Senior managers brace themselves for the SMR

By Ronald Gould, European Chairmanof Compliance Science 

After long debate, years ofdiscussion, consultation and considerable preparation, the UK Senior Managers and Certification Regime came into force this week, as reported by FOW. 

By now, this should be ofno surprise to anyone and if it is, they’re in trouble. The new scheme hasrequired a grandfathering process for existing senior managers and approvedpersons and a new Certification process for staff covered for the firsttime.  Along with all this, a special training regime was meant to havebeen completed already so that firms could comfortably attest to theirreadiness. Hopefully, everyone falls into that category.  

But what’s really involved inthis new regime and why is this happening at all?  After all, there hasbeen a massive number of new rules coming through the EU already, and the UKhas also been active in establishing new requirements. The answer lies in acombination of politics and industry self-awareness. What do I mean? First, after paying billions of dollars/pounds in fines, financial firms havecome to recognise that cultural challenges lie at the core of their collectivebehaviour problems and that prescriptive rules may not be enough to assure achange in behaviour.  Second, successive scandals in the financial industryhave eroded public trust in the sector to such an extent that it threatens toundermine financial system effectiveness at a time when it’s badly needed. 

And so it was that the idea forpersonal accountability as an additional layer of regulation was created, notso much by regulators as by politicians, reacting to a public outcry. Theyreckoned that market abuses would continue to occur unless underlying culturechanged and that cultural change would only occur if there was real, personalrisk to senior managers and key risk takers.  So thus, the SM & CRemerged. 

So what exactly does it do and towhom does it apply? I really hope that no senior industry professional readingthis does not already know the answer. 

First, the regime currentlyapplies to all banks, building societies, credit unions, insurance companiesand PRA designated investment firms.  The regime is expected to haveexpanded coverage to the entire sector in 2018.  The regime applies tosenior managers as well as material risk takers within a firm.  Firms willalready have sought grandfathered status for existing staff and will berequesting approval for all relevant new staff.  The regime is designed toshift the burden of designated responsibility from the regulator to the firm. 

The SM&CR is aimed atstrengthening personal responsibility and accountability for the actions of afirm by making individuals personally responsible for the firm’sactions, either at the top level or among the direct risk takers in specificareas.  One might ask how this responsibility is judged and the answer issimple – the criteria are the rules to which a firm is bound.  In thepast, where a firm might have broken a rule and been subject to enforcementaction, now that action might include sanctions – even criminal penalties – forindividual senior managers or certified persons. The regime is intended tocapture and hold the attention of key people in a firm, to ensure they demandnew standards of behaviour in the future and thus change the culture of firmsas a result.

Will it work? Only time will tellbut our conversations with senior managers suggest that the first objective ofthe regime has been achieved – they are worried and we have their attention.Let’s hope the final objective is achieved as well.