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SM&CR: What now for Asset Managers?

Published by Charles Gubert

SM&CR: What now for Asset Managers?

Regulation has been at the forefront of asset managers’ agendas over the last few years, and a number of rules and obligations will take effect over the coming 12 months including the byzantine Markets in Financial Instruments Directive II (MiFID II). To complicate matters further, there is a very strong possibility that asset managers (certainly those with a lot of capital derived from EU-based clients) will have to implement logistical and operational changes to their business depending on how Brexit talks conclude. The UK’s Senior Managers and Certification Regime (SM&CR) is yet another regulatory requirement which the industry needs to prepare for.

SM&CR came into play on March 7, 2016 and applied initially to banks and any financial institution regulated by the Prudential Regulation Authority (PRA).  In June 2015, the Fair and Effective Markets Review (FEMR) report outlined a number of recommendations to improve fairness and efficiency in the fixed income, currency and commodity (FICC) markets, including an extension of SM&CR to firms operating in the FICC market.  This obviously would have implications for asset managers. The extension of SM&CR to asset managers was confirmed by the Financial Conduct Authority (FCA) and PRA in May 2016. SM&CR will be imposed on asset managers from 2018.  This extension was not an unexpected development particularly given the political and public outrage over the LIBOR scandal and FX rate rigging.

Put simply, SM&CR imposes the following:

SM&CR Key Points


  • The most Senior Managers in firms will be subject to pre-approval and supervision by the FCA or PRA. Certain responsibilities prescribed by the FCA or PRA will be allocated to the Senior Managers and their individual responsibilities will need to be set out in a "statement of responsibilities" (or "SORs") which must be submitted to the regulator with the Senior Manager's approval application.
  • Firms will have to prepare and maintain a Governance or Responsibilities Map showing the key roles within the firm, the people responsible for them, their responsibilities and lines of accountability. 
  • Senior Managers will be accountable to the regulator if they breach Conduct Rules prescribed by the FCA or PRA, are knowingly concerned in a breach by a firm of a regulatory requirement, or fail to take reasonable steps to prevent such a breach by a firm in their area of responsibility, as set out in their Statement of Responsibilities and the Responsibilities Map. 
  • Senior Managers will have a statutory duty of responsibility to take reasonable steps to avoid the firm breaching a regulatory requirement in the Senior Manager's area of responsibility.
  • Firms must ensure that Senior Managers and other staff who could cause significant harm to the firm or its customers are at all times fit and proper, and must certify them as such at least annually. 
  • Firms must also ensure that employees comply with certain Conduct Rules, in respect of which firms will have notification, training and record keeping obligations. 
  • The criminal offense applied to banks of recklessly causing a financial institution to fail will not be applied under the Extended SMCR. 



The current version of SM&CR has retreated from some of its original, more onerous proposals, namely the provisions on the reversal of proof rule, which would have required banks and PRA-regulated entities to demonstrate to regulators they had done all they could to prevent wrongdoing rather than obliging regulators to find evidence of such faults as had previously been precedent. 

Despite this, the implications of the rules will be significant and asset managers will have to adjust their operations to take account of them. This may include added documentation requirements. It is crucial that fund managers up the ante and start implementing a working plan to demonstrate compliance with these rules. The time-frames are tight and firms are likely to be facing a number of other tasks around MiFID II compliance and Brexit contingency planning, so it is crucial SM&CR compliance is not put on the backburner.

The risk of breaching the rules could be significant and may result in investor withdrawals. A handful of individuals have said these rules could result in a talent drain due to the liability fears or firms moving to lesser regulated jurisdictions. Again, this is unlikely to materialise and a decision to relocate simply to avoid SM&CR will not be viewed positively by clients to whom managers have a fiduciary duty to protect.

SM&CR is going to require asset managers to document more carefully their internal procedures and this will obviously have costs. However, compared to other rules and regulations (Alternative Investment Fund Managers Directive, MiFID II, etc.), this should be manageable. 

[1] Clifford Chance Briefing Note, May 2016 – Extension of the Senior Managers and Certification Regime: Impact on Asset Managers