Individual Accountability – Extending the Senior Managers and Certification Regime to all FCA Firms

0

My reaction to the ‘Accountability 2’ Consultation Paper (CP17/25) is one of initial relief that it has finally been published and some subsequent frustration that it still leaves some significant gaps.

I have not, as yet, looked closely at the Insurance paper (CP17/26) or the details relevant to EEA and non-EEA firms. Undoubtedly there is more that is deserving of comment which will be highlighted in following articles. I have had a brief look at the linked Cost Benefit Analysis document, mostly because I expect that few people will.

I have deliberately not drafted a summary of the proposals, TC-News have already documented a good general assessment of what’ the CP contains (see the link here if you have missed it – https://www.t-cnews.com/certification-regime-2017/extending-senior-managers-certification-regime/). Instead this article highlights some initial areas of consideration and focus for people trying to get up to speed with the details and the implications for their firms.

Clear and Concise but beware a few errors
The structure of information presented within the main body of the paper is clear and much better than many previous consultations, but beware that there are a few errors and omissions, when compared to the draft handbook text. For example .Table 4: Certification Functions’ in section 5.8, lists 8 x Significant Harm Functions (SHF), However, in the draft handbook text in Appendix 1, in SYSC 27.6.3, it lists 9 x SHF, which is consistent with the Accountability 1 list currently in force for the banking regime. The point is that, the CP main text is mostly a useful and clear description of the requirements of the new regime but that people reading it should also check key details in the draft rules, if for example you are drafting briefing papers for colleagues.

There also remain differences for Banking and Insurance firms, so we potentially have five different ‘flavours’ of SMCR to contend with!

 Proportionality Wins!
Prior to publication, FCA consistently talked about the SMCR extension being just that – the new regime already existed and would be rolled out to wider firms. While this is broadly consistent with the content of the CP, they have introduced significant differences for the vast majority of the new firms it will apply to.

The CP sets out the 3 primary tiers of the regime, ‘Limited Scope’, ‘Core’ and  ‘Enhanced’ and defines which elements apply to each. There also remain differences for Banking and Insurance firms, so we potentially have five different ‘flavours’ of SMCR to contend with!

One area of potential complexity is how these tiers will apply to ‘Groups’. In theory, the SMCR applies at the legal entity level, i.e. separately to each regulated legal entity, regardless of how the Group is managed. For a new (not banking or insurance) firm, and certainly any collection of firms, operating within a Group structure, this is a good place to start your thinking. It seems a little odd if within a Group there are firms subject to Enhanced and separately subject to Core and potentially Banking or Insurance regimes, with the different ‘flavours’ applying to the same senior managers. This was an area of a lot of debate when Accountability 1 was implemented amongst Banks and Insurers and will attract a lot of attention this time as well.

Consider the Costs!
It is easy to be critical of the details when a new consultation is published and even to challenge the validity of the approach to deliver the intended outcomes. I think that this CP is a good attempt at replacing Approved Persons with something which should deliver better results and general improvements across the industry. However, the accompanying Cost Benefit Analysis is not a good attempt at all!

The method adopted for the CBA has some obvious flaws and the results are inaccurate and not helpful. They seem to have sent a questionnaire to about 2000 firms and received responses from 227. They then reviewed the results and discounted a material number of the cost estimates as ‘unlikely!’

Following their revisions, they conclude that the average ‘one off’ cost for a Core firm to implement the new regime is approx. £14000, which is about 20% less than the ‘reported’ estimate calculated from the survey results from firms. The estimate used in the CBA for ongoing costs of complying with SMCR for Core firms is £5500, more than 60% less than reported!

Critically, they do not seem to have interviewed Banking firms at all to capture details of the actual costs they have experienced. Obviously, the CBA is to some extent less relevant anyway, but anyone who really considers the ‘ongoing’ monitoring and operational implications of Certification, annual FIT assessments, Duty of Responsibility, the Senior Manager Regime, Conduct Rules, Training needs etc. even in a relatively small Core firm, would recognise this figure as extremely unrealistic!

If anyone wants to use the CBA detail to help to ‘guess-timate’ potential programme costs, please be very careful. One may approach that might help is to consider that these are heavily estimated figures based on an ‘average’ Core firm. From other figures in the CBA you can calculate that the ‘average’ Core firm employs about 22 people in total, only some of whom will be subject to SMR, Cert and Conduct Rules.

