The FCA has been writing to some firms recently with an ‘ACT NOW’ message, stating:

“We are writing to you today because our analysis shows you have individuals within your firm who would fit the definition of a Directory Person, but you have not yet submitted any Directory Persons data for your firm.

Solo-regulated firms must complete the certification of their staff in compliance with the SM&CR and submit their Directory Persons data via Connect by 31 March 2021. For firms wishing to submit using the multiple upload functionality, this must be done by 18 March to ensure submissions are processed ahead of the deadline.”

This has caused some consternation, mostly because the firms in question believed they had notified all their directory persons. However, the communication also created a bit of self-doubt as to whether they had indeed identified all affected individuals.

In particular, questions have been raised about how directors or non-executive directors who have no senior management functions, or sole traders and partners are supposed to be categorised, so we thought a quick refresher and clarification would not go amiss.

Back to basics

We think that at least some of the confusion arises because of a misunderstanding of how the SM&CR and the Directory fit together. So, the best place to start is with a clear differentiation between approved individuals for the purpose of SM&CR and individuals who must be listed for the purposes of the Directory i.e. Directory persons.

A directory person is defined as:

• all certified staff (those holding a certification function under the Senior Manager & Certification Regime – SM&CR)
• directors who are not performing Senior Manager Functions (SMFs) – both executive and non-executive
• other individuals who are sole traders or ARs (including those within ARs) where they are undertaking business with clients and require a qualification to do so

The relevant rules are in SUP 16.

SUP 16.26.3G09/09/2019

(1) Section 347(1) of the Act requires the FCA to maintain a record of various categories of person, such as authorised persons and approved persons as well as every person falling within such other classes as the FCA may determine (see section 347(1)(i)).

(2) The FCA has determined that individuals who are Directory persons should be included on the record required by section 347(1) of the Act (see section 347(1)(i) of the Act).

Explanation in plain English

(1) Is the longstanding position and, by default, included advisers until the advent of SM&CR. SM&CR meant that advisers would no longer be approved persons and so would have dropped out of the FS Register. As a result of the uproar that this intention brought to play, the FCA came up with the notion of the Directory – which is merely a list of defined individuals who are also included on the FS Register as per (2) above.

So approved persons such as those holding Senior Manager Functions (SMF) are included in the Register as part of that approval process. Directory persons must be reported for inclusion in the Directory – which is just a non-delineated subsection of the Register.

A Non-Executive Director (NED) who holds the SMF of Chair – which is the only SMF a NED can hold – will be an approved person under SM&CR. Any other NED will be a directory person and needs to be reported for inclusion in the Directory.

Note that this applies to all Directors who are listed at Companies House. Whether they are Senior Managers depends on the nature of their role. If they are, then they must be approved by the FCA and will appear in the FS Register. If they do not hold any SMFs then they will not need to be approved as SMF 3 or other SMF but will need to be counted as Directory Persons/

Partners

Here is what the FCA SM&CR guide says about partners.

“Under FSMA, the Certification Regime can only apply to employees (* see below). If a partner does not hold an SMF and does not meet the definition of ‘employee’ in FSMA 63E(9), the Certification Regime will not apply. The definition can cover secondees and contractors, who must be certified if they are performing a Certification function.

Under our Handbook rules, an LLP is not defined as a partnership. Given the flexibility that an LLP has in designing its internal structure, we would expect the Certification Regime to apply in many cases to members of an LLP who are not Senior Managers.

It could also be the case that members in an LLP would not be in scope of the Certification Regime.  

Where a partner performs a Senior Management Function, their responsibilities will need to be clearly set out in their SoR. However, we recognise that responsibilities within partnerships could be allocated in different ways. For example, a responsibility or function might be shared between several partners, or a more senior partner or executive-type partners could have more responsibilities than a junior partner. Firms should explain how this works in their firm in each of the Partner’s SoRs.

Partnerships will also need to assign the applicable PRs among their Senior Managers.

Unless there is a strong justification, we would not normally expect the PRs to be divided or shared between these partners.”

* Definition of employee:

a person who:

1. personally provides, or is under an obligation personally to provide, services to A under an arrangement made between A and the person providing the services or another person, and
2. is subject to (or to the right of) supervision, direction or control by A as to the manner in which those services are provided.

Sole traders

Sole traders with no employees are classed as Limited Scope firms for the purposes of SM&CR and could be required to be approved by the FCA as SMF16. In practice, a sole trader with no employees is only required to have an SMF16 where required by relevant rules. Further Core tier Senior Management Functions may apply where a sole trader with employees has a governance body comprising of individuals who perform relevant roles. This is likely to be rare in practice.

If a sole trader has no employees, then the Certification Regime won’t apply to them.