There have been many newcomers to the FCA-regulated sector over recent years with the transfer of consumer credit, joining the authorised sectors more seasoned to the vagaries of regulation. Whichever category you belong to, for a firm that has not been through one of the most significant regulatory initiatives of recent years, the Senior Managers and Certification regime (SMCR) can seem a daunting challenge.
The FCA is currently consulting on the implementation of this regime in the remainder of its regulated population and the consultation ends on 3 November. It is highly unlikely that this consultation will result in any significant alteration in the regulator’s direction of travel, and past experience would indicate that, once the detail is settled, the deadlines imposed will be extremely tight.
While, for many firms, having a detailed project plan will be unavoidable, this note is intended to provide some useful pointers for those tasked with this project, which could determine how the regulator will assess the quality of the firm’s implementation.
The approach outlined below articulates the regulator’s thinking, as recently set out in the speech by Jonathan Davidson, Director of Supervision, Retail and Authorisations at the City and Financial Summit.
In that speech, Jonathan set out the wider context: the introduction of the SMCR across the entire regulated sector reinforces the regulator’s commitment to driving higher standards of conduct across all of those involved at every level of the financial services sector.
Culture and individual conduct are considered by the regulator to be one of the root causes of conduct issues in its sector, along with the strategy and business models adopted that may drive the wrong outcomes.
The FCA’s expectations are that, whether in the context of risky business strategies or a weak compliance culture, strengthening and focussing on individual accountability is an important, if not the key, component in the solution.
The speech highlights the four ‘levers’ that the FCA is using to assess how successful (or otherwise) the firm is at managing culture.
Even if your project is not perfectly delivered, if you can demonstrate that you have taken note of the areas that the regulator thinks are important, it is likely (not guaranteed) that minor shortcomings will be overlooked, should the FCA show up to kick the tyres on your efforts.
For this reason, it is essential to document those efforts from the off: if the regulator can see the work that has gone into your decisions, it will be more understanding even if a wrong turn has been taken along the way.
So what will the FCA be looking for?
Firstly, a clearly communicated sense of purpose is essential in starting the change process. This can be evidenced through internal communications, briefing and training (at a role-specific level) in what the standards are and how to meet them. The firm’s management need to focus not only on the ‘what’ of what is required, but the ‘why’ – so that everyone can understand what they are working towards and the reasons why is it is important.
Secondly, management role modelling and the ‘tone from the top’ will come under the microscope – a clear message needs to be broadcast from senior management about the importance that is being attached to successful implementation of the change. This can be evidenced through regular board updates, documented board discussions, relevant management information, and the appropriate allocation of roles, responsibilities and resources to the project.
Measures for rewarding successful delivery, whether or not through staff performance management objectives, will also evidence the management’s commitment to the initiative.
Thirdly, proper governance for the project is an essential. The new regime will require changes (large and small) across most, if not all, policies and procedures in a regulated firm. The areas affected need to be mapped, assessed and followed through methodically to comprehensively deliver the changes.
The regulator has explained, however, that for a firm to evidence that it is competently managing its culture, it will be expected to clearly articulate: what conduct risk means for them; where those risks will be found; the risk indicators that need to be monitored to assess those risks; and the systems and controls that it has in place for mitigating those risks.
Lastly, there is the long-term embedding of culture as a measure in the management of human resources. This means bringing measures of culture into all aspects of the firm’s performance management processes, from performance objectives to remuneration, promotion and recognition. The SMCR brings with it some process requirements for human resources, such as regulatory references and handover notes, but the embedding of the right culture in the values of the firm will win equal points with the regulator.
If you would like to talk to us about implementing the SMCR at your firm, please contact Emily Benson at Keystone Law.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.