A survey that gauges preparations for the British Financial Conduct Authority’s Senior Managers and Certification Regime has revealed that most firms have plenty of work to do as they prepare for its extension to all authorised firms on 9 December.

ACA Compliance Group (which completed its acquisition of Cordium last September) conducted the poll. From a pool of more than 70 respondents, including asset managers, hedge funds, private equity firms, broker-dealers and wealth managers, its findings were as follows.

• Less than 2% of firms have prepared for SM&CR to the requisite degree.
• In equal measure, only 2% of employees know enough about the new rules and their implications for their firms.
• More than one-quarter of firms admit that awareness of the SM&CR outside their compliance teams is 'minimal.'
• Almost two-thirds (60%) of firms surveyed are one-third, or less, of the way through their SM&CR projects.

Adam Palmer, a partner at ACA, told Compliance Matters: “Without a doubt, solo-regulated firms [i.e. firms regulated only by the FCA] need to accelerate the pace at which they are preparing for the SM&CR in the UK. It’s a long road ahead for 98% of firms and it’s clear that they are underestimating the amount of work they have to do. For some, the coming of this new regime will necessitate substantial changes to both governance and culture.

“There are new policies, processes, and documents that solo-regulated firms must implement. Employees throughout each firm need to be trained in SM&CR individually, as it will in many cases touch on their day-to-day roles. It’s important for firms to start working on SM&CR in earnest today.”

The 'stocktake' report

The UK's Financial Conduct Authority introduced the Senior Managers' Regime for deposit-taking firms and dual-regulated investment firms (i.e. the banking sector) in March 2016. It has now released a report (which it calls a 'stocktake') about its efficacy.

The regulator's attempt "to better understand how the SM&CR has embedded in the banking sector in the 3 years since it was introduced," was based on interviews with 45 people at 15 banks, trade associations, the Banking Standards Board, the FCA and the Prudential Regulation Authority. Most of the banks were not private banks, but the FCA expects its findings to be of use to all financial firms - even insurance firms which are scheduled to join the Senior Managers and Certification Regime in December. The regulators asked these people about senior manager accountability, certification, regulatory references, 'conduct' rules, the SMR's effect on 'culture,' its unintended consequences, and the teething troubles (which the FCA amusingly described as "embedding and overcoming initial implementation issues") that it encountered. All findings are based on gossip and not on any "document discovery" exercises.

The FCA's findings in outline

The FCA finds that senior managers everywhere can explain the ways in which they are accountable for their own actions and their responsibilities as leaders in their organisations. Some non-executive directors think that the regime expects too much from company boards and that the line between a non-executive and executive could become blurred. Even the FCA admits that in large firms, the responsibilities of non-executive directors are often "considerable."

Some firms are placing a great deal of importance on the Management Responsibilities Map (MRM) and are using it for things other than the SM&CR.

Many senior managers, according to the FCA's rough-and-ready survey, are worrying about the meaning of the phrase ‘reasonable steps’ to describe the things they had to do to avoid contraventions from occurring or continuing. In its report the FCA brushes this aside with an airy reiteration of these managers' duty to be 'reasonable.' Firms do not seem to have made significant changes to their performance assessment processes "other than incorporating expected behaviours."

Most respondents think that the financial sector has some way to go to improve the quality and timeliness of regulatory references and that banks are not always consistent in recording breaches of the FCA's conduct rules.

Interviewees told the FCA that they believed their staff to have a general understanding of the regulator's 'conduct' rules, at least on average, but the FCA is not convinced. Many firms could not explain what a conduct breach looked like in the context of their business.

The FCA's comments

The regulator calls on firms to notify all relevant persons of the conduct rules that apply in relation to them and to take all reasonable steps to see that those persons understand how those rules apply in relation to them. This must include the provision of suitable training.

The effect of the SM&CR on culture

Most firms said that they had started to work towards changing their before they had to implement the regime. They were spurred on by past conduct problems, the effect of ring-fencing and the remuneration code.

Many firms told the FCA that they were benefiting from "a stronger tone and ownership from the top" and that their people were talking to each other about "culture and expected behaviours" more clearly and in more detail than ever. All the firms talked about the work they had done to create a "culture of challenge and escalation" and a safe environment in staff could speak up. They have, however, found it "challenging" to find ways of measuring culture.

Unintended consequences

The FCA's 'stocktake' report asserts that, for most firms, "the SM&CR did not lead to significant unintended consequences." Polly James of Bryan Cave Leighton Paisner has argued otherwise in her article.

The FCA says that there was a culture of fear during the early days of the regime which "has now largely dissipated." It is also aware of problems to do with recruitment, especially at a few firms that want to hire people from outside the financial services industry. Three years on from implementation, some banks are still not very good at operating the regime below the level of senior management.

Timetable

• 9 December 2019: The SM&CR will commence for solo-regulated firms.
• 10 December 2019: Insurers must have trained all conduct-rules staff to know the conduct rules. They must also have issued the first certificates for their certification staff.
• 9 December 2020: Solo-regulated firms must have trained all conduct-rules staff to know the conduct rules. They must also have issued the first certificates for their certification staff.

Tips for compliance officers

Jon Wilson, the director of the compliance consultancy of Ellis Wilson, said: "The FCA’s 'stocktake' of 3 years of operating the SM&CR at banks provides some insight for firms implementing the new rules for 9 December.

• Be clear on senior managers' accountabilities.
• Short-term changes may include senior management strengthening controls and taking fewer risks.
• Get over any fears that you have about the SM&CR and focus on an environment of healthy challenge and openness.
• Certification is more than competence – assessment should focus on behaviour too.
• Regulatory referencing is good but is being applied inconsistently.
• Conduct training is not being tailored to staff roles; there’s more to do to embed conduct standards across firms."

He ended by admonishing firms with the words: "The SM&CR starts on 9 December; it doesn’t finish then."

* Adam Palmer can be reached on +44 (0) 20 7042 0560 or at Adam.Palmer@ACAComplianceEurope.com; Polly James can be reached +44 (0) 20 3400 3158 or at polly.james@bclplaw.com; Jonathan Wilson can be reached on +44 (0)20 3146 1869 or at jon@elliswilson.co.uk