Improving culture in financial services remains a continuing priority for the FCA and that includes improving the accountability of individuals by extending the Senior Managers & Certification Regime (“SMCR”) to all authorised firms.
FCA reviews SMCR
With the commencement of SMCR for solo-regulated firms on 9 December 2019 fast approaching (click here for our update on the roll out of SMCR), the recent review carried out by the FCA on the embedding of the regime by deposit taking and dual regulated firms over the past three years is of relevance not only to those in the banking sector but also solo regulated firms, as they look to embed the regime and drive the right behaviours to create healthy, sustainable cultures. A summary of the review’s key findings is set out below.
Position of non-execs
Some concern was raised by non-executive directors that the SMCR regime expected too much from the Board. There was a perceived risk that the line between a non-executive and executive could become blurred as Board members became more involved in operations of the business. The FCA confirmed that this was not the intention of SMCR. The FCA sees the oversight and challenge role of non-executive directors as a key safeguard, though it acknowledged that non-executive directors would often have considerable responsibilities, particularly in larger firms.
Duty of responsibility to take “reasonable steps” to avoid contraventions of the rules
The FCA noted that some senior managers’ were reluctant to state “what they believe good looks like” and inclined to look to the regulators for further guidance. The FCA has flagged the non-exhaustive list of the factors in their Decision Procedure and Penalties manual but has also stressed that:
It is not possible to provide an exhaustive list that would cover every situation. Neither would it be helpful; our expectation of senior managers is that they should be doing what they reasonably can to prevent misconduct. Appropriate controls and processes are an important part of this but we also look to senior managers to think more broadly and to create an environment where the risk of misconduct is minimised, for example through nurturing healthy cultures.
The FCA considered there was room for improvement in firms’ certification processes to demonstrate the effectiveness of their assessment approach, their use of judgement and how they ensure consistency. FCA also noted that it was not clear that firms were using the Certification Regime to evaluate if managers of certification staff (who are themselves certified) were competent managers.
Firms were supportive of the need for regulatory references (to prevent the ‘rolling of bad apples’), However, improvements in the quality and timeliness of references was necessary along with greater consistency in recording Conduct Rules breaches.
The FCA considers the Conduct Rules a key foundation for firms’ culture and individuals’ conduct (click here for our note of the FCA’s recent thinking on conduct and culture). The review suggested that Firms have not always sufficiently customised training on the Conduct Rules to specific employee roles or clearly linked the Conduct Rules to their values. Many firms were often:
unable to explain what a conduct breach looked like in the context of their business.
Overview and Next Steps
In general, the FCA concluded that most firms were continuing to embed SMCR while recognising that the initial stages of implementation had been challenging for some. Some unintended consequences were identified, for example, firms being more risk averse in relation to new business and products following a tightening of processes and controls and recruitment challenges with certification and SMF roles. The additional resource and work required to administer the regime was also noted.
The FCA does not plan to make any policy changes based on the review but will increase its supervisory focus on the Conduct Rules and expects all firms to ensure that they are embedding them in their businesses. Firms should take note and ensure that training is provided to enable staff to understand the rules and how they apply to them.
On October 14, 2019