SMCR. The Takeover.

You may not have heard of this in the flurry of new regulations affecting Governance this year, but SMCR (a new set of regulations first introduced into the banking sector in March 2016) is the up-and-coming regulatory kid on the block.  

The FCA have just launched a consultation paper for the newly widened SMCR.  The new regulations will be coming into force across the entire spectrum of financial services sometime next year. 

The aim of the new SMCR, says the FCA, is “to reduce harm to consumers and strengthen market integrity by making individuals more accountable for their conduct and competence…..encourage a culture of staff at all levels taking personal responsibility for their actions…..make sure firms and staff clearly understand and can demonstrate where responsibility lies.”

To give SMCR its full title, it is The Senior Managers and Certification Regime and it is replacing the current Approved Persons Regime and/or PRA's Senior Insurance Managers Regime. It already applies to banks and building societies but now it’s being introduced more widely, including into insurance, with expansion into all other sectors (including financial advisers) in 2019.  

Once SMCR is implemented, it will bring an extra 47,000 firms within the scope of the regime.  

It has been seen by many as the most significant piece of regulation in Governance terms for a very long time.

So what is SMCR?  In layman’s terms.

In a nutshell, SMCR will beef up senior managers that hold the CF/SMF functions to ensure that they are doing their job correctly.  For example, if they need qualifications, do they have them?  Are they conducting the day to day activities that are on their profile?  If not, why not?  Certification and checks that they are “fit and proper” people will be required.

As you can imagine, these specialists need to have a lot of gravitas in order to challenge and push back to the senior stakeholders of the business, without rubbing people up the wrong way… too much.

There is also the issue of where to place the persons responsible for implementation within a company.  The FCA is keen on proportionality and describes the process of moving staff and roles to ensure the new requirements are adhered to as “conversion”: it does not want the process to be too complicated.

When is the deadline and what do firms need to consider?

The exact date is yet to be announced.  All we know so far is that some firms have a deadline of this year, others in 2019…

According to the FT, and I agree with its analysis, there are four main concerns for businesses at this stage.

The first point is board composition and management structure.  Of course, it’s evident that the size and scale of boards/management structures varies in each company, while the process for considering the application of the SMCR will be the same.

So, firms will need to define who will hold an SMF (senior management function) or CF (control function), and who will be within the certification regime.

As a representative example, an existing CF1 (Director) approved person could map across to become an SMF3 (Executive Director) and be subject to the SMCR. The decision that companies will then have to make is whether a senior management role is appropriately classified as an SMF or whether it is better defined within the certification regime.

To close off the first point, I have actually seen firms re-assess their board and management structures as a result of considering the above.  

From a recruitment perspective, we have seen an increase in people hiring specialists to focus on SMCR after the companies have had a reshuffle, in order to meet governance and regulatory expectations.

I hope you are still with me.  It is very complicated – the guidance issued so far from the FCA covering one type of business to be subject to the new regulation runs to 75 pages!

Secondly, there are statements of responsibility.  Integrity, competence, and being respectful of the relevant regulatory requirements all fall under the responsibility of the senior managers, and they are expected to adhere to high standards of conduct.

Statements are important.  Why?  Because they hold accountability in respect of the matters in them.  They effectively create a presumption of guilt in the event of criticism or failure in an area they are responsible for under their statement. This can only be overcome when an individual can demonstrate that they have followed the correct process in the conduct of their role, in effect have done their best, to meet the responsibilities that have been written in the statement. 

This means that senior managers need to work collaboratively to agree to the content of these statements, ensure that the content is accurate, and understand exactly what their precise area of responsibility is.  Seems fairly simple so far?  Good.  

These statements (as you can imagine) are the subject of some negotiation between the firm and the senior managers. This can result in legal advice often being sought because the wording of statements must be clear and unambiguous, as well as covering and complying with FCA guidance.

Thirdly, there are contractual requirements.   What a company should do to comply is not actually spelt out by the FCA in its current guidance, but it looks there is a good argument in the interests of good practice to make changes to the existing contractual arrangements for all employees at regulated firms. The Conduct regime, which the FCA will also be implementing and monitoring, requires all staff to adhere to all good conduct provision in the FCA handbook.  It should therefore be included in employment contracts and, proportionally, featured in training, and be monitored for understanding and engagement.  

Fourthly, we have the modification of internal processes and procedures.  In order to adhere to the SMCR regime, firms will need to review a range of internal policies and procedures.  It will involve an often major overhaul of structures and divisions of responsibilities.

There will need to be many different processes put into place, including the defining and maintenance of statements, processes for reviewing and assessing adherence by staff who are subject to statements and initial and refresher training and assessments of that training to demonstrate commitment to action on the new regs and not mere lip service.

To ensure that the new requirements are appropriately reflected, it is also advised that staff codes of conduct should be reassessed.  

To summarise, the changes that SMCR will require are wide ranging and will impact specifically on senior management (including the board), as well as compliance, legal and HR departments.  

What are the challenges that firms face as the deadlines approach?

Put bluntly, there are a plethora of internal blips and difficulties.  

From speaking to professionals in the market who are faced with these challenges every day, I have noted a few of the most common.

SMCR has detailed and prescriptive rules.  So, as you can imagine, this can be tricky to fit in with a firm’s existing management and governance framework, meaning that, ultimately although you may try to avoid it, a great many policies and procedures have to be rewritten or tweaked considerably.  

What do you do?  You have existing structures mapped out for existing regulations and now you have to ensure that you comply with a much tighter, more micromanaged system.  And as a senior manager with a statement, it is your head on the block.  In the event of a systems failure, you will have to prove you did your best to prevent such a failure occurring.  People, in whatever senior manager role they hold, will want to have spelt out where their responsibility for a particular process begins and ends.

Then there are international firms with a global reach.  Above all, senior management at global level could be reluctant to be involved in any depth with the risks and requirements of a regime that has UK FCA accountability.  As we all know, for something to be effective in a business, it must be driven from the top.  So, this could mean that global enterprises would consider moving global operations outside a UK regulatory framework – and only see that their UK divisions need to be bound by the strict new regulations.  This could produce some conflicts over systems and structures, and areas of responsibility, for UK based senior staff.  We shall see.

The final major area of concern that I have noted concerns the implications for regulated business as a whole.  Lots of employees are going to be subject to the regulator’s authority and influence for the first time.  This is because the scope and remit of the new regs will be much wider than the current sphere of influence.  In effect, all of us working inside financial services and other regulated businesses, will have to comply.  If we fail to comply, those above us, subject to statements, will be held accountable.  Will this be a source of conflict?  I leave that question for you to stew over.

To conclude, mid to late 2019 may seem like a long way off now but firms could be in a lot of trouble if they don’t give ample time to take steps towards implementation of the new SMCR regime.  It’s a tangled web that will take some focused attention to ensure the right steps are taken to put the right processes in place to comply with the correct FCA requirements for your particular company.  And then there’s the all-important process, the one that is crucial to ensuring on the ground compliance – making sure that all employees understand and sign up to the new processes.  

Preparation really is key.

About the Author:

Keeley Fitzsimmons
Training and Development Manager
Broadgate Search
www.broadgatesearch.com/