Seal of disapproval: The new rules that treat advisers like banks

FitandProperTougher accountability rules for advisers will add “unnecessary” regulatory costs which threaten to thwart efforts to widen access to advice.

In a shock move last week, the Treasury announced the senior managers regime will be extended to all regulated firms at some stage during 2018.

The regime passes responsibility for ensuring staff are fit and proper from the FCA to firms, and makes it easier for the regulator to hold senior managers to account in the event of failings.

Experts warn the changes will add tens of thousands of pounds in compliance costs to each firm and could lead to staff demanding higher salaries.

So how do firms prepare for these changes? And what will they mean for a sector struggling to meet the demand for advice under the cloud of rising regulatory costs?

Out of the blue

Banks are currently preparing for the introduction of the senior managers regime in March 2016 following the Parliamentary Commission for Banking Standards’ report on imp-roving standards and culture in the banking sector. Similar rules for ins-urers also come into force in March.

A wider extension of the rules had been hinted at in the Bank of England’s Fair and Effective Markets Review in June but the review said bringing more firms into scope would be subject to consultation.

Law firm RPC regulatory counsel Marcus Bonnell says: “This is a massive change in the way the FCA operates which has come pretty much out of the blue.

“Smaller firms are facing a significant change in the way they are regulated and are going to feel  quite daunted.”

The Treasury also announced the most controversial aspect of the banks’ senior managers regime has been removed.

The so-called “reverse burden of proof” would have required senior managers to prove they had taken all reasonable steps to prevent conduct breaches. Instead, the FCA will have to prove managers failed to do so.

Threesixty Services managing director Phil Young says: “There is something unnerving about the fact the Treasury is moving much faster than the FCA and surpassing the usual consultation processes.

“There comes a point where firms think who is actually driving change and who should I be lobbying?”

Responsibilities map

The FCA is due to consult on how the regime will apply to firms beyond banks and insurers.

There are three main aspects to the rules: statements of responsibilities for senior managers, a new fitness and propriety test for almost all staff, and a new code of conduct for staff.

Pinsent Masons senior associate and former FCA lawyer Michael Ruck says: “Senior managers will effectively be grandfathered into the new regime. What is new is they have to provide a 300 word statement of responsibilities to the regulator, and a responsibilities map setting out what each manager is responsible for. In a smaller firm this should be simpler. However, if you have two directors who generally take shared responsibility for the firm, you need to divide up responsibilities in a way both managers are happy with and that leaves no gaps.”

Bonnell adds the stakes are high for getting these statements right.

He says: “If anything goes wrong, these statements would be used as a starting point for the regulator to take enforcement action against you as an individual. Firms will want to get them checked by a compliance professional.”

Fit and proper

Experts say the biggest challenge for advisers is the ripping up of the approved persons regime, which will be replaced by a certification regime.

This means customer-facing staff are no longer pre-approved by the regulator. Instead, any staff member which could pose a risk to the firm or customers must be certified as fit and proper by the firm both initially and on an annual basis.

It is understood the certification regime will apply more widely than customer-facing staff, effectively to all bar purely administrative roles such as receptionists.

The FCA will be able to take enforcement action against these certified individuals, who must also sign up to a new code of conduct based around treating customers fairly rules. These conduct rules replace the statements of principles which currently apply to approved persons.

It will be down to firms to devise the fitness and propriety tests, which will be checked by the FCA through thematic reviews.

Zurich UK Life principal of government and industry affairs Matthew Connell says: “Firms may already be doing things which they can use to frame a fitness and propriety assessment.

“Those with a regular appraisal process and an internal code of conduct will have a good headstart. These are significant processes which will take time to bed in and to be viewed as more than artificial by staff.”

Experts say processes will also need to be in place for breaches of the standards. This should cover in what circumstances the regulator needs to be informed and any appeals process.

Connell says: “There have been discussions among banks about how serious a breach needs to be before it is reported to the regulator.

“Competence is an ongoing thing and small issues can be resolved through training and learning. But firms will have to make those judgement calls.”

Under the existing regime, the FCA cannot take action against individuals who are not approved persons but this will change with the introduction of the new senior managers rules.

One issue for advice firms is that paraplanners are not currently pre-approved by the FCA but are likely to fall within scope of the certification regime.

Experts say they could argue for an increase in salary, given their greater regulatory responsibilities under the new regime.

Bonnell says: “The FCA is not going to be prescriptive about which job titles fall under the regime, so firms are going to have to make those decisions and no doubt some will be punished for getting it wrong.

“There are likely to be a lot more people who find themselves certified under this regime with a personal responsibility to the regulator. They may say they have a greater level of personal risk and responsibility and expect to be remunerated accordingly. That is what staff have been arguing in banks.”

Ruck adds: “That argument applies all the way up the hierarchy to senior managers as it is going to be clear whose name is in the frame if things go wrong.”

