SM&CR paves the way for increased individual responsibility – A Q&A with Paul Henshaw

Jun 18, 2018

Topics: Compliance | FCA | MiFID II | SM&CR |

In its 2018-19 business plan, the FCA make it one of its cross-sector priorities to finalise the rules and extend the Senior Managers & Certification Regime to all FCA-authorised firms. The SM&CR aims to reinforce confidence in the sector by making changes that raise the standards of governance and increase individual responsibility and accountability.

With preparations in place to extend the regime beyond the banking industry, this regime is something that should be firmly on the radar of the 47,000 financial firms set to be impacted.

Paul Henshaw, one of our senior compliance consultants, outlines the current regulatory thinking in this area and what firms should be doing to prepare themselves for the looming changes.

Cordium: What are the fundamental principles of the SM&CR?
Paul: At the core of the regulation is the aim to ‘reduce harm to consumers and strengthen market integrity by making individuals more accountable for their conduct and competence.’

The SM&CR hit the banking sector in 2016, making a significant difference to the way organisations and individuals operated. Next to feel the impact of the directive will be the wider community of FCA-authorised firms, including asset managers, investment firms, those in the insurance space and consumer credit firms.

Q. The extension of the regulation has already been delayed once. Does this mean that this is low on the regulator’s list of priorities?
A. Far from it. The finalisation and roll out of the rules are outlined as a priority in the FCA’s 2018-19 business plan. The regulator hopes their approach will come across in a simple, clear and proportionate way.

The FCA has also stated its intention to tailor the soon-to-be extended regime to reflect the different risks, impact and complexity of the 47,000 firms who it will be rolled out to.

And indeed, the FCA has made no secret of the fact that lack of senior management accountability can drive poor conduct in firms–from selling unsuitable products to excessive risk taking. So we expect this area to stay firmly in the spotlight.

Q. When will the regulation be extended to all FCA-authorised firms?
A. We expect that the regime will be in place by around mid-to-late 2019.

However, we know that any day now a policy statement and new code of conduct will be published, so watch this space.

Q. What impact will this regulation have on FCA-authorised firms?
A. We will see an increase in individuals being held to account for their conduct failings or shortcomings, not just the firm. Lack of integrity, skill, care or diligence will have personal consequences. Consideration of customer interest will need to be at the forefront of senior management decision making. And, individuals will have to ensure that activity they are responsible for is overseen effectively and meets regulatory standards.  SM&CR will act as a minimum standard for firms to adopt and hold leaders accountable and responsible for their actions.

Q. What should firms be doing now to get in line with the FCA’s requirements?
A. The final SM&CR policy statement is due out very shortly. When this comes through, firms should analyse it carefully, review the principles and start to build them into the foundations of their organisation. Early understanding of the requirements and implementation of the principles is key. It will help a firm to define the minimum standard to adopt to hold their leaders accountable for their actions. This will in turn help to create a stronger compliance culture, which will put them in a better position when the SM&CR comes into force.

In practice, the mechanism for holding senior managers accountable will be through their prescribed responsibilities. Senior managers will have no option but to ‘walk the walk.’ Under SM&CR, senior staff will have to behave in a way that is in line with the spirit of a firm’s values. Abdicating responsibility is no longer a possibility.

Q. And what changes must senior managers make to meet the regulator’s expectations?
A. Once the SM&CR is in force, senior managers will need to have a clear statement of the activities they are responsible for.
They will need to be prepared to take personal responsibility for their actions and make sure firms and staff of all levels clearly understand and can demonstrate where responsibility lies.

While SM&CR does not talk to this point specifically, we can reasonably expect ‘diversity’ and ‘inclusion’ to be key future themes for senior leadership teams.

Q. Culture seems to be an increasing focus area for the regulator. Why is this?
A. The FCA appears to be acutely aware that financial regulation and culture are closely connected – the challenge is to create the right culture to turn good intentions at the firm into fair outcomes for clients.


Q. What are your top three tips for firms preparing for SM&CR implementation?

1. There are five Conduct Rules which sit at the heart of SM&CR – make sure you know them.
2. This is a complicated area – take the time to make sure you and your senior team are well briefed on SM&CR – don’t leave it until 2019.
3. Make sure your firm’s role profiles and responsibility matrix are up to date.


Contact us to learn more about training and preparation for the SM&CR. Our services include the creation of collateral, policies and procedures, as well as regulatory technical solutions to simplify your SM&CR challenges and responsibilities.

 

Paul Henshaw, Senior Consultant, Compliance, Cordium

Paul is a senior consultant at Cordium. He is responsible for regulatory support, and monitoring clients comprising of investment advisers and managers in the private and listed equity space. Previous to Cordium, Paul was a Senior Compliance Consultant at Moore Stephens, a top 10 accountancy firm. He also worked as a Group Compliance Officer at Salamanca, an investment advisory firm. Paul also ran his own consultancy business serving a variety of small private equity LLPs. Paul holds an Master of Theology (Hons) from University of St Andrews, a postgraduate diploma in Law and Legal Practice, and is a Chartered Insurer. Paul also has an Open University MBA.

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