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EY's pointers for the SM&CR: what wealth managers ought to know

Chris Hamblin, Editor, London, 19 December 2018

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The accountancy firm of EY has published a handy guide to the UK's Senior Managers & Certificaiton Regime as it applies to wealth managers.

The SM&CR has applied to banks, building societies, credit unions, investment firms and UK branches of foreign banks since March 2016 and to insurance firms since just the other day. It will apply to all solo-regulated firms (i.e., regulated only by the FCA) on 9 December 2019, so wealth managers ought to plan for this. There are three main elements to it: the Senior Managers' Regime, the Certification Regime and the conduct rules.

The FCA has created three new ways of classifying financial firms that are, in EY's words, "proportionate to the size and complexity of solo-regulated firms." EY states, none too clearly: "It is essential to determine what type of firm a business is and in a group decide whether to opt up entities as this will enable an understanding of the activities required to plan. There is an assumption that you may have already assessed the criteria against your firm."

The accountancy firm believes that the ‘core’ classification will apply to the majority of wealth firms in the UK, but some might be classified as ‘enhanced’ if any of the following conditions are applicable:

  • If they are significant ‘IFPRU’ firms.
  • If they are CASS large firms.
  • If they are firms with AUM of £50bn or more as a three-year rolling average.
  • If they have intermediary regulated business revenue of £35 million or more per annum as a three-year rolling average.
  • If they have annual revenue generated by regulated consumer credit lending of £100 million or more.
  • If they are are mortgage lenders or administrators with 10,000 or more regulated mortgages outstanding.

EY has, of course, worked on many SM&CR projects. Here are some of the main lessons it has learnt.

1. Identify all of the rules

Projects that concentrate immediately on senior manager allocations and do not actually list all the rules that they have to obey to comply with the SM&CR tend to be weak. Rules are to be found in documents such as SYSC, FIT, CONC and CP, which makes this crucial job difficult. EY goes on to say: "Consider using a thorough traceability matrix which provides a clear audit trail from regulation through to the development of minimum standards/business requirements which will underpin implementation."

2. Consider your technology

Realise at the outset that this is a vital regulatory project and is therefore likely to be subject to audit – either as part of pre-implementation or post-implementation. EY is keen for firms to ensure that the set-up process "delivers appropriate governance and documentation of key decisions in support of the adoption and implementation of the regime."

It goes on: "Encourage your project teams to incorporate an ‘assurance’ view to support business readiness decisions. Technology solutions available are maturing, [so] consider which best meets your requirements."

3. Reasonable steps

It is typical for senior managers to want to discuss the things that constitute 'reasonable steps' as soon as they come into contact with the project. WY says: "Well-run projects have considered communications around this to reassure senior managers that they are equipped to address regulatory scrutiny in the event of a potential conduct breach." Many firms have developed something that EY calls "a reasonable steps framework" which provides people who perform senior management functions or SMFs with guiding standards. This, it thinks, should define the minimum evidential standards expected of SMFs at firms.

4. Don't forget to educate and communicate

SM&CR projects should give consideration to all areas of a firm that are affected by the regime and should provide for appropriate briefing and training. EY likes to see training and communication plans covering not only the expected SMFs, non-executive directors and certified staff but also those areas of the business with responsibility for "operating" the SM&CR in a business-as-usual environment. This may include remuneration and performance evaluation committees whose job it is to plan for additional numbers of SMFs.

5. Governance and approval mechanisms

The certification regime can involve "high volume/medium complexity of operation," according to the accountancy firm. Some organisations are now thinking of acquiring new software to manage "business-as-usual operational risk,"  the better to gauge the completeness and accuracy of the certified population, keep documents and follow procedures to do with 'fitness and propriety' (which EY calls F&P).

6. Changing jobs and structures

Firms ought to ensure that they have clear processes to "capture changes to the allocation of responsibilities in the regulatory artefacts underpinning SM&CR" - a phrase that EY does not explain. They should also tell their board members and executives about the implications of re-structuring and re-allocating activities. They should then add the information to their Statements of Responsibilities (SoRs) and Management Responsibilities Maps (MRMs).

EY ends the non-advertising part of its guide by saying: "The time is now to mobilise your implementation programme.  We estimate that implementation programmes will take between 3-12 months depending on size and complexity. Moreover, as a ‘people-focused’ regulation, sufficient time needs to factored in to communicate and manage the iterative tasks requiring discussion and agreement."

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