SMCR – Are You Doing It Right?
Over twelve months on from the date at which almost all financial services firms came within the scope of the Senior Managers and Certification Regime (SMCR), implementation of the Regime is completed and most firms are now getting to grips with what is expected over the long term. The Financial Conduct Authority (FCA) have signalled a general intention to step up – rather than relax – their approach to enforcement, and this likely applies to SMCR as well. With a key indicator that a firm meets the FCA’s expectations being the effective implementation of the SMCR, all solo-regulated firms should take the opportunity to review compliance with the new Regime.
SMCR is – at its core – about governance and culture. Designed to set new standards following serious concerns about the effectiveness of the previous regime in holding senior members of staff accountable, SMCR expects a holistic approach, going beyond simple rules for senior staff, and instead setting a new standard of behaviour throughout firms, albeit very much driven from the top down.
With this in mind, a review of the implementation and of the ongoing compliance with the regime is vital at this juncture. Examples of regulator action against SMFs found in breach of the Conduct Rules demonstrates an intention to take decisive action where necessary, against both senior individuals and the firm. In conjunction with the shift in approach to supervision and enforcement and the focus on outcomes, getting the letter and the spirit of SMCR right is not a luxury but essential for all financial services firms.
All three elements of SMCR must be demonstrably embedded within the firm. This sounds basic, but being able to evidence this is critical to compliance and to building good relationships with the regulator. Each element of the Regime is as important as the next. The Conduct Rules underpin the entire regime, setting a standard for behaviour across all financial services staff. The Senior Managers Regime may affect fewer people – those who need to be approved by the FCA and provided with a SMF designation – but the importance of ‘tone from the top’ and the creation of a healthy culture in the view of the FCA makes compliance with the less easily measurable aspects of the SMR equally important. This is no more evident than in the event of a breach. Evidencing compliance, then, is critical.
The FCA and PRA are able to take enforcement action against both the firm and senior individuals in the event of a breach. Reviews of your firm’s implementation of SMCR must look both at measurable elements of the regime, and at data covering ongoing compliance. It is not enough to show the regulator that initial implementation has been done correctly – SMCR is threaded through everything the business does.
This is what is meant by a ‘culture shift’. Although the rules and requirements are easy to understand, the Regime goes beyond that, to requiring a wholesale understanding and compliance with expectations of care, integrity and skill from the top down. Measuring culture, though, is notoriously difficult. The good news is that the FCA does not expect firms to pluck ethereal concepts out of the air. But this does mean that collating data that is captured to demonstrate how well the firm is meeting expectations is very important.
Understanding the data you need to be able to analyse compliance and the evidence required to support both firm and individual SMF compliance is the next step in the life cycle of SMCR. This needs to be more detailed than it might appear at first glance: Statements of Responsibility are required for every SMF, but checking that every Senior Manager has one isn’t enough. Reviews should make sure that each SoR is up to date, summarises the individual’s role and responsibilities, and is self-contained – this document should be readable in isolation from others and easily understood. Checking that HR policies and procedures are in place for the obtaining and giving of regulatory references are similarly relatively easy to review.
The Regulators have made it clear that stopping at implementation isn’t enough. The spirit and the rules of the Regime need to be thoroughly embedded in all that the firm does, and clear evidence of this must be maintained.
Our webinar on SMCR – Are you doing it right? will be available in the coming weeks. This webinar is designed to give your firm a clear understanding of regulator expectation and industry practice.
Stay up-to-date with news about our upcoming SMCR webinar and online training courses.