Posted: 28th April 2017

Since March 2016, senior managers in banks and insurance firms have been subject to the rules of their respective versions of the Senior Managers and Certification Regime (SM&CR).

SM&CR, which ensures greater accountability within the governance arrangements of a firm, will begin to be extended to all areas of financial services during 2018. The regime will be a tiered system, with ‘core’ and ‘enhanced’ supervisory regimes applied based on the firm’s risk profile.

There will be different implementation dates for different sectors, and given the various forms the regime will take across different sectors of the market, there is a great deal of speculation about the challenges firms will face in their journey towards implementation.

Chief among these is the amount of time the banking and insurance worlds had to prepare for the changes in comparison to the 60,000 or so firms in other sectors, who will have to react more quickly when final rules are published. This in itself is a prompt for firms to think now about how they approach the regime. At a recent conference, the FCA reminded firms that they do not have to wait for the consultation paper to begin preparation.

The rest of the financial services sector can benefit from the experiences of banks to learn lessons from their implementation of the new rules.

key takeaways from banking

Accountability                                                                             

Some of the key accountability principles of the regime include:

• Ultimate accountability for conduct and delivering good customer outcomes will fall to senior leaders
• Firms will be required to define significant senior management functions (SMF) for its senior managers and submit (and keep updated) ‘statements of responsibility’ for each of these functions
• All senior managers must act with due skill care and diligence, be open and cooperative with the FCA and observe proper standards of market conduct
• Senior leaders should be able to articulate the business’s strategy, show it is working for customers and evidence robust, ongoing governance of products, processes and controls

Senior managers must be able to show the steps they take to mitigate excess risk, ensure the firm is treating its customers fairly and address whether their approach is effective on a periodic basis. This includes championing the appropriate and proportionate use of management information (and ensuring it tells an accurate story on an ongoing basis).

Preparation

In time for 2018, senior managers should think about how they will review and, if necessary, update:

Their firms’ organisational structure and the role and makeup of individual committees

• Governance arrangements and their alignment with their operating model
• Allocation and oversight of responsibilities (including responsibility maps and statements of responsibility)
• The distribution and content of management information and board reporting
• Training procedures and materials
• HR processes

Firms can certainly be thinking about this now. Despite waiting for the exact guidance from the regulator, the concept of assessing the customer experience on an ongoing basis to facilitate continuous improvement is evergreen.

Many of the changes will affect how different departments go about their business and/or interact with each other. Here, the creation of cross-departmental teams can be effective in ensuring the impacts are discussed in an open forum, with inter-departmental challenges recognised and mitigated.

Taking action

Post-banks’ implementation of the regime, a significant challenge was translating senior managers’ more advanced view of the business’s activities into proportionate action to help mitigate risk or address specific issues.

If excess risk or other issues are identified, senior managers will need to ensure their firm reacts appropriately with proportionate action. This may mean that senior managers will have to adjust their thinking slightly – for example, on how they evidence their positive reactions to issues to the regulator. There may be an opportunity here for senior managers to consider how they view the value of proactive assurance work, given that it has the potential to protect customers’ – and therefore the firm’s – interests.

In the principles-based regulatory environment, this journey has already begun – proactive action undertaken primarily for the benefit of customer outcomes has been the message in much regulatory work which has been published across all sectors of financial services since 2014. Senior managers who have embraced this change in regulatory approach and started to use more advanced assurance techniques to improve the service they deliver to their customers may well be further on in the journey to implementation than they realise.

Senior managers being inducted into the regime should be aware of the risks of making changes without a robust rationale that incorporates the needs of its customers, the business and the regulator. Activities such as establishing and/or periodically updating a risk statement and assessment for the firm will not only assist in clear decision making, but help to establish an audit trail for these decisions which may one day have to be articulated to the regulator.

Reasonable steps

Senior managers across the financial services industry will be well underway with their thinking on SM&CR, though for the most part they will be trying to make sense of the plethora of information available to them to discern what the next year or so before implementation will look like. By thinking about some of the areas above, senior managers can give themselves a good head start.

The overarching principles of the regime align closely with the changes in the regulatory vernacular over the past five or so years (which has seen the regulator encouraging an iterative, risk-based, principles-based approach).

Of course, senior managers have always had to act with integrity; they have always been required to understand and implement strategy; they will be well aware of the results of delivering poor customer outcomes on business performance. Therefore, SM&CR should not be viewed with trepidation, but – despite the inevitable challenges – as a timely unification of the principles that we are all working towards in financial services.