OpinionSep 19 2017

How effective will the senior managers regime be?

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As the Senior Managers and Certification Regime extends beyond banks to all regulated financial services firms, it is a good time to ask: how effective is legislation in reducing the kind of behaviour that caused the global crisis?

The new regime is designed to reduce harm to consumers and strengthen market integrity by making individuals more accountable for their conduct and competence. 

In announcing its extension last month the FCA emphasised its aim to “encourage a culture of staff at all levels taking personal responsibility for their actions”. 

It identified in its April review of the effect of SMCR implemented in banks that “we recognise culture change takes time and there is still more to do”. 

FCA director of investigations Jamie Symington said in June 2017: “We see culture change as the key aim of our work on individual accountability".

Similarly, the chief executive of BSB said at a recent FT forum about the loss of trust in business: “The focus should be less on trust and more on trustworthiness”. 

Some lessons have been learned and that ticking boxes for legal compliance and a CSR budget is not nearly enough.

History has taught us over-trusting the banks had enhanced their tendency to take advantage of and betray that trust. The focus therefore might more usefully be on how banks behave less on how they are perceived.  

The aim should be grudging respect rather than trust. Other indicators of the direction of travel are various culture change initiatives that are coming to prominence.

The FRC chairman commented the Government’s ‘comply or explain’ reporting proposals only go so far as although code compliance will remain high more insight into business practice itself is needed, which is where culture comes in. 

July’s Institute of Business Ethics forum, called 'changing culture: the role of governance', stated: "Culture is more than ethics, it is something which is hard to define, and even harder to change.

"A healthy culture is comfortable with asking questions, raising concerns and admitting mistakes.

"Robust governance is just one of the elements which influences corporate culture. Culture by its very nature long-term – no amount of governance, regulation or investment will create a healthy one."

Measuring and reporting on good culture remains elusive. The BankingFutures project published reports this summer aiming to create a roadmap for change to ensure banks create long-term value for UK society, including support for the UK’s critical SME sector and what bank leaders and investors can do to deliver long-term value and better societal outcomes. 

The Coalition for Inclusive Capitalism is aiming to produce standard reporting requirements to enable investors to compare the value companies bring beyond increasing profits and to be good not just for investors but for other stake holders (including customers and employees, communities, environment and society).  

A new form of metrics to include the more intangible value including culture is emerging. Good culture as a proven indicator of success and source of profit, is also in debate with those who still consider that the only responsibility a board has is to the needs of its shareholders. 

The Purposeful Company Taskforce argues that good governance is a competitive advantage and it is now generally accepted that improved profit and performance follow ‘the pursuit of purpose’ – an articulated, self-conscious and shared insistence that a company first exists to promote societal and human betterment. 

Optimists may see signs here of positive change through focus on culture and behaviours and on more transparency than before. 

They might consider some lessons have been learned and that ticking boxes for legal compliance and a CSR budget is not nearly enough.

Pessimists may see a lack of accountability and legislation failing to bring large global institutions, their leaders and owners to account. 

They might consider that having to do no more than ‘comply or explain’ will allow information about unscrupulous business practice to go unreported and that other forums that ”name and shame’, such as select committees, gender pay reports, executive pay ratios and public whistle blowers will only serve to scratch the surface of a vital issue. 

William Granger is partner at Charles Russell Speechlys