The latest signpost on the financial industry’s road to greater transparency and accountability is the extension of the Senior Managers Regime (SMR) to incorporate all FCA-regulated firms, but what exactly do the new regulations entail?
Along with MiFID II and the PROD rules, the recent roll-out of the SMR is intended to form a key part of the regulator’s three-pronged attack on the perceived lack of accountability in the industry in the wake of the financial crisis.
As such, the SMR is another step towards the creation of a more comprehensive culture of accountability and part of the FCA’s long-term campaign to regain public trust.
The SMR’s main focus is on the individual accountability of the most senior managers within firms and ensuring they personally take what the regulator defines as ‘reasonable steps’ to prevent compliance breaches.
It is this eye on the most senior individuals that sets it apart from previous regulations.
The SMR will lead to greater scrutiny of the most senior individuals within firms and their operations on a day-to-day basisFirms might be inclined to think that the SMR is simply a rebranded version of the Approved Persons regime that came before it. However, viewing the new regime as a like-for-like swap with its predecessor, which is a mistake the industry has made in the past, could prove costly.
Take MiFID II, for example. Since it came into effect in January 2018, MiFID II has proven to be much more extensive and demanding than its first incarnation.
Estimates suggest that an alarming number of firms are failing to keep pace with the reporting requirements of MiFID II, and this seems to be in no small part down to a lack of preparation and an underestimation of the new requirements as outlined in the regulations.
With an increasingly proactive regulator looking likely to step up enforcement measures, it is crucial that firms do not make the same mistake twice and find themselves unprepared for the changes coming in as the SMR is rolled out.
The recent policy document on the SMR is example-heavy, using the FCA and its senior employees to clearly outline 30 ‘prescribed responsibilities’, as well as a series of ‘overall responsibilities’ relating to a firm’s wider business functions and activities.
These ‘prescribed responsibilities’ need to be formally allocated to a pre-authorised individual performing a ‘Senior Management Function’ within the firm.
Where these responsibilities are concerned, the Regulator has not been ambiguous about just how high up they expect the individuals to sit within a company’s hierarchy.
The reporting of senior managers and their designated duties in the Management Responsibilities Map is also an explicit requirement under the new regulations, and senior managers will also be required to complete and supply the regulator with a Statement of Responsibilities to demonstrate that they are aware of what they are personally accountable for.
In addition, firms are also expected to certify that senior managers are suitable to do their jobs and undertake their responsibilities on at least an annual basis.
Naturally, the SMR will lead to greater scrutiny of the most senior individuals within firms and their operations on a day-to-day basis.
To support senior managers, a firm needs to establish a framework that allow these individuals to quickly and clearly evidence that they are taking reasonable steps towards fulfilling the responsibilities assigned to their ‘Senior Management Function’.
Likewise, a framework needs to be put in place to allow the firm itself to document that it is routinely assessing the fitness and propriety of its senior managers.
It seems clear then that the roll-out of the SMR will lead to yet more pressure on firms to enhance their reporting capabilities.
The best way that firms can meet these regulatory requirements is by ensuring that the day-to-day operations of the firm, and thus senior management, are brought into formal structures of governance focused on record-keeping and the creation of a clear paper trail to evidence the fulfilment of responsibilities.
Of course, the creation of such a paper trail can be a drain on internal resource, and outsourcing is a prudent choice when it comes to record-keeping.
Some companies offer clients the ability to keep up with increasing reporting requirements with a simple phone call, allowing senior managers to securely dictate and then receive an accurate transcript of their meetings so that their talents can be utilised elsewhere.
Kirstie White is co-founder of VoiceNotes.co.uk
