Posted: 23rd June 2016
In October of last year, HM Treasury announced that it intends to extend the Senior Managers and Certification Regime (SM&CR) to all financial services firms.
As most will be aware, SM&CR was initially and primarily directed at banking institutions on the back of the significant deficiencies identified by the Parliamentary Commission on Banking Standards (PCBS). However, the Fair and Effective Markets Review (FEMR), published in June 2015, recommended that elements of SM&CR be extended to the wider financial services industry.
The government subsequently announced its intention to create a “more rigorous, comprehensive and consistent approach across the financial services industry” and as such, the accountability regime will now replace the Approved Persons Regime (APER) for all financial services firms in 2018.
As the Banks discovered in 2015, implementing SM&CR is a significant undertaking. Bearing in mind that consumer credit (CONC) firms have themselves only recently completed the arduous authorisation process, it’s safe to say similar challenges will abound when it comes to applying the new rules. Consequently, it makes sense for firms to begin thinking about what their implementation will look like in the context of what we know already.
Here, we highlight the requirements that consumer credit (CONC) firms can expect to be included in their version of the regime at a time when they should be considering their preparation for the new rules.
This insight is based on our experience assisting clients in preparing for accountability in banking and insurance, however, focuses more on banking due to the Senior Insurance Managers Regime [SIMR] involving multiple aspects of the European Solvency II Directive.
Whilst we have been aware of the extension of SM&CR for consumer credit firms since October (and many had assumed as much significantly earlier), there has been precious little detail following HM Treasury’s announcement, and we might have expected more from the regulator by this stage. However, the experience of banks having gone through SM&CR implementation provides valuable insight into what to expect going forward.
In the FCA’s ‘Individual Accountability timetable’, “2018 TBC” is given as the due date for “Extension of Senior Managers and Certification Regime to all FSMA authorised firms”. If we assume that the regime will be rolled out mid-way through 2018, then we are currently two years away from implementation. Comparing this with the timeline for the banking regime, PCBS published its final report on 19th June 2013, just over two and a half years prior to implementation for the banks. The FCA then issued a paper detailing the ‘key features’ four months later.
During preparation for SM&CR, there was an atmosphere of frustration at the lack of time afforded to banks to prepare effectively for implementation.
This serves to warn that being genuinely prepared for SM&CR requires significant time and effort, and therefore firms should by now have started to consider their own approach to embedding the regime, despite the lack of regulatory engagement. The good news is that, because the banking regime has already been rolled out, we are already relatively clear on the main principles and guidelines that CONC firms will have to adhere to once the new regime comes into force.
What CONC firms can expect from SM&CR
In order to affirm ‘what’s in’ for CONC firms, it is important to first define the principles behind the original regime and assess how that might translate into CONC. The core concept behind SM&CR is that firms are less likely to fail when there is strong individual accountability present, and is expressed nicely in a phrase used during a presentation by the regulator on accountability in banking last year; “it’s rare to find an issue that cannot be traced back to poor governance. To achieve good governance, there is a pre-requisite for strong accountability”.
SM&CR seeks to place increased emphasis on the need for individual accountability, the core features of which are as follows:
- An approval regime focused on senior management, with requirements on firms to submit robust documentation on the scope of these individuals’ responsibilities
- A statutory requirement for senior managers to take ‘reasonable steps’ (i.e. which the regulator would deem reasonable for a senior manager to take given the size, complexity and nature of the firm in question) to prevent regulatory breaches in their areas of responsibility
- A requirement on firms to certify as fit and proper any individual who performs a function that could cause significant harm to the firm or its customers, both on recruitment and annually thereafter
- A power for the regulators to apply enforceable Rules of Conduct to any individual who can impact their respective statutory objectives (these are effectively high-level principles)
These features will undoubtedly be reflected in the 2018 regime as core aspects, and firms should be considering the inherent implications of adhering to them. We have worked with clients to satisfy the requirements that sit within the features listed above, and have identified three overarching components for firms to consider in their preparations for SM&CR:
1. Responsibility allocation & mapping
Firms are required to allocate specific responsibilities (some prescribed by the regulator, others defined by a firm as appropriate) to relevant members of senior management and produce a ‘responsibilities map’ so that, if a failing does occur, the FCA can now hold one person individually responsible and take consequent action as it sees fit. This is a difficult, time-consuming and contentions challenge, and will typically spark lengthy internal debates (e.g. whether allocations of responsibility are appropriate considering the sufficiency of resource and blend of skills available to members of senior management so that they are able to discharge their responsibilities effectively).
All of the activities brought about by SM&CR naturally prompt questions over whether a firm is currently set up in the right way, and many firms have seen it as an opportunity to assess how business areas and management functions are broken down and whether changes may be appropriate. It’s worth considering the impact that these activities have had on firms, specifically that mapping group dynamics is leading to structural changes within banking institutions.
3. Conduct rules / training / HR policies
The regulatory intent of SM&CR is focused on ensuring that firms have the right individuals behaving and performing compliantly in the right roles. Firms will also be required to certify a significant population of their own staff as fit and proper. To support and evidence this, firms need to ensure they have reviewed and, where evident or appropriate, enhanced the policies that support the monitoring and control over the people within the business. Firms will need to develop their training approach for the new regime and Conduct Rules, tailoring it so that it is relevant for the right individuals.
Aside from this, it is not yet obvious how the regulator will apply SM&CR to the remainder of the industry, and it would therefore be too presumptive to speculate on any further detail at this stage. What is clear in the FCA’s 2016/2017 business plan is that it has applied, and will continue to apply, a great deal of scrutiny on the CONC market, and concerns have already been raised on a lack of clear accountability in the area. The regulator will be looking to ensure that the new regime creates an environment of effective and robust governance arrangements amongst senior management, which represents a significant ‘step-up’ for CONC firms, many of whom are only just getting accustomed to the rigours of APER.
Next steps for the regulator and firms
The FCA has committed to consulting on the extension of the regime in advance of implementation, but its Future Publications timetable does not yet include anything related to the extension of the SM&CR to all FSMA authorised firms.
That said, affected firms should not wait patiently for this to happen; striving to understand the implications of SM&CR now and reacting to them accordingly could well provide firms a tangible commercial advantage post-implementation.
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