SMCR and Individual Accountability

 

 

Author

Patrick Rice

Analyst 2 

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Published
Monday 27 January 2020
Compliance

Has the implementation of the Senior Managers and Certification Regime (SMCR) improved individual accountability and will it have a lasting impact on the industry?

Introduction

“Banks in the UK have failed in many respects. They have failed taxpayers, retail customers, shareholders. They have failed in their basic function to finance economic growth”.

This was the overarching message delivered in the Report of the Parliamentary Commission on Banking Standards (1), commissioned following the financial crisis of 2008 and published in June 2013. There was a chronic and widespread lack of individual accountability throughout the banking industry: many failings contributing to the financial crisis could not be attributed to individuals – particularly Senior Managers – and therefore largely went unpunished. The FCA has identified the culture of financial institutions as being a major root-cause of conduct failures (2), whilst Martin Wheatley (then Chief Executive of the FCA) stated that the complexity and lack of clarity in decision-making processes meant Senior Managers were seeking protection through a “Murder on the Orient Express”-type defence: “It wasn’t me, it could have been anybody”.

By 2015, Reuters reported that, over the previous 15 years, misconduct had cost UK banks £53 billion and the world’s top banks £200 billion (3). It was evident to all that there was a need for industry-wide change, and a “Culture of Accountability” was essential to facilitate this shift in firms’ cultures.

The principle of accountability provides rationale for conduct for responsibilities and authorities granted and, by means of a strengthened accountability regime, will support a change in culture in firms at all levels to encourage clear identification of responsibilities to individuals. (4)

Senior Managers and Certification Regime (SMCR)

Figure 1 - Source: https://www.b-compliant.co.uk/compliance/smcr/

In response to the financial crisis, Parliament set up the Parliamentary Commission on Banking Standards (PCBS). Following the publication of their final report in June 2013, the PCBS recommended the implementation of a new accountability framework (4). This new accountability regime was the Senior Managers and Certification Regime (SMCR).

SMCR is Parliament’s improvement upon the Approved Persons Regime (APR), concentrated around Senior Managers and their individual responsibilities. It was initially implemented in March 2016 for deposit takers and large investment firms but, in May 2016, Parliament decided to extend SMCR to all FSMA authorised firms, effective 9th December 2019. (6)

 

SMCR consists of the following 3 pillars (5):

  1. The Senior Managers Regime: requires Senior Managers who perform Senior Management Functions (SMFs) to be approved by the FCA, and responsibilities are clearly mapped out.

  2. The Certification Regime: applies to employees who are not Senior Managers but who could cause significant harm to the firm or their customers. These employees must be annually recertified.

  3. The Conduct Rules: applies to almost all employees, and firms have the responsibility to educate employees on how the rules apply to their individual roles.

The essence of SMCR is individual accountability and strengthening market integrity, requiring Senior Managers to take reasonable steps in fulfilling their responsibilities (3). In order to achieve this, SMCR had to address the concern that some senior bankers avoided accountability during the financial crisis by claiming ignorance or hiding behind collective decision-making processes. SMCR supports a change in culture at all levels, presenting an opportunity to review and assess the effectiveness of governance structures and distribution of responsibilities, effectively promoting increased control over operational risk and deterring misconduct.

By extending the scope of SMCR, the FCA aims to build upon the regulation’s initial implementation to create consistency across the financial services sector. The extension aims to foster a culture of greater individual accountability by increasing individual responsibility at the most senior levels (7). It was the FCA’s intention to tailor the pre-existing principles to reflect the different risks, impact, and complexity of each individual firm and clearly establish where responsibility lies. Ultimately, they sought to continue the restoration of confidence in the banking industry.

Impact of SMCR

In the three years since SMCR was first implemented, the FCA has recorded that Senior Managers were clear on what accountability meant in respect to their jobs and daily responsibilities, and the mindset of Senior Managers had been positively impacted (8). The introduction of the new regime has been widely viewed as a positive development: there are now Senior Managers in place who accept accountability, whilst showing a deep commitment to maintaining the highest standards of conduct (8). The industry’s serious commitment to change is therefore evident, demonstrated by senior figures embracing the spirit of the new rules.

Not only has the implementation of SMCR required the definitive clarification of the roles and responsibilities of Senior Managers, many firms have described a stronger sense of ‘Tone from the Top’. Consequently, there has been an increased level of detail, clarity, and quality of the conversations on culture and expected behaviours (8).

Senior Managers: Do you think the SMCR has brought about a meaningful change in behaviour in the industry?

Figure 2 - Source: https://www.ukfinance.org.uk/system/files/SMCR%20-%20Evolution%20and%20Reform.pdf

Conclusion

SMCR, like all regulations, has its flaws: the new regime has been criticised for being mired down by too much complexity surrounding a focus on recording decisions. Additionally, the regime will require buy-in by firms’ leadership rather than being seen as merely a compliance tick-box exercise (10). Despite this, there is significant evidence that the industry as a whole has already bought in and is currently being led by individuals who are willing to accept full accountability alongside a deep commitment to maintaining the highest standards of conduct (9).  As the FCA stated, “SMCR is a catalyst for change – an opportunity to establish healthy cultures by encouraging greater individual accountability” (6), a change which, three years after introduction, has been deeply embedded into the way the banking industry now operates and will continue to do so in the future.

References: 

1. https://www.parliament.uk/documents/banking-commission/Banking-final-report-vol-ii.pdf

2. https://www.fca.org.uk/firms/culture-and-governance

3. https://whartonbc.co.uk/insights/the-role-of-smcr-in-changing-culture-in-financial-services/

4. https://www.bankofengland.co.uk/prudential-regulation/key-initiatives/strengthening-accountability

5. https://www.pershing.com/uk/en/news/what-is-big-in-our-world/regulation/smcr

6. https://www.fca.org.uk/firms/senior-managers-certification-regime

7. https://www2.deloitte.com/uk/en/pages/financial-services/articles/senior-managers-certification-regime-extension-the-clock-is-ticking-smcr-  2019-update.html

8. https://www.fca.org.uk/publications/multi-firm-reviews/senior-managers-and-certification-regime-banking-stocktake-report

9. https://www.ukfinance.org.uk/system/files/SMCR%20-%20Evolution%20and%20Reform.pdf

10. https://www.pinsentmasons.com/out-law/news/fca-director-emphasises-role-of-smcr-in-changing-firm-culture

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