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FCA Conducts 'Stocktake' of SMCR

FCA Conducts 'Stocktake' of SMCR

Posted on 29 September 2019

It is now over three years since the implementation of the Senior Managers and Certification Regime (SMCR).  Readers will recall that the regime currently applies only to deposit-taking and dual (PRA and FCA) regulated firms.  However, as we cover elsewhere in this issue ("SMCR Implementation for Solo-Regulated Firms"), from 9 December 2019, the regime will also apply to firms authorised by the FCA only.  In essence, the purpose of SMCR is to increase levels of individual accountability and to improve culture across the financial services sector after the perceived failures associated with the financial crisis.  

The FCA has recently conducted a survey (or stocktake) to see whether and to what extent SMCR has become properly embedded in the banking sector.  Whilst being of obvious interest to those in or dealing with the banking sector, this work will also likely be of real interest to those considering implementation challenges for solo regulated firms ahead of December 2019. 

The methodology of the stocktake was to conduct interviews with individuals at 15 different authorised firms of varying types and sizes, and also with trade bodies and the PRA and FCA itself. 

The stocktake reached some interesting conclusions, summarised below:

  • The FCA found that "most" firms were taking steps to embed the spirit of SMCR, not simply to comply with its requirements.  This progress was matched by the ability of Senior Managers to discuss accountability and their responsibilities as leaders in the organisation.
  • However, some Senior Managers apparently expressed concerns about the meaning of "reasonable steps" in the context of the Duty of Responsibility to which they are subject in respect of their areas of responsibility.  The FCA noted that these Senior Managers were reluctant to specify what "good looks like" and instead called on the FCA to provide further guidance.  Given that the risk of personal sanction for Senior Managers is potentially greater under SMCR, this call for more granular guidance is not surprising. However, the FCA has no plans to supplement the existing guidance (in the DEPP chapter of the FCA Handbook).     
  • As an allied point, the FCA found that firms were placing too much importance on Management Responsibilities Maps (MRMs).  Whilst the FCA does not actually say why this is the case, it seems likely that MRMs are being used to determine who is making day-to-day decisions, rather than as a high-level document to reflect overall responsibilities.  Again, it is hardly surprising to see Senior Managers focussing on documents and processes, given the greater stakes now involved in their roles. 
  • In respect of certification (being the SMCR process that has firms determining the "fitness and propriety" of staff), the FCA was generally satisfied that firms have implemented appropriate systems and processes and that they were engaging with the new requirement that certified individuals have appropriate "personal characteristics".  However, the FCA found that firms could not necessarily demonstrate consistent results.  The FCA also specifically mentioned that firms appeared not to be assessing whether certified staff were competent managers. 
  • Whilst interviewees were positive about the intention of the enhanced regulatory reference regime introduced by SMCR, it appears that the quality and timeliness of references varies considerably.  The FCA also notes (correctly) that there are often discrepancies between firms' approaches to determining whether there has been a Conduct Rule breach. A Conduct Rule breach is of course something that would have to be disclosed in an SMCR compliant regulatory reference.
  • Interviewees thought that the new Conduct Rules were well understood throughout their organisations.  However, the FCA was concerned by suggestions that firms are not tailoring their Conduct Rules training to particular roles or levels of staff.  The FCA also found a concerning inability on the part of interviewees to describe what a Conduct Rule breach actually looks like and an over-reliance on firms' own internal values statements, rather than the Code itself.
  • On cultural reform, the FCA reported that most firms see a change in tone and ownership from Senior Managers, with an increase in clarity of thought around cultural expectations.  However, many interviewees actually identified the cause of this shift in cultural change work that preceded SMCR.  Whilst interviewees confirmed a change in the mind-set in Senior Managers, the greater cultural impact appeared to be through the improved conduct controls introduced by SMCR.   It is clearly too soon to say with certainty whether SMCR has brought about or even contributed to meaningful cultural change, that will impact on conduct.  
  • Some interviewees reported a "culture of fear" in the early days of the regime.  However, this apparently abated as firms worked to create a new culture of openness and challenge and also as firms saw the regulators seeking to work collaboratively with them. 
  • Overall, the FCA determined that SMCR is still being embedded by most firms and that larger and well-resourced firms that have regular contact with the regulators are more "mature" in their approach than their smaller peers.  Whilst perhaps not surprising, this insight is concerning given the large number of smaller firms that will come into SMCR from December 2019.
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