Employee T&C -Does it satisfy SMCR requirements?


Does the current market default methodology of employee T&C truly satisfy the changes required by the SMCR?

Whilst the SMCR has applied to most solo-regulated firms since December 2019 – with many firms asserting that they are taking the necessary steps to embed it – can questions be raised about the default methodology of T&C delivery and whether it truly satisfies the regime change and promotes evidenced employee adoption and in-role improvement?

Most firms in the sector would agree that culture change is key to embedding the SMCR. In this respect, firms and Senior Managers are not only focused on the requisite policies and procedures required, but they also want to ensure that the culture of their firm is consistent with the principles and conduct expectations on which the regime is based.

Consequently, with the SMCR deadline upon us, many firms have noted that the implementation of the regime has been a resource-intensive and difficult process due to the changes to HR processes and the requirements surrounding record keeping, in-role competency and compliance evidencing, regulatory notifications, and continual supervising of adherence to the regime.

a cross-section of risk and compliance professionals and found that 40% stated that they had not changed their approach to T&C throughout the Covid-19 pandemic

Firms are consistently looking for ways to ‘set the tone’ of positive culture change from the top down to help ensure that all staff adopt it. However, it is difficult to measure something as subjective as good culture. So, in this respect, firms need to find a way to make the intangible tangible and – crucially – evidential.

After all, adopting new culture is fundamentally asking your employees to change their in-role behaviour. This is particularly tough when a cultural shift requires an overhaul in how your firm does business. In this respect, does default T&C delivery really help firms to not only evidence individual compliance and conduct knowledge – and reward or correct as required – but truly provide firms with an objective insight to how effective their T&C delivery really is and supports their approach to SMCR?

The culmination of a recent three-year study by artificial intelligence T&C platform provider Elephants Don’t Forget found that the average level of tenured employee competency is just 54%. The study, which analysed over 72 million individual employee interactions from some of the world’s best-known brands – many of whom work within the financial services market – indicates that most employees only know half of what they need to perform their roles competently and compliantly. This study may give cause for concern for some firms as it was compiled to help provide worldwide organisations with an average sentiment level of baseline employee competency in a pre-pandemic context.

Now, a year in to Covid-19, most firms have not been able to provide vital peer-to-peer learning (which makes up circa 50% of the average employee learning mix) due to remote working. The removal of office socialisation will undoubtedly have had a detrimental impact on some new recruits and, over time, tenured employees. There is a danger that employees will be less competent as a result, but that they are also far less likely to operate within the documented and trained processes, potentially leading to falling compliance standards, misconduct issues, and ultimately, reduced levels of consumer satisfaction and instances of market harm.

If one of the key objectives of the SMCR is to encourage all firms to foster and maintain a culture of greater individual accountability through ongoing employee training and development, do some firms need to reassess how effective their approach to T&C is to effectively encourage their employees to adopt, retain, and apply in-role knowledge to execute their roles better?

To further strengthen the case for this, in a recent February 2021 T&C webinar ­– hosted by Elephants Don’t Forget in conjunction with ClearStep Consulting – the organisation polled a cross-section of risk and compliance professionals and found that 40% stated that they had not changed their approach to T&C throughout the Covid-19 pandemic.

In a secondary poll, responses from the participants established that 66% of firms were ‘not confident at all’, ‘slightly confident’ or only ‘somewhat confident’ that their Senior Managers could demonstrate a consistent approach and application to T&C, with just 10% of participants stating that they were ‘completely confident’.

Ranging from recruitment to record keeping, the top three primary issues for compliance and risk practitioners were collectively recorded as: ‘Attaining Competence’ (Induction, training timelines, how will employees attain competence and what happens if they do not), ‘Maintaining Competence’ (CPD, ongoing assessment, absence, and failure to maintain wider market, policy, process, and consumer considerations), and ‘Supervision’ (evidence-based assessment of competence and compliance adherence).

The results of the study and subsequent polls may pose a contentious argument that the deployment of default employee T&C methodology of e-learning, self-election, and self-certification, does not work as effectively as some firms may think, and that this should raise important questions for them in relation to implementing the ongoing cultural assessment framework required by the SMCR.

It is also of recent interest to note that the regulator seems to be taking the issue of addressing competency gaps more seriously too. Following the release of the Financial Conduct Authority’s (FCA) FG21/1 Guidance for firms on the fair treatment of vulnerable customers last month, the regulator reiterated the need for action, change, and continual progress in driving improvements throughout all firms operating within the sector when dealing with vulnerable customers.

The regulator asserts that this is not a ‘one-off supervisory exercise’ 1* and that it will be integrated into their supervision and culture assessment. Emphasising that ‘firms need to ensure they are able to demonstrate how their culture and processes result in the fair treatment of all customers, including those who are vulnerable’2*

They also highlight the importance for firms to ‘carry out proactive data analysis to identify where vulnerable customers are more likely to suffer harm when things have gone wrong or where there are patches of poor staff knowledge and performance3*’.

With the regulator highlighting that competence assessments should be evidenced as being objective in terms of the SMCR and, subsequently, that more proactive data analysis is needed to identify poor staff knowledge and performance in relation to consumers, this illustrates that the regulator is stressing the need for firms to address the issue, as there are now more routes to potentially cause consumer harm which ultimately lead back to how capable or incapable every member of a firms’ workforce is.

Firms that have not made any changes to their governance or processes and cannot evidence or monitor that employees are successfully applying what they need them could well be at greater risk of not fulfilling their expectations.

1*FG21/1 Guidance for firms on the fair treatment of vulnerable customers: 1.29
2*FG21/1 Guidance for firms on the fair treatment of vulnerable customers: 5.4
3*FG21/1 Guidance for firms on the fair treatment of vulnerable customers: 5.7

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About Author

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Adrian Harvey is CEO at Elephants Don't Forget. Elephants Don’t Forget are world leaders in the use of Artificial Intelligence to augment how each employee learns, retains and evidences in-role knowledge and competency. We support employee competency and compliance training of some the world’s most recognised brands including Microsoft, Vodafone, Experian, Allianz, Old Mutual, Aviva, Eon and Volvo.

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