Should we fear the arrival of SM&CR?


We’re seeing a range of businesses offering courses and consultancy around the Senior Managers and Certification Regime. My view is that for larger organisations this may well be helpful but for most firms, if they are already reasonably well organised, there shouldn’t be a great deal to change.

With implementation due by 9 December there are still a few months to identify any challenges and adopt some key measures – as usual watch out for the potential unintended consequences that may arise as you go through the implementation process.

  1. Impact of statements of responsibility

Senior managers will have their names placed alongside specific responsibilities. Some people have concerns that this may change the way in which they work, particularly their interactions with those above and below them in the hierarchy. If they adopt a more focused oversight of areas for which they are accountable, there is a risk that those with previously devolved responsibility may find themselves in an environment where they have less autonomy.

Firms should look at what works currently and only bring in closer management or stricter processes where they serve a business purpose. Inappropriate changes and increasing bureaucracy, particularly with experienced staff, can lead to resentment if their scope for decision making is reduced.

One thing to be clear about is that SM&CR doesn’t mandate additional reporting and monitoring mechanisms and certainly shouldn’t lead to an increase in compliance or T&C costs. That is, for firms which are already well-organised!

I think it is helpful to remember that the SM&CR was originally brought in at a specific point in response to the financial crisis and applied to large organisation such as banks and insurance companies. It was felt that in many of these businesses there was a lack of accountability; when something went wrong it was too easy for senior managers to say that it wasn’t their responsibility. Now there will be a document that confirms exactly who is responsible for what.

One thing to be clear about is that SM&CR doesn’t mandate additional reporting and monitoring mechanisms and certainly shouldn’t lead to an increase in compliance or T&C costs. That is, for firms which are already well-organised!

Calm down and carry on as the slogan goes. The senior managers of firms should already have a proportional approach which encourages people to build their knowledge and skills. The required training is to ensure that senior managers have an understanding of the Conduct Rules.

New Conduct Rules

A new two-tier set of conduct rules have been developed:

Tier 1 applies to all employees subject to the conduct rules, and they are as follows.

  • Rule 1: You must act with integrity.
  • Rule 2: You must act with due skill, care and diligence.
  • Rule 3: You must be open and cooperative with the FCA, the PRA and other regulators.
  • Rule 4: You must pay due regard to the interests of customers and treat them fairly.
  • Rule 5: You must observe proper standards of market conduct.
  • Tier 2 applies to senior managers in a senior management function, and they are the following:
  • Rule 1: You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively.
  • Rule 2: You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system.
  • Rule 3: You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively.
  • Rule 4: You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice.

    2. Impact on staff

  • Good firms will already have mechanisms in place to minimise the likelihood of unfair dismissal claims or challenges over the content of references – note more detail has to be provided under SM&CR than just job title and dates. As ever good record keeping is at the heart of this. T&C/compliance personnel should be having a conversation with their colleagues in HR to ensure a joined-up approach.The strapline of my business from its inception has been right people, right systems, right outcomes. SM&CR is built on this idea – clarifying that those people need to be in the right roles. In achieving the right balance firms should consider whether responsibility and accountability are spread across an adequate number of people. Some of my clients illustrate the humour generated by the FCA taking an idea that was built for very large organisations with multiple layers and applying it to one man bands – with a list of specified responsibilities to allocate: who gets to do what??Remember proportionality, look at your own business and what reassurance you need that the firm is being well managed with the interest of clients at its heart. The rest is paperwork – have fun designing the certificate for each person covered by the certification regime.
  • Summary As I have tried to indicate regulated firms will have existing processes and procedures in place that can support SM&CR implementation and compliance. Many are doing what is required already – so use the existing infrastructure with a few tweaks rather than engage in massive disruption.

    3. Impact on the firm’s risk appetite

  • This takes us back to the training: how does the firm’s overall view get reflected in the style and preferences of each manager? Given personal accountabilities, senior managers are closer to the business activities they are responsible for and are likely to be best placed to identify the key risks to them. The larger the business, the greater the effort to make sure senior managers and certified individuals are able to communicate in a way that builds and is aligned to the overall risk appetite framework.
  • I accept that there may be concerns here: do your employment contracts cover the issue of someone failing to maintain competence or meet the fitness and propriety requirements? Again, good firms have invested a lot of resource into building the quality of the team and shouldn’t have major issues in this area. Does the outcome of a breach of the conduct rules need to be explained further – or documented in an amended employment contract?
  • Given that it takes seconds to read these I imagine that this training will take the form of a discussion rather than death by ‘powerpoint’. For example: What does integrity look like in our business? Perhaps a more challenging debate will be had around ‘reasonable steps’ in three of the four rules for senior managers.

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Compliance Cubed Financial services is constantly changing - my passion is helping firms function effectively and in compliance with FCA regulation

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