An essential first step is to understand the very essence of the regime and how it has played out in the banking sector.
The regime was first rolled out in the banking world to replace the Approved Persons Regime for banks, building societies, credit unions, and Financial Conduct Authority and Prudential Regulation Authority regulated investment companies, in March 2016.
It was further adopted by the insurance industry in December 2018, and from December 9 2019 the FCA is replacing APR with SMCR in almost all financial services firms, to "reduce harm to consumers and strengthen market integrity" as the FCA states.
Source: Duff & Phelps
Drive toward change
Martin Davis, chief executive of Kames Capital, points out the regime provides “a new way of dividing up firms into different buckets of individual accountability, but it is also about instilling a new culture of conduct for all employees”.
Similarly, Linda Gibson, director of regulatory change and compliance risk at BNY Mellon’s Pershing, says “the countdown is on and this time, it’s cultural”.
Ms Gibson continues: “Part of taking more accountability for individual decisions under SMCR is recording them in a way that assists a reliable investigation.
“When things do go wrong, firms will need reliable data and people in place full-time to oversee its accuracy.”
Indeed, the incentive for the new regime followed the financial crisis, when recommendations were made by parliament that the FCA develop a new accountability system more focused on senior managers and individual responsibility, notes Janice Laing, managing director of Compliance First, part of SimplyBiz Group.
Ms Laing adds: “It is worth noting that the FCA rules for smaller firms are designed to be proportionate. This means the same rules that apply to banks and larger institutions do not apply in the same way to the majority of adviser firms.”
However, some in the industry have questioned whether the regime is truly necessary, especially when advice companies are already time and resource-poor as it is.
Ms Laing says: “Anything that encourages more personal accountability for advice given and helps to tackle firms which may not operate in a way which ensures good outcomes for clients is a positive step.
“In addition, I believe it will help to bring about a culture where more attention is given to education and development on an ongoing basis.”
Nevertheless, it is difficult not to empathise with advisory firms that are struggling under a heavy regulatory burden, she adds.
“I know they may find it more difficult to see the positive side of yet more policy change.”
Lessons from banks
An analysis of the FCA's enforcement database by Clyde & Co in 2018 showed the value of fines handed down by the FCA decreased by 88 per cent that year, but the penalties on individuals trebled, with the average fine for an individual at around £186,000, up from £63,000 in 2017.
But, speaking at a Tax Incentivised Savings Association conference in London on January 29, Max Lewis, director of KPMG, suggested it was far from smooth sailing when it came to implementing the regime and new culture of accountability in the banking sector.
He explained that some statements of responsibilities – present in the banking sector when the regime was rolled out – did not clearly explain an individual’s role and accountability, and some gaps were present in the allocation of responsibilities.
He said there were also examples of duplication of ownership and shared responsibilities that were not defined effectively, and “a lack of innovation in firms' approach to managing SMCR”, such as the “inadequate use of systems and technology”, resulting in “a reliance on manual processes and controls to manage and maintain large populations”.
There was also a “lack of engaging training for individuals as to what the implication of applying the SMCR conduct rules meant to them” and “insufficient use of tailored scenarios to bring training to life”, he pointed out.
Finally, he explained that some firms have, since implementation, struggled to operate an effective certification regime, as their process controls were not suitably robust, leading to some issues and failures.
“Often it is unclear who was responsible for compliance and operational effectiveness of the regime – commonly across human resources and compliance – and insufficient resource allocated to the ongoing management of the regime,” he added.
But, if implemented well, SMCR has the potential to be a mechanism to reinforce culture and expected behaviours, says Roy Beale, head of media relations at St James’s Place Wealth Management.
He explains: “The lessons learned within the banking sector has meant the FCA and PRA have provided more guidance to firms implementing the new regimes. However, the level of focus and effort needed for a successful implementation should not be underestimated.
“SMCR is not just about getting to the implementation deadline, but ensuring that there are sustainable processes to support senior managers in discharging their responsibilities.”
He adds: “A particular area of focus is ensuring the certification regime and conduct rules are fully understood by those affected, and implemented in a way which aligns with the firm’s way of doing business.”
Good practice
Claire Cornell Johnson, technical policy manager who is leading SMCR at Tisa, points out that, realistically, the requirements are nothing new, and, as this regime started with the banks, advisory companies are getting the benefit of additional guidance that did not exist when it was originally rolled out.
Ms Johnson says: “Really, it's all just solidifying what firms probably should have been doing all along.”
She continues: “The FCA wants any actual conduct breaches to be reported by firms for senior managers.
“If normal conduct rules staff did something outside of the workplace that wasn't anything to do with work – like they stole something – that wouldn't necessarily be brought into the workplace.
“But if a senior manager did it, it would be brought in as 'not acting with integrity', so there are a few more documents you need if you're a senior manager.”
Parts of the regime are just good practice and so companies should be doing it already, agrees Dominic Crabb, chief compliance officer at London & Capital.
Mr Crabb explains: “When it's targeted at banks I can see it is a good thing – I think there was a failure in culture and the challenge was always that you couldn't pin the blame on individuals.
“But the possible challenge when you move to smaller firms, wealth management firms and small advisory firms, is that it becomes a very cumbersome piece of regulation.”
For these reasons, Caroline Bradley, group risk and regulatory director at Tenet Group, says companies with strong governance structures and well-documented systems and controls should not find any significant challenges.
Ms Bradley says: “But for others, this may represent a more fundamental change to their business.
“[But] as this regime started with the banks, advisory firms are getting the benefit of additional guidance that didn’t exist when it was originally rolled out.”
victoria.ticha@ft.com
