SMCR – Kickstarting a Culture Change

Author

Adam McQuitty

Analyst II

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Published
Monday 30 July 2018
CSR

One of the results of the recent high-profile banking scandals and the financial crisis in 2008 was a dent in consumer confidence and a disconnect between the consumers and the firms that are supposed to serve them. Following the crisis, The Parliamentary Commission on Banking Standards (PCBS) published a report recommending increased responsibility for senior bankers and encouraging behavioural change through increased individual accountability. This resulted in the creation of the Senior Managers and Certification Regime (SMCR). The regulators replaced the Approved Persons Regime with the SMCR to raise standards of governance, increase individual accountability and help restore confidence in the financial services sector. [1] The SMCR was introduced to banks in March 2016 and is now being extended to all regulated financial services firms with the aim of encouraging ‘a culture of employees at all levels taking personal responsibility for their actions.’ There are 3 parts to the SMCR that will be applied to regulated firms:

  • Senior Managers Regime

  • Certification Regime

  • Conduct Rules

 

What is The Senior Managers Regime?

The Senior Managers Regime was introduced to create direct accountability to the Regulators for individuals making important decisions about a firm’s affairs. [2]

 

The PRA and FCA define a set of Prescribed Responsibilities and allow for a set of overall responsibilities which must be allocated to Senior Managers performing a Senior Management Function (SMF). Senior Managers must be approved by the regulator before being appointed and re-assessed once a year to ensure they are still suitable for their role. Within a firm Senior Managers will usually include the board members, executive team members, heads of key business areas, Compliance Officer and Money Laundering Reporting Officer (MLRO).

Senior Managers will be included in a Responsibilities map which is a summary of the Statement of Responsibility for each manager. A Statement of Responsibility will set out an individual manager’s prescribed responsibilities to allow the FCA to track who is personally accountable during any investigations into regulatory breaches.

Under the new regime each manager will have a duty of responsibility to prevent a regulatory breach from occurring, and so will be required to take the steps a reasonable person in this position would take to achieve this. Another significant change is the shift from it being the individuals’ responsibility to prove they have taken all reasonable steps to prevent a breach to the burden now being on the FCA to prove the individuals have not taken reasonable steps. [3]

The Certification Regime

The Certification Regime applies to all employees that are not SMF holders, but who pose a risk of significant harm to the firm or any of its customers and are known as ‘certified persons’. Certified persons must be identified by a firm and certified as being fit and proper to perform their roles, with a reassessment occurring every year.

Conduct Rules

The conduct rules take into account a far larger number of employees than the previous Approved Persons Regime and are split into 2 groups; Tier 1 Rules and Tier 2 Rules.

Tier 1 consists of 5 rules that apply to all employees at a firm other than the administrative employees and are as follows:

•                You must act with integrity,

•                You must act with due skill, care and diligence,

•                You must be open and co-operative with the FCA, PRA and other regulators,

•                (FCA only): You must pay due regard to customers and treat them fairly,

•                (FCA only): You must observe proper standards of market conduct.

Only Senior Managers will be subject to both Tier 1 and Tier 2 rules. The 4 Tier 2 rules are:

• You must take reasonable steps to ensure that the business of the firm for which you are   responsible is controlled effectively,

• 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,

• 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,

• You must disclose appropriately any information of which the FCA or PRA would reasonably           expect notice. [4]

Firms will be obliged to provide training to ensure all employees understand the rules applicable to their particular roles. The firm will also have a responsibility to notify the FCA if formal disciplinary action relating to a breach of the conduct rules has been taken against any employee to allow the FCA to decide whether it should also take action against the individual.

Implementation of SMCR

Implementation of the SMCR will vary depending on the firm as there is such a broad spectrum of governance structures within the industry. ‘Enhanced Regime’ firms will have to allocate significantly more resources into the application of the regime due to the more complex systems within these firms. On the other hand, ‘limited scope regime’ firms will have fewer requirements to meet under SMCR and should therefore need less resources and not have as many problems implementing the new regime.

The FCA has stated that its desire is to make the transition from the approved persons regime to SMCR as smooth as possible without the need for large amounts of paperwork. [5] However, this may not prove to be the case as firms are going to need to carry out large amounts of new training with employees as well as looking at any improvements that can be made to existing systems to make the processes more accountable and efficient.

The implementation of SMCR into all regulated firms should be an opportunity for these firms to review their governance structures, allocation of responsibilities and assessment processes thoroughly and make improvements accordingly. This increase in personal accountability will lead to a culture change within the industry and undoubtedly benefit the financial industry as a whole.

References

  1. https://www.fca.org.uk/publication/corporate/applying-smr-to-fca.pdf

  2. https://www.pinsentmasons.com/PDF/FinReg/SMR_and_CR_Overview_Flyer.pdf

  3. https://www.ashurst.com/en/news-and-insights/legal-updates/extension-to-smcr-fca-publishes-eagerly-awaited-rules-for-fca-firms/

  4. https://www.professionaladviser.com/professional-adviser/news/3014504/fca-outlines-two-tiers-of-conduct-rules-for-financial-firms

  5. https://www.burges-salmon.com/news-and-insight/legal-updates/senior-managers-and-certification-regime-how-to-prepare-for-the-transition/

 
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