It almost seemed an insignificant paragraph (5.14) in the Carol Brady [CB] Independent review of claims management regulation (March 2016), but I have always said the proposal to implement a senior managers regime [SMR] requiring the pre-authorisation of individuals who perform ‘controlled functions’ for authorised firms will have a significant impact. CB listed three benefits of a CMC SMR. They were:
- Unscrupulous directors would be prevented from utilising dormant pre-authorised companies, acquiring legitimate CMCs, or establishing ‘phoenix’ companies.
- Individuals would be held personally accountable for the conduct of their firms, providing a proper framework to ensure that poor conduct does not go unpunished.
- There would be less likelihood of a firm being controlled from behind the scenes, as individuals would be reluctant to be held accountable for regulatory breaches.
CMCs ‘senior managers regime’ implementation
Many CMCs are not fully au fait with Financial Conduct Authority [FCA] regulation or the implications of what can appear to be simple statements in a complex proposal, like the CB one, they have lived under a different regulatory regime and many of the senior managers in CMCs have not worked in any capacity in any FCA regulated firm. As the CMR and FCA work closely to implement the CB recommendation 7, “Persons wishing to perform controlled functions for a firm regulated by the CMRU should be required to: 1) Pass a fit and proper persons test, which will consider honesty, integrity and reputation, but also competence and capability, and financial soundness and 2) be personally accountable for rule breaches for which they are responsible” CMCs should consider the most recent FCA fine [the Towergate fine].
Senior managers within CMCs could be fined
It is not particularly the £3,760,000 Towergate fine (before the early settlement discount) that should act as the ‘wake up’ call for CMCs although it is clearly significant to any business. In respect of the senior managers regime, it is the individual fine levied against and prohibition from having any direct responsibility for client and/or insurer money in relation to any regulated activity against Timothy Duncan Philip (£85,817.97, before the early settlement discount) that CMC managers should consider and act upon.
Failing to adhere to suitable processes
The action against Mr Philip was for breaches of Statement of Principle 6 (An approved person performing an accountable higher management function must exercise due skill, care and diligence in managing the business of the firm for which they are responsible in their accountable function) while performing the significant influence function [SIF] of a CF1 (Director). Put simply the FCA final notice in this case confirms that Mr Philip failed to exercise due skill care and diligence in managing the business in his controlled function. These failings included failing to establish and adhere to suitable processes, identifying risks associated with failing to adhere to processes and failing to assure himself that risks were managed appropriately.
CMCs ‘senior managers regime’ first steps
The formal integration of the CMR into the FCA stable will no doubt take some time and the final CMC version of a SMR are still awaited. However, CMCs should not delay in making sure that their business processes are robust and compliant. CMCs should also take steps now to ensure that any senior manager who is responsible for any control function is able to carry out their role with the necessary skill, care and diligence. One of the first steps CMCs should take to put them on the right track is develop a statement of responsibilities for all their senior managers. There is no doubt that CMCs will be required to certify annually the fitness of their senior managers – any work completed now will make the transition to FCA regulatory oversight easier. Our independent audit partners, Rockstead, are already experienced in the specific requirements of CMCs and are already assisting CMCs to meet the challenges of the new regulatory world.