RegulationFeb 28 2019

What are the potential challenges of SMCR?

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What are the potential challenges of SMCR?

The Senior Managers and Certification Regime is likely to increase the overall operating costs of the advice industry.

This is because companies will need to pay for consultants and lawyers, technology solutions and third-party training providers to see to it that the certification process is done right, notes Dominic Crabb, chief compliance officer at London & Capital.

Additionally, while some of the regime is just good practice – what companies should be doing already – implementing and making sure companies can evidence ongoing compliance with the regime will nevertheless be a strain on resources and time.

Mr Crabb explains: “Everyone is going to need to be signing documentation, so from the human resources perspective, it's a massive piece of work in terms of the audit trail.”

Unfortunately, the cost is likely to come out of clients’ pockets, he says.

Perhaps the biggest challenge will be in how the FCA supervises the regime, as it is all about taking ‘reasonable steps’, which can be quite subjective.Caroline Bradley

“A lot of it is just adding another layer of responsibility and oversight, which unfortunately increases the level of cost, and the overall impact of that is the client is possibly going to end up paying a little bit more for a piece of regulation,” he adds.

But aside from an increase in administrative burdens, cost and demand on resources, what other challenges and potential pitfalls should advisers be aware of?

Impact on productivity

Claire Cornell Johnson, technical policy manager and SMCR lead at the Tax Incentivised Savings Association, says that when things do go wrong, companies will need reliable data and people in place full-time to oversee its accuracy.

“As a result, SMCR compliance can’t be achieved overnight: instead, firms will need to ensure the responsibilities prescribed to each employee are being fulfilled on an ongoing basis,” she says.

But Linda Gibson, director of regulatory change and compliance risk at Pershing, part of BNY Mellon, says the very fact that implementing the regime is not an overnight process could mean it turns into a distraction for companies from their day-to-day activities.

She suggests: “This could become a distraction from business-as-usual activities if employees are locked in a grind about the fear of taking risks – however material to the customer or their employer.”

While this would not have been the Financial Conduct Authority’s intention, she worries SMCR has the capacity to make everyone scared of making a decision.

She continues: “It will lead to delays in decision-making if, for instance, someone who previously had conviction in their expertise and authority to execute will soon want a longer, more comprehensive audit trail to justify that decision.”

However, according to Caroline Bradley, group risk and regulatory director of Tenet Group, for core firms, the transition should not be too onerous.

Ms Bradley continues: “While the annual re-certification requirement will be a big burden for larger firms, and the biggest challenge for enhanced firms will be in relation to the statement of responsibility and the responsibilities map, and systems to ensure they stay up-to-date."

Ms Bradley adds: “[But] perhaps the biggest challenge will be in how the FCA supervises the regime, as it is all about taking ‘reasonable steps’, which can be quite subjective, so it will be interesting to see how this pans out over time.”

Identifying certified staff

Richard Nuttall, director of compliance policy at SimplyBiz Group, says the biggest challenge firms will have is to actually identify all certified persons.

Mr Nuttall says: “A certified person is not just the adviser or other person that carries out a regulated activity within the firm, it is extended to anyone whose decisions or actions could have ‘a detrimental or harmful’ effect on the business or its customers.

“Therefore, the guidance includes all individuals that manage or supervise the firm’s advisers up to the level of a senior manager.”

Senior managers, by their very nature, are busy people, so will they need to step back from some of their roles to allocate enough time to it?Dominic Crabb

He continues: “Where some firms may identify a weakness in their procedures is the lack of ongoing evidencing, demonstrating competency of the non-advising managers/supervisors.”

While Martin Davis, chief executive of Kames Capital, warns the new concept of conduct rule breaches and how this fits in with current processes is a potential challenge.

He says: “Firms will be taking on more oversight of certified persons which will require sufficient resource for firms to deal with.”

Indeed, Mr Crabb points out that some individuals who are not regulated staff at the moment, but are directly involved with making investments on behalf of clients, might have to become certified staff reluctantly.

He explains: “The regulation has the potential to drag such individuals into a regulated function.

“This could lead to some emotional turmoil because they might come under greater regulatory scrutiny, while they were happy simply being support staff, but who are now being dragged into that.”

He acknowledges: “There may be one or two very tough conversations with people as part of this process of repositioning where people are.”

Senior managers’ responsibilities

There are also a few drawbacks for senior managers as, obviously, responsibility will fall on individuals rather than the collective board, notes Mr Crabb.

He explains: “One of the big challenges is the statement of responsibilities: the requirement for people to sign exactly what they are reliable and responsible for – and I think that really focuses the brain a little bit more.

“[But] some of the challenges will be where some people are made a senior manager when they don't necessarily feel they have the level of authority and shouldn't be senior managers.”

He adds: “Also, from a compliance officer's perspective, it will be interesting to see whether compliance officers feel ultimately responsible for all areas of compliance, or if they don't sit on the board if they will still be the responsible person when reporting to a chief executive?

“Is that chief executive, or similar, the person who's ultimately responsible because they may choose to take a different path than the one recommended by the compliance officer?”

As the statement of responsibility will need a lot of time and consideration, another challenge will be for time-poor senior managers to make the most of their time.

He continues: “Senior managers, by their very nature, are busy people, so will they need to step back from some of their roles to allocate enough time to it?

“You can't have a quarterly board meeting and think allocating two hours a quarter to it and that's going to be good enough.”

Poor implementation

According to Mark Turner, managing director of Duff & Phelps, if poorly implemented the regime could be counter-intuitive.

He says: “Firms might end up creating a culture in which managers are afraid to make decisions in case they make a mistake that leaves them at risk of scrutiny or, in a worst-case scenario, enforcement action.”

So the new emphasis on individual accountability may not only risk discouraging new talent from joining this industry but also may leave managers feeling afraid to take responsibility for their actions (or the actions of others) and increase the temptation to identify scapegoats, he says.

He continues: “This could lead to mistrust in the workplace and even deteriorate professional relationships. In addition, this self-preservation impulse will almost certainly increase bureaucracy in firms, hamper decision-making and could even restrict innovation and creativity.

“These new processes are aimed to improve responsibility and clearly label the onus of liability in the financial services industry, but it could risk organisational structures becoming more rigid and hierarchical silos and an 'us versus them' culture.”

However, he says the good news is that when implemented with due planning and thought, embracing the principles of individual accountability can actually break down barriers and bureaucracy, and empower individuals to make decisions.

“This is something that we are starting to see at some of the banks,” he adds.

victoria.ticha@ft.com