Regulatory reckoning: bracing for the SM&CR


Financier Worldwide Magazine

June 2019 Issue

With around six months remaining until the Senior Managers and Certification Regime (SM&CR) – a UK financial regulation which aims to embed personal responsibility into the functions held by boards and senior managers – takes full effect, financial services (FS) firms are bracing themselves for its impact.

Aimed at domestic and international firms with UK operations, the SM&CR requires a complex shift of mindset and extensive re-evaluations of internal operational processes, policies and strategies.

“The focus for firms should be on conducting reviews of their readiness under the new regime,” says Linda Gibson, director of regulatory change and compliance risk at BNY Mellon’s Pershing EMEA. “Their overarching responsibility is to fully understand how their culture aligns with what the SM&CR is trying to achieve: greater accountability for individual decision making and a positive cultural change to drive higher quality outcomes. That change does not happen overnight.”

Poised to be hugely influential in terms of its impact on firms’ culture and operations, those within its scope need to ensure their SM&CR implementation plans are on track and as robust as possible. That said, some firms are seemingly not as prepared as they could be.

“A sizeable proportion has yet to identify how much change may be required,” says Matthew Drage, head of external engagement at Huntswood. “This is usually driven by a firm’s start point – the robustness of its current governance processes, for example – and its desired end point. By this, I mean its approach to the regime. The regime operates well if it is approached as a culture change project rather than a tick-box exercise, and it is a great opportunity to embed best practices into an organisation.”

Implementation issues

The implementation of the SM&CR presents many different issues and challenges. Overcoming them will take time, a luxury few firms have in abundance, even large financial institutions.

“In being more accountable, firms and their employees will need to record decisions in a way that assists an investigation, with reliable data and processes that are supported by people in place full-time to oversee accuracy and regular recordkeeping,” asserts Ms Gibson. “As a result, firms will need to ensure the responsibilities prescribed to each employee are being fulfilled on an ongoing basis, with the necessary checks and balances in place.

The implementation of the SM&CR presents many different issues and challenges. Overcoming them will take time, a luxury few firms have in abundance, even large financial institutions.

“In requiring the implementation of new structures and processes, the SM&CR risks bringing a huge fear factor to financial institutions of all sizes,” she continues. “This focus could become a distraction from business-as-usual activities, if employees are locked in a grind about the fear of judging risk, however small.”

According to Mr Drage, the breadth of operational change that the SM&CR requires cannot be underestimated. “It will impact firms’ processes, policies, systems and controls, as well as recordkeeping and reporting, to name just a few,” he says. “For example, we are seeing firms making changes across the employee lifecycle, including enhancements to job descriptions, recruitment, goal setting, review and talent development, as well as aligning assessment, disciplinary and performance management processes to ‘fit and proper’ requirements.”

Conduct culture

In the view of Ms Gibson, it is important for firms’ senior managers and their HR functions to reassure core employees that they are ‘in it together’ – through a mixture of training and promoting discussion within teams. “This can be achieved by providing examples of expected good outcomes relevant to the firms’ business,” she explains. “Firms need to embrace this change. It may be directed towards senior managers, but this is about individual accountability and responsibility.

“Governance structures need to be fit for purpose, with the right people having responsibility for decision making. SM&CR compliance is not confined to the period in which an individual was active in any specific role. The burden of proof is on an ongoing basis and so the SM&CR will be more than just a box-ticking exercise,” she adds.

For Mr Drage, it is essential that firms do not leave conduct rules to the end of the SM&CR implementation process. “These rules will have wide-reaching effect on almost all employees in a firm,” he says. “Firms should therefore give serious thought as to how they will embed the rules in their organisation and create a compliance culture. Additionally, it may be wise to consider the allocation of certification functions alongside senior management functions to ensure the holistic implementation of the regime.”

Given the SM&CR’s potential to significantly effect their business operations, FS firms must ensure robust governance and oversight is at the heart of their implementation plans, while bracing themselves for the regulation’s yet-to-be-determined full impact.

© Financier Worldwide


Fraser Tennant

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