms ceasing to satisfy the criteria will remain within Enhanced Regime for 1 year
o these periods will start from different points, depending on the criteria that apply
o some large/complex firms may not meet the criteria but may still be required to comply
• Where a firm moves from core to enhanced, some senior managers may require a new or different
approval
Firms falling within the Enhanced Regime
There are 6 criteria for assessing whether a firm will be in the Enhanced Regime
20

21. 21
The Enhanced Regime
• 11 additional SMFs
o SMF2 - Chief Finance Function
o SMF4 – Chief Risk Function
o SMF5 – Head of Internal Audit
o SMF7 – Group Entity Senior Manager
o SMF10 – Chair of Risk Committee
o SMF11 – Chair of Audit Committee
o SMF12 – Chair of Remuneration Committee
o SMF13 – Chair of Nominations Committee
o SMF14 – Senior INED
o SMF18 – Other Overall Responsibility
o SMF24 – Chief Operations Function
Additional Requirements
Additional Senior Management Functions for enhanced firms
21

22. 22
The Enhanced Regime
• 7 additional PRs must be allocated to senior managers in enhanced firms:
o (1) compliance with rules relating to the firm’s responsibilities map
o (2) safeguarding and overseeing the independence and performance of the internal audit function
(SYSC 6.2)
o (3) safeguarding and overseeing the independence and performance of the compliance function
(SYSC 6.2)
o (4) safeguarding and overseeing the independence and performance of the risk function (SYSC
7.1.21R and 7.1.22R)
o (5) overseeing the independence of any outsourced internal audit function from external audit and
supervision of outsourced internal auditors
o (6) developing and maintaining the firm’s business model
o (7) managing the firm’s internal stress-tests and ensuring accuracy and timeliness of information
provided to FCA for purposes of stress-testing
Additional Requirements
Additional Prescribed Responsibilities
22

23. 23
Application of the new regime to incoming UK branches
• The following SMFs are proposed for EEA branches
o SMF21 – EEA Branch Senior Manager
o SMF17 – MLRO
• No territorial limitation for Senior Managers in EEA branches
• No Prescribed Responsibilities need be allocated for SMs in EEA branches
• Certification Functions will apply to EEA branches
• Conduct Rules will apply to all non-ancillary staff of a UK branch, but not to other branch employees
based outside the UK
EEA branches
EEA branchest
23

24. 24
Application of the new regime to incoming UK branches
• The following SMFs are proposed for non-EEA branches
o SMF19 – Head of Third Country Branch
o SMF3 – Executive Director
o SMF27 – Partner
o SMF16 – Compliance Oversight
o SMF17 – MLRO
• It is proposed that the following Prescribed Responsibilities will apply to non-EEA branches:
o PR1: performance by the firm of its obligations under SMR (including implementation and oversight
o PR2: performance by the firm of its obligations under the Certification Regime
o PR3: performance by the firm of its obligations in respect of notifications and training of the Conduct Rules
o PR4: responsibility for the firm’s policies for countering the risk that the firm might be used to further financial crime
o PR5: responsibility for the firm’s compliance with CASS (if applicable)
o PR6: responsibility for management of the firm’s risk management processes in the UK
o PR7: responsibility for the firm’s compliance with the UK regulatory system applicable to the firm
o PR8: responsibility for the escalation of correspondence from regulators to the firm’s governing/management body
o PR9: (Authorised Fund Managers only): responsibility for an AFM’s value for money assessments, independent
director representation and acting in investors’ best interests
• The Certification Regime and Conduct Rules will apply to non-EEA branches with the same scope as for
EEA branches
Non-EEA branches
Non-EEA branchest
24

25. 25
Changes affecting banking firms and non-banking firms
• New Prescribed Responsibility for Conduct Rules
o all firms, including banks, will need to allocate to a senior manager responsibility for ensuring that the firm trains
its staff in the Conduct Rules and complies with related notification requirements
• The “12-week rule”
o APER and SMCR currently allow someone to cover for an approved person/Senior Manager without needing to
be approved for up to 12 consecutive weeks
o This rule will be carried over to the SMCR for non-banking firms and it will be extended to apply to
responsibilities under the Overall Responsibility requirement
• SMF27 (Partner) will now apply to banking firms as well.
Proposed rules that will affect firms currently within the SMCR and core/enhanced firms
25

