SM&CR Firm Classification – how to comply with a moving target
Unless they are exempt, most FCA solo-regulated firms are placed into one of three buckets under the Senior Managers and Certification Regime (SM&CR).?More specifically, they can be either:
1.??????Limited-Scope Firms,
2.??????Core Firms, or
3.??????Enhanced Firms.
It is possible for a firm to move between classifications over time, or to move from being out-of-scope to being in-scope (or vice versa).?There are a number of reasons why this might happen, as discussed below.
Exemptions
Firms can be completely exempt from the SM&CR.?An “overseas” firm is an example of a firm that is exempt.?However, if that exemption no longer applies, the firm may then become subject to the SM&CR.?For example, a firm that previously satisfied the definition of an “overseas firm” but which subsequently has an establishment in the UK (or has an appointed representative that has an establishment in the UK) will no longer be exempt from the requirements of the SM&CR.[1]
Firms can also benefit from specific exemptions from being classified as an Enhanced Firm.?Typically, this depends on the firm’s status.?For example, an exemption is available from Enhanced Firm status to unauthorised Alternative Investment Funds (“AIFs”) or authorised AIFs that are marketed solely to professional clients.[2]
Waivers
Benchmark firms can qualify as Limited-Scope Firms, but only if they have been granted a waiver by the FCA (and they have permission to carry on the regulated activity of administering a benchmark but no other regulated activity).[3]?That waiver is unlikely to remain available from the FCA if the firm begins to administer a benchmark that is “important”.[4]?In addition, the waiver is only likely to remain available for so long as regulated activities form a “small part” of the firm’s overall activities.[5]?A “small part” is typically interpreted as meaning that revenue from regulated activities represents less than 20% of overall revenue.[6]
Permission based criteria
Certain firms are classified as Limited-Scope Firms because of the permissions they hold.?Principally, Limited-Scope status is available to those firms which carry on activities OTHER THAN regulated activities.?For instance, oil market participants, service companies, energy market participants and sole traders are typically Limited-Scope Firms.[7]?In addition, claims management companies can qualify as Limited-Scope Firms (but, again, only to the extent that they do not hold permission to carry on any other kind of regulated activity).[8]?More generally, Limited-Scope Firms must be able to demonstrate that their principal purpose is to carry on activities other than regulated activities.[9]?
Financial criteria
Financial criteria can also apply in determining whether a firm is an Enhanced Firm.?Essentially, a firm is an Enhanced Firm if it meets ANY of the following criteria:[10]
Specific rules require retail intermediaries to check whether they meet the financial criteria for being an Enhanced Firm and to report to the FCA when it meets those criteria for the first time or ceases to meet them.[11]
Other criteria
Other criteria also apply in determining whether a firm is properly to be classified as an Enhanced Form for SM&CR purposes.?For example, if a firm is a “significant SYSC firm” or a “CASS large firm”, it will be an Enhanced Firm.[12]
Check your classification – and then record it
The point is that its SM&CR classification is not necessarily static.?As such, understanding a firm’s status is not a “one and done” exercise.?SM&CR classification needs to be periodically monitored.?
A number of the observation periods for determining SM&CR firm classification relate to accounting periods.?Therefore, ideally, a firm should check its SM&CR status at least once per year.?In some cases, firms should check their SM&CR status once every six months. [13]?Certain intermediaries are expressly required to “regularly” calculate whether they meet the ‘intermediary regulated business revenue’ condition for being regarded as an enhanced firm.[14]
Moreover, given that the old adage ‘if it can’t be evidenced, then it didn’t happen’ applies in spades as far as the FCA is concerned – ongoing monitoring efforts need to be recorded.
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How can we help?
Corterum enables users to meet SM&CR firm classification requirements with a minimum of effort.?Our SM&CR classification tool will help you to identify the bucket into which your firm falls – recording the date on which the decision was made as well as the full rationale behind the decision itself.?After that, Corterum’s central calendar function can be used to diarise when the firm’s classification should be reassessed.?Every classification decision (and the full underlying rationale) is captured within the system and is immediately available – providing the audit trail every firm (as well as the Senior Manager with the prescribed responsibility for SM&CR compliance) needs in order to evidence compliance with the requirements of the SM&CR.
About Corterum
For less than it costs to maintain a spreadsheet, we provide every firm – no matter what the size – with SM&CR capabilities beyond those of even the largest banks.
Time is undoubtedly money.?At Corterum, we aim to help you to reduce operational burden whilst simultaneously enhancing compliance.?Our ultimate goal is to enable you to subsume SM&CR into ‘business as usual’ processes whilst helping you to rest easy that you are SM&CR compliant.?Contact us today at [email protected] and let us show you the case for change.
[1] SYSC 23, Annex 1, 3.2
[2] SYSC 23, Annex 1, 7.3R
[3] SYSC 23, Annex 1, 6.13R
[4] SYSC 23, Annex 1, 6.16G(3)
[5] SYSC 23, Annex 1, 6.16G(2)
[6] SYSC 23, Annex 1, 6.17G
[7] See SYSC 23, Annex 1, 6.3R and 6.4
[8] SYSC 23, Annex 1, 6.11R
[9] SYSC 23, Annex 1, 6.5G
[10] SYSC 23, Annex 1, 8.2R
[11] SYSC 23.3.3G and SUP 15.15
[12] SYSC 23, Annex 1, 9.1R
[13] SYSC 23, Annex 1, 8.9G
[14] SYSC 23, Annex 1, 8.22G