What the FCA expects from heads of compliance and MLRO applicants

What has happened?

In January 2022, the FCA issued guidance, based on its experience of Senior Manager applications, intended to help firms decide whether an individual candidate for an SMF 16 (compliance oversight) or SMF17 (MLRO) Senior Manager function is suitable.

What does the guidance explain?

The FCA explains in the guidance that most successful applicants have:

• Already completed relevant training courses before applying for FCA approval – the FCA explains that it is less likely to accept individuals who intend to complete the necessary courses after approval,
• Attended training courses tailored or relevant to the business of the firm they propose to work for,
• Attended recent and up-to-date training providing relevant knowledge of current regulatory rules and expectations. Where training happened several years ago, the FCA emphasises that it may ask whether the candidate has supplemented their training with recent continuous professional development courses, and
• Attended training courses with sufficient length and depth to gain knowledge to carry out the role – the FCA takes the view that very short ‘introductory’ training courses, alone, do not provide sufficient coverage or depth to be useful for a head of compliance or MLRO, even in the smallest firms.

The FCA does not endorse or recommend any courses or training providers or prescribe the form training should take. However, it explains that it has found that courses involving an examination or assessment are better in demonstrating that an individual has gained relevant knowledge.

Experience

The FCA notes that:

• Individual applicants do not need to have held head of compliance and MLRO positions previously to be successful and it emphasises that successful applicants may have held more junior compliance roles in the past, such as a compliance manager or deputy MLRO,
• Previously holding the same or similar approved positions is a good demonstration that someone may be suitable for these roles, but it does not mean that an applicant will be automatically approved,
• Successful applicants for heads of compliance and MLROs have a range of backgrounds and experience, including in compliance and legal teams, or as lawyers, accountants or consultants. The experience of an applicant who has only previously worked in a front-line role (and in the absence of other training or experience) is often insufficient to demonstrate that they have the necessary skills and knowledge to establish and operate a compliance function, and
• In some smaller firms, it may be appropriate and proportionate for the owner and/or chief executive to hold these functions. However, the FCA expects those individuals to have relevant training and experience to ensure their business will comply with the relevant rules and regulations.

Support from third parties

The FCA recognises that applicant firms will sometimes have support from external advisers to help with their FCA approval or the running of their compliance function. It comments that this is not a necessary requirement but may be a helpful addition to the firm’s in-house arrangements, and it goes on to emphasise that applicant firms have tended not to be successful where the external support services proposed represent the firm’s only compliance resource.

Having third-party support is unlikely to reduce a competence concern regarding an applicant firm’s head of compliance or MLRO candidate. Even with external support, the individual accountable for the compliance and MLRO function should have sufficient knowledge and experience to make compliance decisions for the business, know when to seek advice and know how to implement the advice received.

Capacity

Many firms will have a full-time person responsible for their compliance and MLRO functions, while some smaller firms may consider proposing an individual who carries out the role on a part-time basis. The FCA has accepted proposals of this kind in some circumstances, but it notes that the time commitment to the role must be proportionate and sufficient and that applicants who intend to fulfil the role for only a few hours per week have tended to be unsuccessful.

If the proposed head of compliance or MLRO has another role within the firm or externally, the FCA emphasises that it will want to understand any conflicts of interest. Successful applicants tend to be independent from the client-facing side of the business, given a compliance function’s responsibilities to oversee that client-facing business.

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, and successful applicants tend to be those working from the firm’s principal place of business in the UK.

The FCA points out that heads of compliance and MLROs are usually senior leaders within their firms, and are often directors. Individual applicants who are not senior leaders, such as external compliance consultants, are often unsuccessful in their application since these individuals, while potentially experienced and knowledgeable, may not have the incentives or authority required to be effective in these roles.

The FCA explains that it may request an interview to test that candidates have sufficient experience or training and will consider their response to the questions asked during the application process, where that helps the FCA to assess their competence and capability.

How can we help you with FCA approval arrangements?

If you’d like to know more about how we can help you with your SMF 16 and 17 recruitment, training or FCA approval arrangements, or with any other regulatory compliance issues, our specialist team is here to help.

Our support package for firms includes;

• Compliance and financial crime training, including our online Knowledge Centre modules,
• Assistance with assessing individuals’ competence,
• Assistance with completing FCA SM&CR application forms,
• Assistance with completing the fit and proper assessment,
• Implementation of compliance monitoring frameworks, and
• Implementation of AML frameworks

Contact us today on 0207 436 0630 – or email info@thistleinitiatives.co.uk.