26. Implementing the regime –
what have we learned so far?

27. 27
Statements
and duty of
Responsibility
Responsibility
Map
Fit and
Properness
SENIOR
MANAGERS
REGIME
Delegation Whistleblowing
References Handovers
Senior Managers and Certification Regime – key supervisory areas
• Increased individual accountability
• Focus on responsibility (prescribed
responsibilities assigned to senior
managers)

28. 28
Delegation
• Senior Conduct Rule 3 states: “You must take reasonable steps to ensure that any delegation of your
responsibilities is to an appropriate person and that you oversee the discharge of the delegated
responsibility effectively”.
o you are able to delegate the investigation, resolution or management of an issue
o if you do delegate you should have reasonable grounds for believing it is to an appropriate person i.e. someone
with the requisite knowledge, skills and competence
o you remain accountable for your responsibilities. You should supervise/ monitor adequately any delegate and
receive progress reports, updates and an explanation if an issue is not resolved.
• Code of Conduct (new handbook, COCON) includes guidance for SMFs to comply with this rule (4.2.17
onwards) and what would constitute a breach of the rule.
28

29. 29
Outline of Regulatory Reference Requirements
• Obtain references before regulatory approval
• Take reasonable care to collect regulatory references for regulated roles for the past six years
• Regulated firms must provide reference within six weeks
• Duty to update for six years/record keeping obligations
• Mandatory template
• No arrangement/agreement must limit ability to disclose relevant information

30. 30
What have we been seeing over recent months ?
• The role of HR, Legal and Compliance - getting the project team structure right
• HR up skilling of regulatory knowledge
• Consistency of approach across the firm - dealing with staff matters
• Skilled Person reviews for firms who haven’t got it right
• Regulators keen to see overseas/group individuals within the regime where there is significant influence
over UK entity
• Consolidation of committees
• Updating of Responsibility Maps and Statements of Responsibility
• Firms keeping a steady state of preparedness
30

31. 31
Fit and Proper Assessments – what have we been seeing?
• Onus is on the firm to get it right
• What are individuals being assessed against? Is there consistency of approach?
• Linking F&P, T&C requirements and performance management
• Who makes the final decision?
• What happens if the assessment fails?
o Escalation and communication process
o “People” or F&P Committee to consider the evidence
o Conditional sign off with a development plan
o Reporting of breaches
o Reference impacts
31
A firm must take “reasonable care” that no individual is
certified without being demonstrably fit and proper

32. 32
Typical Queries
• Population identification
• Role sharing - consistency of approach
• Meeting regulatory and business objectives – on boarding and references
• Escalation of issues – keeping the regulator onside
• What constitutes a conduct rule breach
• Whistleblowing/grievances
• Adopting a “handover” process
• Performance management - personal characteristics – what is the expectation?
32

33. 33
Practical issues
• How will you identify the certified population? Consider ‘scenario testing’ to establish risk an employee
might pose
• Ensure employment documentation is adequate from recruitment to exit: e.g. employment offer conditional
on ‘fit and proper’ assessment/ handover policies/ job specs consistent with statement of responsibility/
disciplinary policies/record retention/ references/settlement agreements
• Increased risk of requests for legal representation at hearings. How will you respond?
• Set up an adequate framework to deal with the overlap between a firm’s HR processes (disciplinary/
grievance/ performance management, etc)
• When should you be notifying in house legal/compliance in connection with a disciplinary?
• Recording of decisions/ overlap of disciplinary sanctions and certification status
• Timing of annual appraisal process and annual certification process

34. 34
Next steps - Getting Prepared and Lessons Learnt
• Firms to start as early as practicable
• Keep things as simple as possible
• Ensure that all relevant areas of the business
participate in planning, preparation and
implementation
• Don’t forget HR aspects - this isn’t just about
compliance
• Staff attrition, salary demands, contract changes
34

35. Q & A

36. 36
Highlights
• Manage by alerts not reports
• Dashboards deliver greater oversight
• Custom questionnaire builder
• Continuous updates to the software
• Enhanced control
• 100% data capture
• 24/7/365 support
• Scalable into the future

37. 37
Contact
MyComplianceOffice
www.mycomplianceoffice.com
Phone: (866) 951-2279
advance@mycomplianceoffice.com
@mycompliance
Eversheds Sutherland
Greg Brandman - Partner
gregorybrandman@eversheds-sutherland.com
Simon Collins - Managing Director of FS
Regulatory Compliance
simoncollins@eversheds-sutherland.com

38. Thank you