Many firms ask us if our consultants can stand in as SMF16 and SMF17 for their fledgling business. The answer is not a straightforward ‘Yes’ or ‘No’.
The Financial Conduct Authority (FCA) have issued some guidance (Jan 2022) regarding the competency and capability of the Compliance Officer (SMF16) and Money Laundering Reporting Officer (MLRO/SMF17).
The following Q&A questions should help, but if you have any queries:
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- What does my financial services firm have to have as an SMF16 or SMF17?
Authorised and registered firms should have heads of compliance and money laundering reporting officers (MLROs) who are suitably competent and capable of effectively performing the roles. Firms should carefully consider how individuals can demonstrate this ahead of seeking regulatory approval.
Heads of compliance and MLROs are important roles within financial services firms and many firms are required to have an FCA-approved senior management function (SMF) holder eg, SMF16 and SMF17. They will need necessary skills and knowledge, from training and experience, to be effective. The level of those skills and knowledge should be in line with the size of the firm and its risk of harm.
- How do I know if my preferred applicant is likely to be accepted?
We need to answer questions with questions here.
- Have they already completed relevant training courses?
- Have these courses been specific to the firm type?
- Do they have evidence of continuous professional development (CPD) since their original or ongoing training?
- What roles count?
Previously holding the same or similar approved positions is a good demonstration that someone may be suitable for these roles but it is not essential. Successful applicants may have held more junior compliance roles in the past, such as compliance manager or deputy MLRO.
Successful applications for heads of compliance and MLROs have a range of backgrounds and experience, including in compliance and legal teams, lawyers, accountants, and consultants.
Some smaller firms may consider proposing an individual who carries out the role on a part-time basis and the FCA have accepted proposals in some circumstances. However, the time commitment to the role must be proportionate and sufficient.
The person placed in the role must be able to demonstrate that they have the necessary skills and knowledge to establish and operate a compliance function.
If the proposed head of compliance or MLRO has another role within the firm or externally, the FCA will want to understand any conflicts of interest.
- Do I need to use 3rd parties?
This is not a necessary requirement but may be a helpful addition to the firm’s own in-house arrangements. Applicant firms have tended not to be successful where the external support services proposed is the firm’s only compliance resource.
The external resource has to demonstrate that they have the necessary skills and knowledge to establish and operate a compliance function.
Heads of compliance and MLROs are usually senior leaders within the business and are often company directors. Unfortunately, the FCA’s view is that Individual applicants who are not senior leaders within the business, such as external compliance consultants, are often unsuccessful in their application.
These individuals, while potentially experienced and knowledgeable, may not have the incentives or authority required to be effective in these roles.
- What training does the FCA require our people to do?
The FCA will not and do not endorse or recommend any courses or training providers, or prescribe the form training should take, whether that’s classroom-based courses, e-learning or course books/materials. However, they state that they have found courses with an examination or assessment are better in demonstrating that an individual has gained relevant knowledge.
Attended recent and up-to-date training to provide relevant knowledge of the current regulatory rules and expectations
- Do my SMFs need to have already been in a similar role?
Individual applicants do not need to have held head of compliance and MLRO positions before to be successful. Successful applicants may have held more junior compliance roles in the past, such as compliance manager or deputy MLRO, and …
On the other hand, previously holding the same or similar approved positions is a good demonstration that someone may be suitable for these roles but does not mean an applicant will be automatically approved.
- What sort of background do they need?
there is no specific proifile of previous experience, however, common sense should prevail. If you have an applicant who has only previously worked in a front-line role (and in the absence of other training or experience), this would prove insufficient to demonstrate that they have the necessary skills and knowledge to establish and operate a compliance function.
- What if there are only two or three of us in the business?
In some smaller firms, it may be appropriate and proportionate for the owner and/or chief executive to hold SMF16 & SMF17 functions themselves. However, we still expect those individuals to have relevant training and experience to ensure their business will comply with the relevant rules and regulations for their firm.
- What about in larger firms?
Heads of compliance and MLROs are usually senior leaders within the business and are often company directors. Individual applicants who are not senior leaders within the business, such as external compliance consultants, are often unsuccessful in their application. These individuals, while potentially experienced and knowledgeable, may not have the incentives or authority required to be effective in these roles.
- Who determines the ‘right’ level of experience or training?
If an applicant believes they have sufficient experience or training, the FCA may still request an interview to test this. They will also consider the applicant’s response to the questions asked during the application process, where it helps us assess competence and capability.
The physical location of the head of compliance and/or MLRO is a relevant factor when deciding if the applicant will be effective in their role. Successful applicants tend to be those working from the firm’s principal place of business in the UK.
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