New Year's resolution: embrace the SM&CR

Banks and insurers already have to comply, now every other FCA-regulated financial services business will have to follow suit.

It is not over-egging it to say that this represents a cultural revolution in financial services. In the wake of successive high profile events, from the 2008 banking crash to LIBOR manipulation and Forex “fixes”, the SMCR raises the stakes for regulatory scrutiny. Now, firms must be clear about where (i.e. with whom) responsibility for certain activities or areas of the business lie, and individuals will be held more accountable for their own conduct and competence. Enforcement action for non-compliance will concern both firms and individuals, and it is not just deliberate wrongdoing that is in the frame: culture and governance failings will be as well.

Firms have had some time to get ready for this change although as ever with new and complex regulation, this is often easier said than done, as they grapple with how the rules should be applied, requirements communicated and compliance demonstrated. Businesses and professionals should be under no illusion though – with the rules enacted, they will be firmly enforced. Indeed, we understand that several investigations over non-compliance are already in progress. 

Spotlight on enforcement

 Regardless of whether this is the case, financial services firms and those who work for them must be prepared: non-compliance is firmly in the regulator’s sights. In fact, since the SMCR was first introduced for banks in 2016, the number of open FCA enforcement cases has increased significantly, jumping almost 60% from 410 in April 2017  to 650  by the same time this year. Of these, the rise in culture and governance cases is particularly striking. From just 15 of such open cases in 2017, there were 70 in 2019. That’s no coincidence.

Whilst the FCA’s rhetoric suggests that the small number of sanctions imposed on senior managers over recent years reflects an improvement in behaviours, the number of investigations currently pending potentially contradicts this view.  The FCA has increasingly sought to use investigations as a diagnostic tool, supposedly not entering into investigations with any preconception as to what they may find, but it is inevitable that we will see significant sanctions imposed on a number of senior managers over the next 12 months.

The key for many firms and individuals will to be learn lessons from others as to any such findings by the FCA and to tailor the implementation of SMCR to their own firm.

2020 and beyond

Forward-thinking firms will have done everything they can to check they are prepared to meet their obligations under the law from day one. But just as importantly, they must stay in line with the rules. Compliance will be a rolling exercise as personnel changes, roles adapt and the businesses evolve. 

As firms will know, having been through the implementation process, there’s a huge amount of administration and paperwork to keep on top of. Statements of responsibility, “fit and proper” assessments, certified person certificates, regulatory references, training manuals, contracts and offer letters, performance reviews and other HR policies: the list goes on. Proper procedures will need to be in place, for example to ensure assessments take place when they should, and that other documentation is reviewed and kept up to date as necessary.

Ongoing training should not be overlooked either. When the FCA published a review of how the SMCR was working in the banking sector this year, one of its key findings was that “conduct rules” training had not always been adequately tailored to individuals’ job roles. Of course, firms must first know themselves what a conduct breach looks like, so that they can then explain it to staff. Initially at least, training should be bespoke and happen face-to-face where possible if it is to be most effective. Later on, when staff are more familiar with the rules and their personal responsibilities, regular refresher sessions and tailored online training modules, plus periodic testing, should continue.

Though many in the financial services sector understand the rationale for clamping down on bad behaviour and poor practice in the industry, the prospect of more intense scrutiny and personal liability is nevertheless somewhat daunting. However, done right, the new regime should positively benefit financial services businesses by improving governance and management procedures. It’s vital, not just to handle the practicalities of implementation correctly, but to embed the rules into firm culture and individual thinking. Embracing the SMCR – next week, next month, next year and the one after that – is an important resolution to make and one that absolutely must be kept.

This article was first published by Economia.

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