Around 60,000 firms large and small have less than two years to put in place a more wide-ranging and robust regime centred on the individual accountability of senior managers. Designed to address failings in corporate culture that contributed to the 2008 financial crisis, the new regime aims to ensure named and identifiable individuals are responsible for a firm meeting all its regulatory obligations and are culpable for any failings. The wider objective is to change the corporate culture within firms to encourage competition across markets and improve consumer outcomes.
What is changing?
The new SM&CR regime has been described as "a bigger toolkit"*. It replaces the Approved Persons Regime (APR) which was criticised for failing to ensure firms properly defined the responsibilities of key staff or carried out adequate ongoing supervision of those whose actions could be damaging to the firm or customers. The new regulatory framework has three components:
- The Senior Managers Regime (SMR)
Ensures senior roles are fully defined and individuals who have accepted responsibility to carry out Senior Management Functions are approved by the regulator; - The Certification Regime
Staff carrying out roles deemed “significant harm functions” must be certified fit and proper at least annually; - Conduct Rules
Applying to senior managers, certified persons and other employees, these are rules specified by the regulator to promote integrity and best practice at all levels.
Practical matters
Compliance consultant Paul McDermott says the new regime certainly aims to address weak points by making firms and individuals prove their fitness and competence to operate in a way that benefits markets and consumers. But on a practical level, it brings a new depth and complexity to documenting compliance in many areas that previously enjoyed a relatively light touch.
Firms will be obliged to create detailed responsibility maps of their management structure to ensure all responsibilities are apportioned with no gaps or overlaps. There are 17 Senior Manager Functions identified by the regulators and 30 Prescribed Responsibilities to be allocated among senior managers. Firms will have to prepare “Statements of Responsibilities” for senior managers which must be kept updated to reflect changes, with annual assessments to show ongoing competency for each position.
While ‘grandfathering’ will be allowed for existing senior managers in 2018, one of the completely new requirements that could add complexity to recruiting is that firms will have to provide new appointees to senior positions with a “Handover Certificate” containing all the information they could reasonably be expected to need to perform the job in accordance with regulatory requirements.
Under the Certification Regime, individuals will no longer be subject to direct regulatory approval but instead a senior manager will assume responsibility for the certification process and ongoing assessments. Many of the new Conduct Rules will apply through the management structure with firms subject to reporting requirements imposed for actual or suspected breaches.
Although not a reinvention of the wheel, the changes strengthen some spokes and add some new ones. Paul McDermott says the new rules may lead to problems because they will force senior managers whose focus is often on the commercial challenges of running the business to start thinking and acting like regulators, protecting consumers and the market. Ultimately the new rules are designed to enhance trust and build confidence in the firms and the markets for everybody’s benefit.
How can Equiniti Hazell Carr help?
The SM&CR challenge for firms is not only ensuring senior managers understand and manage the risks in their areas of individuality responsibility, but how that risk-management can be articulated to an independent party such as a regulator, through documentation and verbally if required. Firms must work out for themselves how to meet the new rules – there is no blueprint the whole market can adopt.
Equiniti Hazell Carr has unrivalled expertise working closely with a wide range of regulated firms, using our skilled technical resources to help them understand the practicalities of meeting the regulator’s changing requirements efficiently and effectively. With the clock ticking down to implementation in 2018 we can help firms in a number of ways including:
- Company reviews and readiness assessments;
- Practical guidance and a summary action plan for tackling the changes;
- Key staff training on the impact and implementation of the new rules.
For more information about how Hazell Carr can assist please email us on contact@hazellcarr.com.