A particular aspect of the UK regulatory environment is that financial institutions can be classified in a number of different ways. For example, it’s possible for a firm to be classified as an FCA-regulated firm, an investment firm, a portfolio manager, a small CASS firm and an ‘IFPRU’ firm – amongst others!
The Senior Managers and Certification Regime (“SMCR”) has introduced further categorisations, and these are not always intuitive. This article seeks to explain how the different categories fit together, and to facilitate the task of identifying a financial institution’s SMCR categorisation.
Why are there different categories?
There are almost 60,000 entities that are authorised and regulated by the UK’s financial services regulators. These range from some of the world’s largest financial institutions to very small and uncomplicated businesses comprising one individual.
Whilst the ‘high-level’ aims of SMCR are a constant, the specific requirements are applied in a proportionate manner dependent upon perceived conduct risk. Hence, for example, HSBC is subject to more stringent requirements than a small car dealership that offers consumer credit. Dividing financial institutions into the various categories aims to apply this proportionality in a way that is both fair and effective.
Dual-regulated v Solo-regulated firms
The first way of categorising firms is by how they are regulated. In the UK there are two financial services regulators – the Prudential Regulation Authority (“PRA”) and the Financial Conduct Authority (“FCA”). Systemically important firms are authorised by the PRA and regulated by the FCA – these firms are known as ‘dual-regulated’ firms and include banks, building societies, credit unions and insurers. All other firms are authorised and regulated by the FCA – these firms are ‘solo-regulated’ firms.
SMCR was introduced for such firms as follows:
|Dual-regulated firms: banks, building societies and credit unions||March 2016|
|Dual-regulated firms: insurers||December 2018|
|Solo-regulated firms||December 2019|
Dual-regulated firms are generally considered to have higher conduct risk compared to solo-regulated firms. Hence, such firms were subject to SMCR at earlier dates, and are subject to more detailed requirements.
Solo-regulated firms: Enhanced Firms, Core Firms and Limited Scope Firms
There are almost 60,000 solo-regulated firms, and these are subject to further categorisation. A majority of these fall into three categories reflecting their activities and perceived conduct risk:
|Enhanced Firms||Higher risk|
|Core Firms||Medium risk|
|Limited Scope Firms||Lower risk|
Determining which category a solo-regulated firm fits into is not a straightforward task. The FCA has published a firm classification diagram, replicated on the SMCR Compliance website, which provides a useful starting point. However as with many aspects of financial regulation the devil is very much in the detail. Set out below is some additional guidance on how to work out into which category a solo-regulated firm belongs.
Limited Scope Firms vs Core and Enhanced Firms:
There is a dichotomy between Limited Scope firms on one hand, and Core and Enhanced firms on the other.
Limited Scope firms comprise a discrete population of firms i.e. a firm has been identified as Limited Scope by virtue of the activities that it conducts.
For other firm types, the ‘default’ is that the firm is classified as a Core firm. However, certain firms – typically larger firms – will instead fall into the Enhanced category by virtue of various criteria that will be explored in greater detail later in this article.
Limited Scope Firms:
There are seven categories of Limited Scope firm:
Of these a majority of Limited Scope firms fall into the first category which comprises ‘limited permission’ consumer credit firms. This is broadly defined as a consumer credit firm that performs one or more of the following activities:
NB: If a firm carries on lending, secondary broking and/or consumer hire activities under a limited permission, the firm can also apply to carry on limited permission debt counselling, debt adjusting and providing credit information services.
Core and Enhanced Firms:
There are a wide variety of firm types that fall into either the Core firm category or the Enhanced firm category. These include (but are not limited to) the following:
On account of them having higher perceived conduct risk, Enhanced firms are subject to requirements that are most similar to those for dual-regulated firms.
A firm falls into the Enhanced firm category where it meets one or more of the following six conditions:
Criteria calculated on a rolling average:
Criteria calculated as a point in time
Some other points
The above details the process for identifying the correct category for a majority of FCA regulated firms. There are some firm types that fall outside of this, including (but not limited to):
Our team of compliance experts are always here to help you connect the dots – please contact us should you have any further questions on how to categorise a financial institution under SMCR.
Alternatively, you can visit the SMCR Compliance website where you can find cost-effective and convenient SMCR e-Learning courses specific to your type of Firm and the types of functions you and your team might need.