The clock is ticking on SM&CR: time to prepare...

After a fatigue-inducing workload of regulatory projects over the last two years, compliance departments can be forgiven for wanting a bit of a breather. Professionals have spent long hours preparing for PSD2, MiFID II and GDPR - and those regulations were introduced in the first six months of 2018 alone!

The tail-end of the year has provided barely any respite, as compliance teams forge ahead with Brexit planning against a backdrop of ongoing political uncertainty. At the risk of adding more fuel to the fire, I believe now is also the time that financial services firms should get ready for one of the next big events on the regulatory calendar: the full rollout of the Senior Managers & Certification Regime (SM&CR).

But what is SM&CR? Who will it affect? And what should businesses do to prepare?

A history of the SM&CR

The Global Financial Crisis (GFC) resulted in a backlash against banks worldwide, leading to allegations of irresponsible lending, widespread misconduct and toxic work environments.

A lack of accountability across the industry was a major issue. Many key banking industry figures, such as former RBS CEO Fred Goodwin, were accused of bringing financial institutions to the brink of collapse, before walking away relatively unscathed.

As a result, UK regulators have introduced an array of legislation in recent years to stabilise the financial services sector and rebuild trust in banks. The Senior Managers Regime (SMR) was introduced in March 2016 to increase corporate accountability and encourage a better tone at the top. This formed the foundation for what would eventually become the SM&CR.

How does the SM&CR affect financial services firms?

The original rules only applied to banks, building societies, credit unions and PRA-designated investment firms. However, the previous regime's perceived success led to the development of the SM&CR, which will be rolled out to all financial services firms by the end of next year, starting with insurers and reinsurers next month.

So, what does the SM&CR actually do? The regime is fairly comprehensive, but we can break it down broadly into three categories: the SMR, the Certification Regime and Conduct Rules.

1. The SMR

Under the SMR, senior professionals working within financial services firms must have FCA or PRA approval before they can begin doing their job. These 'Senior Managers' also need clearly defined areas of the business for which they are responsible, with this information outlined in a statement of responsibilities.

At least once a year, companies are required to confirm the Senior Managers they have appointed remain fit and suitable for their role.

2. The Certification Regime

This part of the Regime is designed to boost accountability for professionals who may not classify as Senior Managers but still hold important enough positions within a business that their irresponsible behaviour could cause serious damage. Businesses must certify they are fit and proper to perform their duties, although FCA or PRA approval isn't required.

3. Conduct Rules

The Conduct Rules are a set of guidelines designed to improve professional behaviour across the board at financial services firms. Some of them apply to all staff, while others are for Senior Managers only. Organisations must also train their employees to follow the Conduct Rules, as well as inform the FCA on any breaches.

Are you prepared for SM&CR?

Awareness of SM&CR is excellent among compliance departments. A recent London Institute of Banking & Finance (LIBF) survey revealed every professional it polled within these teams knew about the impending regulation.

However, less than one-third (30%) of business owners or principals said the same, and only half of advisers were aware of the SM&CR. Even three in every 10 compliance professionals admitted they wouldn't know which category their firm would fit under after the rules changed.

The research was conducted earlier this year, so awareness levels may have improved, but the fact remains that SM&CR compliance is no easy task. Perhaps this is why 100% of compliance staff in the LIBF poll said they would like further guidance and support from professional bodies?

What should firms do next?

Many financial services firms will be affected by the changes, from the country's largest asset managers and pension funds to payday lenders and debt collection companies.

Compliance departments must also work closely with HR, legal, finance and other core teams to ensure compliance. Here are just some of the tasks that may be required:

·        Identify, establish and redefine key roles;

·        Perform background checks and screening of employees;

·        Seek regulatory approval for Senior Manager candidates;

·        Revise employment contracts and role profiles;

·        Rearrange reporting lines; and

·        Formulate organisational charts.

Businesses of all sizes will encounter problems complying with SM&CR. Big firms with large headcounts are likely to have a complex web of roles and multiple areas of responsibility to untangle. Smaller organisations may seem to have an easier job but could lack the capacity or in-house skills to tackle the project effectively. 

(Image credit: Rawpixel via Unsplash)

Can interim staff ease the burden?

The right contractors can prove a particularly valuable resource for SM&CR projects. After all, this is not a new regime; there are already interim staff with extensive first-hand experience of supporting these projects when the country's biggest banks were overhauling their internal accountability structures a few years ago. 

All financial services firms must take regulations such as the SM&CR seriously. With just over one year to go until the regime is fully rolled out, now may be the time to consider bringing in extra resource to help manage these projects. A consultant who understands the SM&CR and has previous experience implementing the regime can provide crucial assistance over the coming months.

Do you have any questions about the SM&CR? Feel free to post in the comments box below. I'd love to hear your thoughts. Alternatively, if you'd like to discuss interim resource requirements for an SM&CR project, please contact me on 020 7936 2601 or via email at [email protected].