The FCA’s recently published Stocktake Report reviewing the implementation of the Senior Managers and Certification Regime (SM&CR) is a polite criticism of senior managers and their superiors in the banking sector.
The report consisted of interviews with trade associations, Banking Standards Board, FCA and the PRA to understand how SM&CR has been implemented since it was extended to apply all firms authorised under FSMA. Even though the industry has made a ‘concerted effort’ to treat the SM&CR as more than a “tick-box” compliance exercise, managers and firms are still reluctant to use their initiative to fully embed the SM&CR at all levels of practice.
The report analysed areas such as senior manager accountability, conduct rules and overall cultural impact to determine whether firms had followed the stipulations of the SM&CR. Generally, the findings were as follows:
- Better definitions and planning needed
Overall, senior managers had a good understanding of how to improve governance and accountability and were in agreement with the aims of the SM&CR.
Nonetheless, it is easier to have general ideas about how to improve accountability, and firms need more consistency in explaining how they record a breach of conduct and what this breach would look like for their firm. Managers should not be relying on the FCA to give a concrete list of ‘reasonable steps’ that they should take to improve accountability in their businesses. Instead, managers should note the context of their individual firm and adapt the SM&CR accordingly.
- Universal awareness
The sine qua non of the SM&CR is that staff at all levels of the firm are aware of the expected standards of conduct. Again, there is a basic understanding of what this means, but firms have not always tailored the conduct rules to staff’s job roles. Similarly, firms need to be able to justify their values in light of the specified conduct rules in SM&CR and strive to ensure that these values are recognised at a level below senior management.
The SM&CR created two tiers of conduct rules, one applying only to senior managers and another applying to all other employees. Distinguishing between these tiers is relatively simple, but managers have to place equal emphasis on both and spread awareness of conduct rules that apply to all relevant persons.
- Culture is difficult to measure but fundamental
The SM&CR is the cornerstone piece of legislation that has sought to create criteria of expectations for the UK financial sector. A deep-rooted cultural change is at the heart of this, but this is inherently difficult to measure and define. Firms can only align their culture with that of the SM&CR if they are able to properly quantify the challenges that their particular firm is facing. Initially, some firms had felt that the implementation of the regime was marked by a culture of fear, but this has largely subsided due to firms collaborating with regulators and developing an environment of “healthy change”.
Nonetheless, if managers are employing more people to execute the regime, they need to be clear about how this will contribute to a more robust governance environment in the long term. The FCA added that controls and processes are an important part of ensuring good governance, but senior managers have to contextualise this and think more broadly about how to minimise the risk of misconduct.
Despite the optimistic tone of the report, firms should guard against complacency. Since this was the first review done by the FCA, it is likely that future interviews will get harsher and less forgiving. Given the SM&CR’s focus on individual accountability and its wide range of sanctions, including imprisonment, it would be remiss of managers to disregard the FCA’s findings. With the 9th December 2019 deadline for compliance fast approaching, firms should embrace these findings and move beyond the letter of the law.
DRS’s Michael Beaton has developed a leading-edge software tool “Corterum“, both to assist in SM&CR compliance, and to provide evidence of compliance measures. Corterum is currently in late-stage beta testing. If you would like to participate in the Pathfinder group, contact Michael Beaton at firstname.lastname@example.org or 0203 617 6666.Contact Us