Does your culture support SMCR?

0

What would you say if the regulator asked “Does your culture support the Senior Managers and Certification regime? And if the answer is yes could you answer their follow-up question –“What evidence have you got that it does”?

Whether you are already immersed in the regime or are one of the many firms in the extended application of the regime you cannot have failed to miss the direct correlation between SMCR and Culture.

The regulators’ dilemma
Over the years the regulator has come to realise

  • Culture has been a root cause of failure
  • Rules don’t change cultures
  • Fining firms large amounts of money won’t change their culture …….
  • But making individual’s responsible and accountable for their behaviour will change culture because culture is behaviour – “the way we do things round here”.

How many times have you seen in FCA publications, be it the Business Plan, The Conduct Risk Report or a speech or an article made or written by an FCA executive, the word culture?

The regulator can certainly influence the composition of management within a company and has been known to ask for firms to change their entire Boards or run the risk of being closed for business.  

In the FCA’s 2017/18 Business Plan it stated “Our focus on culture and governance in financial services and its impact on individual and firms’ conduct is a priority. We will continue to promote the right cultures, behaviours and effective governance across the industry to deliver appropriate outcomes for consumers, markets and competition”

Culture forms an important part in demonstrating these changes. With the embedding of the   Senior Managers Regime in Banking and the implementation for other regulated firms coming along in 2018 there isn’t a better time to ensure your strategy, governance and underlying culture are aligned.

The FCA wants to see progress on culture, alongside embracing the requirements of the Senior Managers and Certification regime, SMCR. They have made it clear that senior management teams and the individuals within those teams will be held to account for failings in company culture.

The regulator can certainly influence the composition of management within a company and has been known to ask for firms to change their entire Boards or run the risk of being closed for business.  

Six Cultural Drivers
When the FCA looks at a firm’s culture they use the following drivers to make their assessment

  • Leadership
  • Strategy
  • Decision making
  • Controls
  • Recruitment training and competence
  • Reward

Let’s take each of these in turn and give you some examples which you may find useful in helping to assess whether your culture would support the spirit and requirements of the SMCR.

Leadership
A firm are holding their annual Christmas event, business and recognising staff achievement in the day followed by a dinner and party in the evening. During the year the firm had undertaken a number of projects which involved the training of individuals across the group from Conduct Risk and TCF to Financial Crime. The CEO makes a big show of thanking all the people involved in leading the projects and confirms it was absolutely the right thing for the firm to be doing to ensure they treat their customers in the right way.

At the start of the evening a number of employees are sitting in the bar area having a pre-dinner drink. The CEO approaches the bar with a number of his fellow Board members and other Senior Management. The CEO announces “now we’ve finished with all that TCF nonsense who would like a drink?” His colleagues laugh and proceed to give their drink orders. The other employees’ sittings in the bar hear the CEO and take note of the response from the other members of their leadership team.

Strategy
A firm embarks on a strategy to grow their business by 25% over 3 years. It will mean that a number of Senior Management will be away, overseas, from the main office for large periods of time. The day to day oversight activities have been delegated to middle management, a number of who have not been at the firm long, especially those in risk and compliance. It is difficult to communicate with the Senior Management when they are away due to the locations and time zones.

Decision Making
A firm takes the decision to ‘white label’ an investment product from another company. The investment product has been rated high risk by the provider. The Sales line in the firm that is white labelling the product decides to classify the product as medium risk. The Compliance department argues that the product is high risk and should remain so. The Compliance department report to the Sales line and are told to ‘back down, the product is ideal for clients who have retirement funds to invest’.

Controls
A firm monitors the number of investment trades to identify potential ‘churning’. The firm uses this information to write to the clients to ask if they are happy with the advice they received.

Recruitment training and competence
A firm uses eLearning to keep staff up to date and informed on a number of regulatory topics on an annual basis as part of their T & C scheme. The Board including the NEDs refuse to complete the eLearning as they do not see why they should also undertake this training as they believe the level at which they operate does not warrant them doing this. The Head of HR therefore struggles to ensure everyone completes their CPD as per the T & C scheme.

Reward
The new remuneration policy at a firm means that if advisers do not meet their competence standards they have 25% of their bonus deducted. A number of the advisors in the top 10% have pushed back against the policy and have threatened to leave if the criteria remain. The firm drops the requirement from the remuneration policy.

If your firm:

  • Has internal processes and procedures that conflict with doing the right thing for the client
  • Where profit is prioritised over “doing the right thing” and
  • Words and figures differ in the leadership

You may want to question your culture further.

The reputation (and revenues) of your business depends on your approach to culture, and conduct risk and of course, SMCR. Every week we hear of another corporate failure that has eroded the trust in the industry – better business culture has become and will remain a regulatory priority.

Share.

About Author

Business Development Partner Financial Services Training Partnership

Leave A Reply