Preparing for the Senior Managers and Certification Regime – what can we learn from banks?

Posted: 30th May 2017

First published on Thomson Reuters Regulatory Intelligence in May 2017

Since March 2016, banks and insurance providers have been subject to the rules and additional rigours of the Senior Managers and Certification Regime.

The regime is part of the FCA’s focus on increasing individual accountability within financial services following the financial crisis.

There will be varying implementation dates for the different types of business the regime will cover. SM&CR will be extended to all companies at some point during 2018, and as a result, there is a great deal of speculation about the challenges firms will face on their journey towards implementation.

While considering this, firms should also recognise the extra amount of time that banking and insurance firms had to prepare for the changes. The FCA issued the ‘key features’ of the new regime for banks over two years prior to the implementation date – the 60,000 or so firms due to implement the regime next year have considerably less time than this.

The internal challenges firms will face and the timescales for implementation are in themselves a prompt for non-banking and insurance firms to think now about how to plan for and approach embedding SM&CR. At a recent conference, the FCA reminded firms that they do not have to wait for the formal consultation to begin preparation.

Lessons from the current regime

Non-banking and insurance firms should therefore look to learn from the experiences of banks in adapting to the individual accountability regimes. Below, we examine the core high-level aspects that can be expected in 2018.

1. An increased scrutiny on individual accountability

• Firms will be required to define an appropriate population of Senior Manager Functions (SMFs) (based broadly on the current ‘controlled functions’ under the Approved Persons Regime), who will in turn be responsible for maintaining accurate ‘statements of responsibility’ for their roles
• Individual senior managers will be held personally accountable for failings identified in their business area. This, in effect, means that a senior manager should now be seen as the CEO of the business function(s) he or she is responsible for. Firms must ensure they are set up so that reporting structures provide robust insight, and so those who are allocated responsibility are able to embed appropriate governance and oversight of their respective business areas
• In principle, all executives of a firm must be able to articulate the business’s strategy, demonstrate that it is working for customers and evidence robust, ongoing governance of products, processes and controls

2. A need to comprehensively evidence good governance

• Clear audit trails of executive decision-making have become an integral part of SM&CR. Any strategic changes made by a firm must be able to stand up to independent challenge in order to mitigate the risk of failures being identified and attributable to individuals
• The creation of clear and effective Management Information plays a key role for senior managers in ensuring they are receiving appropriate and effective information to assess business risks and take reasonable steps to mitigate them

3. Certifying that high standards are adhered to throughout the business

• In line with the rules of conduct brought about by SM&CR, senior managers must evidence that:
• The business of the firm for which they are responsible is controlled effectively
• They take ‘reasonable steps’ to ensure that the relevant requirements and standards of the FCA Handbook are complied with
• They take ‘reasonable steps’ to ensure that any delegation of responsibility is to an appropriate person, and that they oversee the discharge of the delegated responsibility effectively
• They disclose appropriately any information of which the FCA or PRA would reasonably expect notice
• Senior managers will carry the responsibility for certifying as fit and proper any individual who performs a function that could cause significant harm to the firm or its customers, both upon recruitment and annually thereafter, effectively acting as the regulator of Material Risk Takers (this forms the ‘Certification’ aspect of SM&CR)

How firms can prepare and take action now

Broadly, there are some key, high-level requirements that need to work well in combination for the successful embedding of SM&CR. In time for 2018, senior managers should think about how they will review and update:

• Their firms’ organisational structure and the role and makeup of committees
• Individual governance and oversight arrangements, and the alignment of these with the firm’s target operating model
• Allocation and oversight of responsibilities (including responsibility maps and statements of responsibility)
• The distribution and content of management information and board reporting
• HR processes (including training procedures and materials), which play a key role in governance & oversight of certified staff

As well as this, to operate successfully under SM&CR (and indeed the wider, principles-based approach of the regulator in recent years), senior managers should be aware of the potential need to provide assurance to the regulator that the above areas continue to perform as desired. This should already be driven internally by the need for a firm to protect its customers and treat them fairly. Although there will be some new, explicit obligations for senior managers to discharge here, the process of refining the customer’s experience should largely be a natural consequence of a firm’s customer-centric approach.

Embrace the principles driving the change

Firms should be aware of how they intend to adapt to the incoming regime, and once the specific new rules are released as part of the FCA consultation, SM&CR project teams should be in place to define detailed plans for implementing the rules. The creation of a cross-departmental team can be effective in ensuring the impacts are discussed in an open forum, with business-wide challenges recognised and mitigated.

The requirements of the regime align closely with the changes in the regulatory tone and direction over the past five years, particularly the FCA’s focus on principles, culture and ‘tone from the top’. SM&CR will serve to further unify and embed these concepts within financial services. Firms embracing the regime by thinking proactively about some of the areas above can put themselves in the best possible position when it comes to implementation.