SM&CR – sole traders and single directors

This week SM&CR has been in force for FCA solo regulated firms for a month and it is to be hoped that all our readers have its implementation well in hand. Most of the guidance and many articles (including ours) that appeared in the run up to the 9 December 2019 effective date concentrated on Core Firms. That is likely to be the categorisation that applies to most adviser firms. However, there are some sole trader firms out there, and some single director limited companies. In this article, we explain how the SM&CR applies in these firms.

Sole Traders
Sole traders are one of the types of firm that the SM&CR rules define as ‘Limited Scope’. Limited Scope Firms are subject to fewer requirements than Core Firms. In turn, Core Firms have fewer requirements than Enhanced Firms.

There are only three possible Senior management Functions that can apply in a Limited Scope Firm:

  • SMF29 – Limited Scope Function
  • SMF 16 – Compliance oversight
  • SMF 17 – Money Laundering Reporting Officer

Which of these apply in any particular Limited Scope Firm depends upon the nature of the firm.

In practice, a sole trader with no employees is only required to have a 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.

Prescribed Responsibilities do NOT apply to sole traders.

The Conduct Rules do apply to anyone in a Limited Scope Firm that is in any way involved in, or supporting, financial services activities, and the firm is required to train relevant staff in how the Conduct Rules relate to their roles.

The Certification Regime does not apply to a sole trader as an individual, but may apply to their employees. So, the Certification Regime does not apply to a sole trader with no employees.

Most sole traders will not need to conduct a fit and proper assessment on themselves. This is because neither the governing SMFs nor the Certification Regime apply to a sole trader themselves, though these functions can apply to their employees.

Sole traders don’t need to get references about themselves from previous employers to perform a Senior Management Function as the sole trader. Firms do not need to request a regulatory reference for a candidate if they were previously a sole trader.

Sole traders do not need to conduct criminal records checks on themselves.

The Conduct Rules do not apply to a sole trader as an individual unless they hold a SMF. The Conduct Rules will apply to employees of sole traders (unless they perform one of the excluded ancillary roles).

Single Director Firms
This all appears very straightforward and sensible – Limited Scope firms have limited requirements, and sole traders have even fewer requirements.

However, while a firm that is a limited company with a single director might appear to be effectively the same as a sole trader, with the only difference being the legal structure under which the business operates, single director firms are not treated in the same way as sole traders for the purposes of SM&CR. 

To start with, a single director firm is NOT considered to be a Limited Scope Firm. It is considered to be a Core Firm and all Core Firm requirements apply, namely Senior Management Functions, Certified Staff and Conduct Rules.

This means that a single director, who we assume would be the adviser in the firm, must be certified each year as ‘fit and proper’ for any applicable SMF role(s) and their certified role as adviser. That raises the question of who makes that assessment. 

Daft as it seems for an individual to effectively mark their own homework, self-certification will be the only option if there is no one else in the firm of sufficient seniority and capability to do it credibly. The individual should reflect on anything that they need to do to maintain their competence, ensure that they do it and certify themselves. Guidance on fit and proper assessments can be found in the FIT sourcebook.

It is theoretically possible that such a Director does not meet the FSMA definition of an employee. In that case, the individual would be outside the certification regime with no need formally to self-certify but the firm would still have to keep the individual’s competence under review. If the Director had staff falling under certification for example, then they would need to assess their capability and certify that they are fit and proper on an annual basis.

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

For information. ATEB has created a suite of tools to help firms implement SM&CR, including Conduct Rules training.

Action Required By You

  • For information;
  • Contact your usual ATEB Consultant for further assistance with SM&CR or contact ATEB directly.
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About the Author

Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

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