SMCR has moved up the agenda

Born out of the financial crisis, SMCR aims to drive cultural change in firms, reducing potential harm to consumers and strengthening market integrity by increasing individual accountability.

Three years on from its initial introduction, has SMCR achieved what it set out to?

SMCR can be a burdensome and lengthy process, requiring internal stakeholders to work together

While it is still early days, and a swathe of firms still await the SMCR go-live date, those already subject to the SMCR have taken huge strides to embed the regime within their own firms – the task of which should not be understated.

SMCR is a triumvirate of regimes, focussing on senior managers, a broader population of certification staff, each of whom must be certified as “fit and proper” to perform their role, and the holding of most staff to a system of important (but straightforward) conduct rules.

Each constituent part of the regime requires firms to take considerable action to implement.

It can be a burdensome and lengthy process, requiring internal stakeholders (such as the Board, Compliance, HR and Legal) to work together to unpick how SMCR will apply to their own firm and group, both structurally and culturally.

It should not, however, be seen as a tick-box exercise; firms that embrace the change can and are clarifying or changing their operations, their approach to risk and (more broadly) culture, for the better by improving their internal decision-making processes, governance, and structuring.

On 5 August 2019, the Financial Conduct Authority (FCA) released its Senior Managers and Certification Regime Banking Stocktake Report.

The report focussed on implementation of SMCR in the banking sector and commented on the ‘concerted effort’ that firms had undertaken to implement the regime.

It found that senior managers were aware of and understood their unique responsibilities, that firms had introduced suitable processes to oversee the certification population, and that the conduct rules were generally understood.

Importantly, those interviewed by the FCA remarked on the ‘stronger tone and ownership from the top’ in relation to matters of cultural change in their firms.

SMCR, and particularly its focus on appropriate conduct (both financial and non-financial), is at the top of many boards’ agendas.

There have been teething troubles though.

Senior managers have been very concerned about their own personal responsibilities and liabilities, and some firms have found it challenging to recruit into these roles.

Others have struggled to demonstrate the effectiveness of their own certification processes, including maintaining consistency of approach across their businesses and ensuring that all relevant factors that might affect the assessment of an individual’s fitness and propriety are known and taken into account.

Regulatory references (designed to stop ‘rolling bad apples’) have sometimes been of poor quality and/or delivered in an untimely manner, reducing their effectiveness.

The regime’s focus on the overall accountability of senior managers has also had an impact on internal decision-making, which while mostly positive, can at times lead to the siloing of decisions as senior managers ask, ‘Why should this decision be taken collectively any more, if the buck ultimately stops with me?’

Overall, however, SMCR is driving positive change as a preventative measure.

Firms have (and will be) forced to review their governance, responsibilities and structures to ensure that responsibilities and functions are clear; that certification staff are (and remain) fit and proper, and importantly safe, to perform their roles; and that staff behave appropriately at work, all in an environment that is free from misconduct and in which constructive challenge is encouraged.

Within firms, compliance, human resources and legal functions are working ever more closely together and with management to ensure that information is shared appropriately and that risks are assessed in line with the regime’s requirements and for the good of the firm, its customers and the market.

The success of SMCR will ultimately be defined, however, not by the degree to which it is implemented in the short-term, but in years to come when we look back and assess the extent to which it has driven positive cultural change and a long-term improvement in conduct and performance where it is needed.

Louise Skinner is a partner at global law firm Morgan Lewis