The new Senior Managers and Certification Regime aims to encourage senior managers at British financial firms to take responsibility for their actions, but its primary function is to hold them accountable for other people’s.

The Senior Managers and Certification Regime (SM&CR), which came into force on 7 March 2016, replaced the Financial Conduct Authority’s former Approved Persons Regime (APR). The rules apply to people who work at all regulated firms, namely banks, building societies, credit unions, investment firms regulated by the Prudential Regulation Authority and foreign banks with branches that operate in the United Kingdom.

The threat of succession

Under the new rules, senior managers have to provide their successors with handover certificates that (a) set out the ways in which those successors should discharge their responsibilities and (b) identify any issues of which they should be made aware.

If you are going to be the recipient of a handover certificate, be probing. Don’t just ask questions of your soon-to-be-predecessor – ask other senior managers to get a full picture of what has happened in your particular area of the business. Don’t just accept the certificate and expect all the information to be contained therein. The chances are that certain aspects of the job will have been left out, especially if your predecessor has not done his job properly.

Regulatory references

The FCA and PRA have now passed rules that will, on 7 March 2017, apply to references (either requested or provided) that pertain to recruitment and movement between jobs. A ‘relevant firm’ must provide, on request, a reference to another relevant firm. An ‘irrelevant firm,’ however, must provide a reference at the request of a relevant firm that wants to appoint a senior manager.

Regulatory references are fascinating when considered in the light of the LIBOR crisis. The issue of regulatory references is obviously relevant to people who have settled out of court in those cases, who must be worried that their involvement might blight their chances of working in financial services in future.

These people are, at the moment, able to negotiate with their previous employers about references and therefore stand some sort of a chance of glossing over the embarrassing days of yore when composing their job applications. Such leeway is about to disappear.

A career-ending moment?

People in financial services are now being tested for their ‘fitness and propriety’ continually. Under the new regime, they will be tested for this every year and this will apply not just to senior managers but to ‘certified persons’ as well. The test will have to take into account any disciplinary or performance-related issues and firms will have to make their own decisions about whether people have passed it or not. If a senior manager fails the test, his firm will have to report that failure to the regulator. If a certified person fails, the firm will have to refuse to renew his certificate. People who have contravened the rules to a very serious degree will obviously not be around to see the renewal date!

You will also, as a senior manager, be accountable for the standard of your own behaviour. If you fall short of that standard, you are going to have to make your peace with the regulator and it could be a career-defining moment.

Here be dragons!

Additionally, you will be accountable for managing the risks in relation to that area of the business for which you are responsible. This is where the real dangers lie. The need to delegate, of course, will force you to trust people in junior positions to be fully competent. If it transpires that those people are incompetent, it will be very difficult to convince the regulator that you are not accountable. If you fail in this respect and your firm collapses, you could be held accountable in a criminal court. You could be prosecuted and end up with a criminal conviction.

Four steps to take

How do you protect yourself against this risk? There are four obvious steps to take. First, keep your statement of responsibilities (a statement that sets out the activity for which you are/will be responsible for managing) under regular review. Make sure that it is always up-to-date and keep thoroughly familiar with it at all times.

Second, ensure that your management responsibilities map (a document, called for in SYSC 4.5.4, that describes your firm’s management and governance arrangements) is equally up to date. The statement and the map might disagree with each other. Your responsibilities must be set out clearly and there must be no ambiguity as to who is accountable for a particular senior manager function. If it’s your function, make sure the map says so. If things go wrong, the statement and the map will either be swords to be used against you or shields that protect you.

Third, do not denigrate the importance of delegation. Be careful about those to whom you delegate responsibilities and ensure that you develop your own systems to monitor those responsibilities regularly. Check documents and don’t just rely on someone’s word.

Fourth, ensure that you have the right systems and procedures in place. Place automation at the heart of this process, creating alerts, tracking progress and ensuring that your documents are accurate.

Remember, the regulator might end up aiming its pistol at you, not your firm.