Financial services

SM&CR now extended to all financial services firms

David Morrey David Morrey

For many in financial services, the extension of the Senior Managers and Certification Regime (SM&CR) opens up a new regulatory horizon.

The publication by the FCA of its long-awaited consultation paper on the extension of the SM&CR attempts to square the circle between proportionality and the faithful implementation of the underlying concept by extending to all financial services firms.

Firms should consider these immediate aspects before the final rules are published in 2018:

  • Who will own and be accountable for your implementation project?
  • Are the relevant functions (compliance, HR, Legal, Operations) engaged in your project planning?
  • Who will be your firm’s Senior Management Functions (SMF) holders and certified staff, and where will accountabilities (prescribed and otherwise) lie?
  • How will you define reasonable steps across your organisation?
  • How will you ensure the ongoing administrative, certification and reporting requirements are efficiently rolled into ’business as usual’ (BAU)?

Where will accountability lie?

We have seen accountability lie with the COO and the human resources, legal and compliance departments. However, where the accountability resides is not the primary question. Our experience of implementation projects as part of the initial Senior Managers Regime (SMR) rollout indicates that the most important determinant of success is the allocation of responsibility to a single accountable individual with significant gravitas (or a sponsor who has this) to drive the difficult decisions.

Engagement

Of course, the flipside to a single line of accountability is the siloed approach. A single point of accountability is vital, that person must also build a team of SMEs around them to deliver the project, from design through implementation to handover to BAU. If nothing else, some of the key stakeholders will likely fall under the scope of the regime, so their early engagement is important to achieving organisational commitment.

Identifying SMFs

Identifying your SMF may be easy or very difficult depending on your firm’s structure. For example, it will prove significantly easier for a single line-of-business, one-entity firm versus a multi-divisional firm with an overseas parent. Where firms have historically divided responsibilities across a number of senior managers, they may now need to combine them under one person’s accountabilities. Where firms rely heavily on another regulated entity, or even a non-UK parent, the regime may extend to those entities (including to staff in non-regulated entities).

Teasing apart such organisational legacies, realigning accountability and allocating prescribed (and other responsibilities) is complex. Our insight from the initial implementation across banks and insurers shows that getting the identified SMFs to commit to the resulting responsibility statements (and possibly new employment contracts) has proven challenging.

The number of SMFs versus existing Approved Persons is likely to reduce in most firms. However, the certification regime will extend to cover at least as many staff, and the accurate identification of these certified people is paramount. The regulator will see over- and under-certification as an indicator of a lack of understanding and potentially a weak control framework.

Duty of responsibility and reasonable steps

What constitutes reasonable steps can differ significantly between firms, internally between business lines and between individual SMFs. At its most fundamental level, reasonable steps is driven by the regulatory risk appetite of the individual SMF holder, and will not be fully tested until something goes wrong and the FCA investigate.

Whilst this is the case, firms that have successfully implemented the SMR regime have established a broadly consistent approach to what constitutes reasonable steps across the organisation. 

Moving to business as usual

For some firms, implementing SM&CR will create a significant stretch on human and financial resources. However, successful implementation of the regime is just the beginning. The ongoing administrative and compliance requirements provide equally significant challenges.

Specifically, the extension of the Certification Regime (as required by the legislation) and regulatory references to all firms will have a profound effect on firms’ HR functions. Without a clever solution, the extension will greatly expand the level of administration around annual assessments.

It is critical that firms design their SM&CR frameworks to maximise efficiency when the programme moves to BAU. This may include introducing new systems that can reduce as far as possible the administrative burden.

Next steps

The FCA states that this consultation will close in November 2017, with a policy statement containing finalised rules and guidance published in summer 2018. You can infer that implementation will begin in Q4 2018 at the earliest, more likely extending into 2019.

The timeline has given firms, whichever regime they fall into, the space to prepare properly. It has given firms a chance to develop and run programmes that implement the regime in a fully thought out and efficient way.

Your firm can take steps to prepare for the SM&CR regime by:

  • confirming your firm’s classification and where you sit in the regime
  • engaging in an impact analysis – identification of likely SMFs, scale of likely certified population, impact of international business model
  • undertaking a gap analysis of existing arrangements under the Approved Person Regime against proposed rules and guidance
  • begin work on identifying and allocating responsibilities (proscribed and otherwise) to likely SMF holders
  • responding to the consultation.

Download 'Extension of the Senior Managers and Certification Regime' (PDF) [ 188 kb ] for more technical information, or to discuss how the extension of SM&CR applies to your firm, please contact David Morrey.

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