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Key messages on the extension of the Senior Managers & Certification Regime to all FCA firms

Following publication of the FCA's Consultation Paper on the extension of the Senior Managers & Certification Regime (SMCR) to all regulated firms earlier this year, the FCA began a programme of engagement with the wider financial services industry designed to raise awareness of the impending changes and promote feedback on its proposed approach.

This programme began with a series of SMCR regional forums which brought together members of the industry to discuss the proposed regime with key FCA stakeholders. In this note, we explore the key messages delivered by the FCA at one of these forums and areas of concern cited by some of those in the financial services sector who will be affected.

The drivers for change

Jonathan Davidson, Director of Supervision – Retail and Authorisation at the FCA explained in a recent speech at the City and Financial Summit that the SMCR is designed to address two root causes of the financial crisis: firstly, the strategy and business models of firms and secondly, their culture.

The FCA is keen to reassure firms that it will not dictate how they should structure or run their business.  Its expectation is that the majority of firms will simply transition their current Approved Persons into the new regime. However, firms should be prepared for the FCA to scrutinise their governance arrangements through the Statements of Responsibility and, where relevant, Management Responsibilities Maps, so getting these right will be very important.

Culture may not be measurable but it is manageable

The word 'culture' is increasingly prevalent in FCA literature.  The FCA has gradually developed the concept of culture in a regulatory context and has recently given guidance on what it means and how it can be managed by firms. 

The culture of a firm means the mind-set and behaviour of individuals which are typical for staff of that firm.  While difficult to measure, the FCA believes firms can manage culture through four "levers":

  • A clearly communicated sense of purpose and approach – the "what", "how" and, most importantly, "why";
  • 'Tone from the top' – The actions and omissions of senior management as role models for their staff;
  • Formal governance processes and structures – the policies, procedures and systems which specify behaviours, expectations and decisions.  A robust conduct risk framework forms an important part of these structures; and 
  • "people related practices" – remuneration, promotion and recognition criteria.

The FCA is increasingly using behavioural economics to guide its policy making and wants the SMCR to drive a move away from a "compliance culture" to an "ethical culture", encouraging firms to create an environment which builds on people's desire to see themselves as good people and "do the right thing."

It can't just be business – it has to be personal too

Mr Davidson likes to call the SMCR the "Accountability Regime".  One of the underlying objectives of the new regime is to improve individual accountability across the financial services industry and not just at senior management level. The introduction of the Conduct Rules means that for the first time, all but a small number of support staff will be accountable to the regulator, though indirectly in most cases. 

Statements of Responsibility for Senior Managers should, according to the FCA, be statements of accountability, setting out the areas each Senior Manager is responsible for, not listing the day-to-day tasks that he or she will be carrying out.  In response to concerns expressed by the industry, the FCA has repeatedly stated that the SMCR is not an opportunity for the enforcement team to increase its workload.  It has also sought to reassure firms that it will not be applying "hindsight goggles" when things go wrong; Senior Managers need only demonstrate that they took reasonable steps based on the information they had at the time. 

Recent data has shown, however, that FCA investigations into individuals have increased significantly since the introduction of the SMCR.  Senior Managers should also take note of the FCA's warning that the "reasonable steps" assessment is not just limited to decisions taken by the senior managers themselves. It will also take account of the systems and controls the Senior Manager has put in place and the culture that exists within his or her team. 

What do I need to do now?

While acknowledging the government's current position that the extended SMCR will come into force in March 2018, the FCA has conceded that it is more likely to be the end of 2018 before it is actually implemented.  This doesn't mean that firms should rest on their laurels however.

Affected firms have now been given a strong indication of the likely feel of the new regime and should start:

  • considering whether the firm will be a limited scope, core or enhanced firm and what the associated requirements will be;
  • reviewing the governance structure – will it be fit for purpose under the new regime?  If changes need to be made it is better to make them now as the FCA is exploring ways of converting existing Approved Persons to the corresponding Senior Manager Function without the need for the firm to fill in any forms;
  • up-skilling the HR function whose responsibilities are likely to be significantly increased under the new regime; and
  • working on a training program which "brings the conduct rules to life" for their staff by applying them to the firm's business.

TLT are currently offering a series of half day workshops to guide you through the process of implementing the SMCR. TLT also offer bespoke detailed analysis and tailored training to help firms implement the SMCR. For more information, please contact Noline Matemera on 0333 006 0734 or Tim Needle on 0333 006 0771 or email Tim.Needle@TLTsolicitors.com 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions.


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