This complex regulation aims to ensure senior individuals within the financial services industry take responsibility for their role in shaping and influencing financial markets while also making it easier for firms and regulators to hold individuals to account. It has applied to banking firms since 2016, insurers since December 2018 and will soon be extended to all solo-regulated firms from December 2019. This means that more than 47,000 companies – including mortgage lenders, financial planners, paraplanners and wealth managers – have less than a year to get their houses in order.
The SM&CR is one of the most personally impactful pieces of regulation to affect the sector in recent memory. Central to the regime is the ideal of putting customer interests and market stability first, ahead of personal gain.
The regulator is keen that firms do not approach the SM&CR with a tick box mentality. Instead it believes that “those firms who focus their culture on what is best for their customers, and not just on compliance, ..make the biggest strides”. The SM&CR is meant to be the minimum standard, in terms of culture, behaviours and mindsets, not the ultimate.
It should act as a catalyst for positive change, enabling financial firms to foster healthy cultures that lead to sustainable high performance, strong employee fulfilment, engagement and productivity and good outcomes for clients. In turn, the hope is that this will result in a changed industry where everyone takes responsibility and accepts accountability for their actions.
In a nutshell
With less than nine months to go before the last planned extension of the SM&CR, there is a lot for solo-regulated firms to get their heads around. The SM&CR consists of three interconnected elements - the Senior Managers Regime, the Certification Regime and Conduct Rules.
The Senior Managers Regime requires firms to consider and define the roles of relevant individuals, ensuring they hold appropriate responsibilities and that these are clearly documented and understood. The Certification Regime will require businesses to confirm those in a position to cause potential harm to the firm or its customers as fit and proper, at least once a year. The Conduct Rules set minimum standards for nearly all employees who perform financial services activities.
In terms of developing a ‘plan of action’, the first step will be to form a project team that will be responsible for implementing the changes required. Firms should agree the strategy, people, budget and ‘terms of reference’ early on. Leadership from the HR team is vital, as they will play the central role in implementing the Certification Regime and Conduct Rules.
Once formed, the project team will need to identify which category their firm falls into, specifically whether it is Core, Enhanced or Limited Scope. This is important because the SM&CR applies proportionately, according to the size, complexity and potential impact a firm may have on consumers or markets.
As part of adhering to the Senior Managers Regime, companies must work out exactly who their senior managers are. Though this may sound simple, in practice, it does take some time and effort, particularly for those part of a business group, complex structure or with overseas operations or management. In particular, Conduct Rules will have wide-reaching effect on almost all employees in a firm. Firms should give serious thought to how they will embed the Conduct Rules well in advance to create a successful conduct culture.
When the SMCR was first introduced to banks in 2016, there was concern about its impact. However, according to Jonathan Davidson of the FCA, “once firms started to implement it, we found that leaders welcomed the clarity of the accountabilities and responsibilities it gave them and how it supported a healthy culture.” We believe the same will be true for smaller firms this year as they embrace the changes. SM&CR is a golden opportunity to kickstart a culture change that will bring health and sustainability to your business as a whole and, from that, benefit your employees and customers.
Simon Goryl is sector lead of life, pensions and wealth at Huntswood