Based on my experience of working with Banking firms, these cost estimates are grossly understated but if your firm employees 100 staff in total, even using the FCA’s CBA figures, your annual costs could be £25,000.

One interesting extra detail in the CBA though is the estimate of numbers of firms subject to each tier of the regime:

  • Limited Scope: 32,800
  • Core:13,720
  • Enhanced:350 (this number is in the main CP)

Spot the Difference and Mind the Gap
Finally, although most elements of the new regime are similar in the detail, to how they were implemented under Accountability 1, the way that some are described has significantly changed. This, coupled with the deliberate separation of key elements between Core and Enhanced Firms suggests that going forward the regulator will be focusing more intensively on some areas.

For example, for Enhanced Firms, the way that .Overall Responsibility, is now described is materially different to how it was positioned in Accountability 1. This was a complex area for many Banks, which was highlighted in FCA Feedback Statement FS16/6 and reinforced in PRA’s updated Supervisory Statement SS28/15. Firms with this obligation will now need to give some quality thought to what it means for them.

For Core firms, although the draft rules are proportionate and have removed a number of key elements from their obligations, these exclusions will not entirely take away the need to consider them. For example:

  • It will remain good practise for all Senior Managers to consider Handover arrangements even if the Handover obligations under the rules don’t apply.
  • Allocating Functions and Responsibilities and managing Statements of Responsibility for Senior Managers will require some of the diligence and record keeping and oversight required for maintaining a Responsibility Map.
  • The Duty of Responsibility and the obligations for Statements mean that in practice many of the requirements for ‘Overall Responsibility’ will be incumbent on all Firms anyway – few would argue that it will acceptable for important regulated activities within the Firm not to be clearly accountable to a specific senior manager

Missing in Action
It is disappointing that we are missing some key elements of the puzzle. Two obvious areas are the Transitional Arrangements, including any guidance on potential implementation timeline, and the treatment of Appointed Representatives (ARs).

The CP states that FCA will publish a subsequent Consultation Paper to cover Transitional Arrangements, which will include grandfathering, forms, templates and implementation timescales. There will also be a further CP to consider ARs and how SMCR will apply to them and their principles. Given the number of firms and groups that this will be relevant to, how soon this is published is pretty critical. Many firms will find it difficult to respond to this CP by November without some indication of where this is going.

This CP gives no indication of potential dates for these additional consultations.

Also in Section 4.25, they are promising to review the published guidance on Duty of Responsibility, recently published in PS17/9. This will have implications for all Firms because it will directly link to the definitions of Reasonable Steps. This was an area of much debate under Accountability 1. Hopefully the proposed review will seek to clarify and simplify the requirements, particularly for Core firms but the intended outcome is not specific.

Obviously we are being subject to the process of .complex changing regulation’ and it takes time and requires careful consideration but some guidance, even heavily caveated, would help.

 In Conclusion
Even if you can now identify yourself as a ‘Core firm’, don’t underestimate the implications and impact that replacing APER with SMCR will have on your business.

Although we are still waiting for the ‘transitional arrangements’ and details of the timetable it is clear from this CP that your Exec Teams and Senior Managers need to start to mobilise and should expect to spend a good proportion of their time considering this new regime.

Finally, in many of the Accountability 1 firms, Compliance departments held on to the details of the firm’s response to the initiative for many months, pending the resolution of outstanding issues and publication of final rules etc. When the project began in earnest, they most often reached for HR resources to consider Certification. Many of the new firms the extended regime will apply to already have Training and Competence teams, who already do much that is similar to CERT. You could definitely get a leg up by starting there!

Share.

About Author

Carl Redfern is the Compliance Director and co-founder of Redland Business Solutions, the market leader in specialist GRC Solutions for the Financial Services industry, for the past 15 years I have spent my time: • Working with Industry Forums, Professional Bodies and Regulators to help to assess the impact and define the requirements of developing regulation. • Designing solutions to support key strategic functions within Compliance, T&C, Conduct Risk, Governance and Operations. • Helping businesses to develop the business case for people, culture and conduct initiatives. Most recently, I have been extensively involved in the development of the SM&CR regimes, working with industry bodies, both regulators and many firms, assessing the implications of the rules and designing specialist solutions to enable efficient and effective implementation. Redland have been voted the Best Solutions Provider – Senior Managers Regime with our specially designed technology solution, Insight SMR, to help firms comply with SM&CR and holistically integrate Certification with wider Culture and Conduct programmes.

Leave A Reply