Financial services

SM&CR - Raising the stakes for financial crime

Tom Townson Tom Townson

The extension of Senior Managers & Certification Regime (SM&CR) heightens the impact of future financial crime failings.

After months of responsibility mapping, certification, regulatory referencing and online training modules, it may be tempting to look at the boxes ticked on a progress report and breathe a sigh of relief that all of your SM&CR extension preparations were completed on time. From a financial crime perspective though, initial preparation is just the beginning. Find out more information on the impact of this extension.

We expect SM&CR extension to heighten the impact of any future financial crime failings that may be uncovered in regulated firms. Why should this be the case? It’s all to do with the backdrop of events and the continued regulatory and political focus on financial crime.

Watch our video, Tom Townson, Partner and Head of Financial Crime at Grant Thornton discusses the impact of the SM&CR.

Rising expectations

Initial implementation feedback published by the regulator in September 2016 highlighted financial crime as an area where Senior Management Functions (SMFs) and Prescribed Responsibilities were not always assigned to sufficiently senior individuals. There was also criticism over the clarity of responsibility maps and governance arrangements and the FCA is expecting material improvements this year.

More data

The new Financial Crime Return will provide stats to allow the FCA to judge performance against the SM&CR. This year is also the first year in the FCA’s rolling sampling programme of firms supervised under the UK money laundering regulations and firms sampled may see possible consequences under the SM&CR. We expect links between this new data, effective management of Financial Crime as a Prescribed Responsibility and expectations under the Conduct Rules.

Constant change

The draft Money Laundering Regulations 2017, the Policing and Crime Act 2017 and the Criminal Finances Act 2017 represent just a small part of the changes to the UK’s financial crime framework, as it prepares for its Financial Action Task Force (FATF) visit in 2018.  New regulations mean financial crime compliance over the next 18 months to two years will be a moving target.

The new regulations provide the FCA with a perfect test case to check that SM&CR arrangements in firms are keeping pace:

  • will responsibility maps properly reflect changes in board responsibilities for financial crime under the money laundering regulations?
  • how will HMRC’s emphasis on culture as a preventative measure against tax evasion be reflected in firm-wide training under the Conduct Rules?

Increased individual risk

We have already noted the pointed nature of current FCA correspondence with firms, which often highlights specific individual failings relating to financial crime oversight. The new conduct rules for the majority of staff broadens the field of who could suffer specific regulatory sanctions if they are found to have contributed to a failure to spot or report financial crime. The extension also increases exposure for SMFs as it is their job, under the Senior Conduct Rules, to ensure training and communication are suitable for all staff. Most recently, the extension of individual Conduct Rules to non-executive directors and the FCA’s clarified guidance on the duty of responsibility, both widen the net even further.

Continued corporate exposure

The FCA have been clear that the SM&CR should not be seen as offering a free pass to firms: they will continue to seek stiff corporate penalties in the event of financial crime, as well as punishing individuals who have misbehaved. This is in line with the legislative trend of extending corporate responsibility evident in the Criminal Finance Bill. In fact, it is likely that individual failings uncovered under the SM&CR will provide additional ammunition for corporate sanctions, thus magnifying tensions between individual and firm interests, which often diverge with the prospect of regulatory intervention.

Overall, against a background of continued corporate misbehaviour (Rolls Royce, Credit Suisse, Barclays) and with the improved line of sight on individual and firm behaviour that the SM&CR provides, we do not expect the pressure on financial crime to let up any time soon.

For more information or to discuss the impact of SM&CR from a financial crime perspective, please contact Tom Townson and Lucinda Hallan from the Financial Crime Team.