AIMA: How The U.K.'s SMCR Will Affect U.S. Firms

Jun 20 2017 | 6:29pm ET

Editor's note: U.S. investment managers need to think seriously about how tough new U.K. conduct rules for senior staff could affect their employees in the States, explain AIMA's Adele Rentsch and Michelle Noyes in this contributed article.

How The U.K.'s SMCR Will Affect U.S. Firms
By Adele Rentsch and Michelle Noyes

Post financial crisis, U.K. banks were hit with tough new senior manager accountability rules, allowing the regulator to vet their senior staff and defining new levels of personal responsibility for management. Asset managers are next in line, with the rules being rolled out to the rest of the U.K. financial services industry from 2018. As we know from the experience of the banks, non-U.K. staff is also in the firing line.

What are the new rules in the U.K.?

The U.K. Senior Managers and Certification Regime currently applies to U.K.-regulated banks and insurers. The regime focuses the U.K. regulator’s attention on the very top layer of management of U.K. firms. Those managers can only be appointed if approved by the regulator. The rules also make it easier for the regulator to hold individuals personally responsible for failings within their remit. This has caused a lot of angst among senior banking staff.

The new rules also push the onus back onto firms to verify the fitness and propriety of a significant proportion of their staff, including salespeople and traders. When the rules get extended to the asset management community, this is likely to cause huge headaches for H.R. and compliance teams in terms of revising recruitment processes and annual performance assessments. 

There are also new conduct rules that apply to all staff members, except for the few identified as ancillary staff (e.g. cleaners and security guards), with firms having to provide training on what those rules mean in the context of individual roles. Firms have to report breaches of the conduct rules to the U.K.’s Financial Conduct Authority (FCA) each year.

Why is this of interest to staff in the U.S.?

While the rules apply directly to U.K. firms, U.S. staff involved in the U.K. business may very well be captured by the new rules, for example, global business heads (e.g. the head of I.T.) or managers of the U.K. business located offshore. A U.K. firm will also have to think carefully about how it outsources trading and other functions to U.S. affiliates to make sure this doesn’t blur accountability lines. Overall, this may lead to a lot of very difficult conversations and decisions about reporting lines and potentially costly restructures for global asset managers.

Likewise, traders and other staff located in the U.S. aren’t safe either. If they’re involved with the clients or business of the U.K. entity, they may well be caught by the regime. This means the firm will have to sign off on their fitness and propriety when they’re hired and annually thereafter for them to continue in their role. 

What is the deadline for the new rules coming into force?

The rules are being extended to all U.K.-regulated firms from 2018. However, the exact timing and arrangements to transition to the new rules are yet to be announced. But overall, this doesn’t really give firms much time to assess how the rules impact them and get ready.

Is there still time to influence the final rules?

The FCA has committed to designing the new rules to apply proportionately across firms of differing size, type and complexity, but we don’t yet know what this will look like in practice. 

AIMA has engaged directly with the FCA over the last year to raise particular challenges with extending the rules to asset managers. We continue to encourage our members to raise specific issues or questions with us, so we can channel these through to policy makers or supervisors at the FCA.

While there may still be some scope to raise particular concerns with the FCA, a word of caution: for the banks, the final rules were not materially different from the draft rules. There may also not be much time between releasing the final rules and their go-live. 

The clear message for firms is not wait for the final rules to start on implementation.

How can you start getting ready?

The U.K. Government has already told us that the rules for asset managers will look very similar to what is already in place for banks. On this basis, AIMA has already started rolling out an education programme for our members. 

In advance of the draft rules coming out, we would encourage firms to look at reporting lines and delegations, and start mapping out who has overall responsibility for the different parts of the U.K. business. 

U.S. senior managers who are potentially captured should fully understand their personal responsibilities under the regime, and may want to carefully review their insurance arrangements and indemnities. 

At the staff level, the new regime may mean that firms have to change employment contracts, including for in-scope individuals in the U.S. Firms will also need to ensure that any changes to, for example, staff training and annual performance assessments are extended to non-U.K. staff, as necessary.


Adele Rentsch is a member of AIMA's Market Regulation Team. Prior to joining the Association last year, she she worked for the Financial Conduct Authority (FCA) as a supervisor of the commercial and private banking divisions of one of the largest UK banks.

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