Unnecessary costs

In addition to potential salary increases, the changes will heap costs on to firms through management time and compliance services.

Experts say a consultant would typically charge a mid-sized advice firm £15,000 to implement the relevant processes and £4,000-£5,000 for an annual check.

Firms will also need to train staff on the new conduct rules, particularly those who are not approved persons under the current regime.

Bonnell says: “No doubt off-the-shelf training solutions will be available, but a half-hour session and some multiple-choice questions is unlikely to ensure staff truly understand what TCF means.

“The banks have spent millions of pounds preparing for this regime and firms should not underestimate how significant a change it is.”

Others argue the changes are evidence of a lack of joined-up thinking, given the Treasury launched the Financial Advice Market Review this month.

The review aims to widen access to advice and is seeking views on barriers to firms providing advice, including regulatory costs.

Apfa director general Chris Hannant says: “The senior managers regime was designed to address specific problems in banking, and makes sense in large organisations where there are multiple and conflicting lines of responsibility.

“But for small advice firms, where is the value? It is the unnecessary regulatory costs that are most exasperating for advisers, and these rules seem stupid in the context of the advice review.

“We already have the sunset clause next year, Mifid II in 2017 and new capital adequacy rules being introduced for advisers. There is only so much you can chuck at an industry and expect it to cope.”


One of many question marks over how the regime will work in practice is how it will be applied to networks. The FCA says this is yet to be decided.

One option would be for the network itself to apportion responsibilities to senior managers, and to certify each appointed representative as fit and proper. Alternatively, the regime could apply to each AR firm as well as the network.

Ruck says: “If the regime applies to each AR, that would negate one of the major reasons for joining a network: the lack of direct regulation.

“But if the networks have to do all the work, might they raise their membership fees to cover the cost? Policymakers will need to try and square access to advice with the Treasury’s desire for the regime to be consistent across all firms.”

The FCA says it understands the need for the regime to be proportionate for smaller firms.

A spokesman says: “It is worth bearing in mind that in smaller firms lines of responsibility and accountability are already often much clearer than is the case in large, complex organisations.

“Additionally, the senior managers regime has been designed so as to be inherently proportionate, adapting to the size and structure of different firms.

“We understand the need for the extended regime to appropriately reflect the diverse business models operating in the UK market and to continue to be proportionate to the size and complexity of firms.”

Expert view: Tough judgement calls on fit and proper tests

There are three key aspects to this change for advisers to consider: the senior managers regime itself, the certification regime and the conduct rules. Certification presents the biggest challenge. Under the current regime, all customer-facing advisers are approved as CF30s. That system will fall away and it will become the firm’s responsibility to undertake an initial and annual fit and proper test.

It will be down to firms to decide what that involves, but it is likely to include criminal checks, careful referencing and questions about an individual’s financial position.

Ideally, everyone would get signed off as fit and proper every year but that may not be the case and firms will have to make some challenging judgement calls.

The most difficult scenario is where something happens to an existing member of staff which leads you to question their fitness and propriety.

For instance, last year, the FCA banned a former Blackrock Asset Management managing director for dodging £43,000 in train fares. While his train fares had nothing to do with his work, he had committed fraud which indicates a propensity to do bad things.

A less clear-cut example is an employee who falls into debt. A senior manager will have  to work out what has driven that and whether it can be resolved. The firm will need to decide which of these cases should be reported to the regulator.

The conduct rules apply to everyone within the senior managers and certification regime.  These are high level and are largely based around the fair treatment of customers.

Given advisers’ exposure to the FCA and its work on TCF, advice firms should be well positioned but will still need to show staff have understood and are adhering to the rules.

As the senior managers regime was specifically brought in to control the banks, the rules need to be proportionate and workable for small firms and the FCA’s consultation process will be crucial.

Colin Wilcox is advisory director at The Consulting Consortium 


What is happening? The Treasury has announced the senior managers regime will be extended to all regulated firms in 2018. The regime was previously due to come into force for banks and insurers only in March 2016.

Why is the Treasury doing this? The Treasury wants the regime to be consistent across all firms and says many firms beyond the banking sector can pose a threat to financial stability.

What is the senior managers regime? It aims to improve individual accountability, and means senior managers must take responsibility for specific business areas. If there is a rule breach, and the FCA can show the individual failed to take reasonable steps to prevent it, the regulator can take enforcement action against them. The regime also means responsibility for certifying staff as fit and proper will be shifted from the FCA to firms. If the FCA finds the firm has failed to ensure its staff are fit and proper, it can take action against the senior manager responsible.

What happens next? The FCA will publish a consultation paper on how the regime will apply to firms, but it is not known when.

Will there be different rules for the smallest firms? All firms will have to comply, regardless of size. The FCA says rules will be proportionate to firms’ size and complexity.