Friday HighlightJul 12 2019

Clock is ticking on SMCR compliance

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Clock is ticking on SMCR compliance

With less than six months to go until the Senior Managers and Certification Regime comes into force, the clock is ticking for UK firms.

Those affected need to take steps now if they want to be ready for the new regime.

Non-compliance with the SMCR after December 9 2019 could incur significant regulatory penalties.

Overview

The SMCR came about after the financial crisis, when parliament recommended that the Financial Conduct Authority establish a new accountability regime that focuses on senior managers and individual responsibilities.

The implementation of SMCR will have significant impact on management, compliance, HR and technological processes for all FCA regulated firms.

To put it simply, firms will need to ensure that the right person is performing the right role, and is properly trained and qualified to perform that role.

Its aim, as outlined by the FCA, is to reduce harm to consumers and strengthen market integrity, as well as restore confidence in the industry by making individuals accountable for their conduct and competence.

To comply with the new regime, firms may need to take a number of steps, such as adjusting their governance arrangements, clarifying areas of responsibilities, identifying and eliminating gaps, and recording and evidencing their review processes.

SMCR is also meant to stimulate a deeper cultural change and improve conduct within firms.

When responsibilities are clearly defined and allocated, management and staff are able to fulfil their duties with confidence, without having to make assumptions.

And when responsibilities are transparent and visible to all staff, it can help inspire trust between colleagues, and encourage greater ownership of responsibility.

Culture drives behaviour. There is never a right time to do the wrong thing, there is never a wrong time to do the right thing.

The tasks at hand

In addition to the roles and responsibilities that apply to senior management, firms will also need to identify their certified persons; these are persons who could potentially cause harm to clients, employees or the firm itself.

Certified persons will not be directly authorised by the FCA, but firms will need to identify any roles that include investment advisers, wealth advisers, pension transfer advisers, proprietary traders or any person who supervises or manages a certified function, just to name a few.

To put it simply, firms will need to ensure that the right person is performing the right role, and is properly trained and qualified to perform that role.

And all this must be evidenced - it’s the age-old “show me” test.

Senior managers and certified persons will have to get educated on the new code of conduct rules that will apply to them specifically and will be required to undergo appropriate training before the commencement of SMCR.

They must also put together a 'statement of responsibility', setting out clearly and succinctly what that senior manager is responsible and accountable for.

There is also a duty to prevent and report breaches.

Senior managers and certified persons must also undergo annual, or sometimes even more frequent assessments, to demonstrate their fitness and propriety, including competency and financial soundness.

Firms must retain evidence demonstrating competence under fitness and propriety, of knowledge and skills through testing, file reviews, skills assessments, line manager reviews, ongoing CPD, and so on.

Implementation of the new regime will be a lengthy process, taking months to complete and requiring a dedicated team to work out its requirements.

Here are the key steps that firms will need to take ahead of the implementation deadline:

  • Determine its classification and understand how SMCR applies to them;
  • Identify senior managers, allocate the appropriate responsibilities and produce 'statements of responsibilities';
  • Identify certified staff, ensuring that mechanisms are in place to train, assess and certify them as competent, as fit and proper;
  • Train senior managers and certification staff on the new conduct rules;
  • Review 'statements of responsibilities' and terms of reference of governance and committees;
  • Store the evidence, and be able to produce the evidence, demonstrating competence under fitness and propriety, of knowledge and skills through testing, file reviews, skills assessments and ongoing CPD, and so on.

Caution

Some firms may have decided to adopt manual processes to comply with the regime.

While it may be possible to use spreadsheets to administer SMCR, the process would quickly descend into a tick-box exercise, thus defeating the purpose of the initiative.

Not impossible, but certainly a risky approach when one has to consider annual deadlines, keeping information up to date and ensuring information remains consistent across numerous documents.

By adopting the appropriate technologies, firms could reduce the administrative burden and make time for the more complex and strategic parts of SMCR, like training and competence, and the duties of responsibility and accountability.

Still to come

On top of all that, when the FCA’s Directory opens for submissions, firms will be required to submit the details of their senior managers, certified individuals, as well as other important individuals who undertake business with clients and require a qualification to do so.

Firms must also ensure that the details remain up-to-date.

Banking firms and insurers can start submitting data as of September 2019, while all other firms can start submitting from December 9 2019.

The Directory is a new public register that enables consumers, firms and other stakeholders to find information on key individuals working in financial services.

Start now

Firms must start preparing now, if they have not done so already, to effectively tackle the plethora of changes that are being introduced by the new regime.

Whether a firm decides to build their own solution, or engage consultants to assist with their SMCR readiness programme, it will require many lengthy discussions along the way.

Therefore, my advice is to push through the inertia because, “a journey of a thousand SMCR miles begins with a single step”.

Sean Lam is chief executive of Walker Crips