Senior Managers Regime compliance could usher in a new era of joint working

The FCA’s Senior Managers Regime (SMR) puts accountability front and center.

Senior Managers Regime compliance could usher in a new era of joint working

Originally introduced in 2016 for larger banks and insurers, it’s set to be extended to almost all UK firms next year – including smaller companies in the credit sector, such as mortgage lenders and brokers.

The large institutions have broken through the pain barrier and implemented the changes. But what about smaller firms, many of whom are struggling to interpret the new regulations and adopt practical measures in time to meet the deadline?

There is a way to help small firms; one which could pave the way to a new era of low-cost, pain-free regulatory compliance for all. It’s all about regtech. 

SMR will have a significant impact on smaller firms

The new Senior Managers Regime seeks to strengthen personal accountability in financial institutions. It requires firms to detail to regulators the responsibilities of their most senior individuals, as well as identify specific individuals who are responsible for different areas of regulation, such as financial crime prevention and compliance with client asset rules.

It also requires these senior individuals to be certificated on an annual basis, and make sure all their staff act with integrity, care, skill, and diligence; remain open and cooperative with regulators; pay due regard to the interests of customers; and observe the proper standards of market conduct

It’s got a long reach too, and is likely to impact almost all global financial institutions. That’s because it applies to UK-based subsidiaries of non-UK firms and will also extend, in slightly modified form, to UK branches of non-UK banks. So SMR will have a significant impact on everyone in the financial services industry.

But many smaller firms just aren’t ready. And this isn’t such a surprise. According to KPMG, when bankers first saw the regulations nearly half of them said it would have a greater impact than they’d expected. That’s because SMR is not merely about filing another form with the regulator, as some people think. It goes much further; it will often require firms to put in place organisational reforms to make sure that accountability is clear and transparent.

In addition, the FCA is getting tough on management accountability. According to Wolters and Kluwer, 39 per cent of recorded penalties since 2013 have been due to “management and control” failures. Mary Steven, the global regulatory analysis manager at Wolters Kluwer, agrees: “The SMR is set to be extended to all authorised firms in 2018 and from this point we are likely to see an even greater increase in the number of cases reaching final notice stage.”

The difficulty is turning the regulations into action

But what’s the problem? The real difficulty for smaller firms is taking the regulations and turning them into practical action. For example, what does it mean in practice for officers to “pay due regard to the interests of customers”? Does it mean every decision needs an evaluation exercise to assess how it will interface with customer interests? Do you have to keep this on file to evidence a document trail if the regulator comes knocking?

In fairness, the FCA has done its best, publishing case studies showing how the rules could be applied in practice. But the financial services industry is huge and diverse – some firms have thousands of employees, some perhaps just five. There can’t ever be enough case studies to cover every firm and every situation.

We know interpreting SMR is going to be a challenge for small firms because the big organisations struggled too. Julian Bentley, Head of Risk and Compliance at Alderbrooke, wrote last year that “even now – six months later – some firms continue to struggle due to a lack of clarity and understanding,” and there were “many gray areas for businesses”.

Sharing knowledge is the solution

But there is a way forward, I believe. Eighteen months after the rules were originally applied to bigger financial institutions, we haven’t yet seen the FCA call anyone out for making mistakes in implementation. The big banks seem to have done well, as least so far. They understand SMR and have worked hard to comply. This begs the question: what can everyone else learn from them – and how?

Frankly, we’re at a crossroads. Either smaller firms invest as much money again to find the solutions that the biggest banks have already found; or the banks share their know-how, best practice, and lessons from the process and help minimise the costs for new smaller organisations. I’m firmly of the view that the latter is the better, and it could provide a test-bed for collaboration across the financial services sector.

The obvious objection is that it would be nonsense for a big bank to give away this knowledge freely to help a competitor, such as a small broker. But I think that’s wrong. The next decade will see a huge avalanche of regulations packages, and to have a chance of coping, the industry as a whole must radically change the way it deals with and implements these regulations.

We need to smash down the Chinese walls between compliance departments on Wall Street and within the City; open up to each other and start sharing our knowledge. It will save us all money in the long run, and this is where technology fits in. We can now allow people to connect in real time and share knowledge over the Internet. But at the moment, in financial services, we aren’t taking full advantage of this at all. Instead we’re choosing to keep ourselves holed up, or else discuss things in 1-2 day windows at conferences.