Compliance Blog

The Senior Managers Regime one year on

Compliance and regulations

This week (7 March) marked a year since the Senior Managers and Certification Regime (SMCR) came into force. You can read more about the new rules and what they mean for firms here.

In a nutshell, the regime is a number of policy changes introduced by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA), aimed at increasing individual accountability in the banking sector.

It aims to put individual responsibility at the heart of firms’ conduct, making managers and senior staff more accountable for the ethical stance and governance of their firm.

In a speech in January this year, the FCA’s Director of Enforcement and Market Oversight Mark Steward described the regime as embracing ‘a very simple proposition – a senior manager ought to be responsible for what happens on his or her watch’ and said that ‘The challenge of responsibility – and suppressing the instinct to evade responsibility – is a cultural one.’

In tandem with the banking rules, it introduced new regulations for senior managers in insurers, which also came into effect on 7 March 2016.

Further rules apply from 7 March 2017

From 7 March 2017, new rules under the SMCR come into force.

These relate to regulatory references for senior managers and staff within the Certification Regime, and apply to staff in roles that can cause ‘significant harm’ to either the firm or its customers. This includes, for example, investment and mortgage advisers.

By 7 March, firms also needed to have issued certificates for staff in the Certification Regime.

And the Conduct Rules, which have applied to Senior Managers and staff in the Certification Regime since 7 March 2016, also apply to all other staff (apart from those undertaking purely ancillary functions, such as security staff) from 7 March 2017.

Has the regime been successful?

Writing on the anniversary of the rules, the Financial Conduct Authority said that:

‘The changes have been put in place to ensure that individual responsibility is at the heart of how these firms conduct themselves. One year on, the FCA has seen firms taking their responsibilities more seriously. But we recognise culture change takes time and there is still more to do’.

FCA research since the regime’s introduction has shown that:

  • There is still evidence of overlapping or unclear allocation of responsibilities
  • At some firms, responsibility appears to be shared among some staff at different levels of management, obscuring who is genuinely responsible
  • But there has also been strong progress in relation to firms adopting a culture of individual accountability

So – firms are on the right lines, but it’s an ongoing journey.

What does the industry think?

According to a survey of 183 senior finance executives by corporate finance adviser Duff & Phelps, 55% believe that the SMCR has positively affected the banking and alternative investment communities.

Risk practitioners say the introduction of shared responsibility has been the most beneficial impact.

The report’s author, Monique Melis, responsible for Regulatory Consulting at Duff and Phelps, says that “The threat of personal sanctions is ensuring compliance functions put their duties before other considerations….cultural change in financial services is finally starting to happen.”

Despite the generally positive feedback, the SMCR has seen pushback.

In January, members of the industry called for it to be dropped for smaller firms, citing the disproportionate cost and work involved for smaller firms. In response, the FCA claims that the extended regime ‘will be clear, simple and proportionate’. 

What next for the SMCR?

It was extended by The Bank of England and Financial Services Act 2016 to all sectors of the financial services industry, which also allows the regulator to apply all elements of the regime to insurers.

  • In Q2 2017, the Authority will consult with the industry, firms and consumers on its proposals
  • Implementation is expected to begin from 2018

The shift in the regulator’s approach from prescribed rules to an expectation of good governance is something we have looked at before. The need for cultural compliance was the focus of another FCA speech in August last year, while the regulator’s Future Mission has a strong emphasis on in-built ethics, rather than draconian oversight and penalties.

Actions to take

If you are responsible for regulatory compliance in a firm currently covered by the SMCR, or in a smaller one that will be covered from 2018, there are steps you can take to get ahead of the regulations.

Building a culture of compliance, where managers take responsibility and where ‘doing the right thing’ is the default, will stand you in good stead.

If you want tips and suggestions on how to do this, download a copy of our whitepaper, How to embed a compliance culture within your business. It’s free and you can read it here.

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