What has happened?
The Financial Conduct Authority (FCA) has indicated that it intends to increase its supervisory focus on the application of the senior managers and certification regime (SMCR) conduct rules.
The FCA has published the findings of a review into how successfully the SMCR is embedded into the banking sector.
The results of this review will be of interest to firms in the banking sector as well as all other financial services firms to which the regime applies or will apply from 9 December 2019.
What does this mean?
The purpose of the review was for the FCA to understand whether there are any issues that warrant more focus from firms and the FCA.
The FCA indicates that it will increase its supervisory focus on the conduct rules.
What did the FCA find?
The FCA interviewed 45 people at 15 banking sector firms, as well as trade associations, the Banking Standards Board, the FCA and the Prudential Regulation Authority.
The FCA concludes that the industry has made a concerted effort to implement the regime and is moving away from basic rules-based compliance towards embedding the regime throughout organisations. Following concerns raised in interviews, the FCA reiterates:
- that it does not expect non-executive directors to act more like executive directors. However, it recognises that, especially in larger firms, the responsibilities of non-executive directors carrying out senior manager functions will often be considerable; and
- the importance of senior managers nurturing a healthy culture in an organisation.
While the FCA found evidence that: (a) processes and controls on approvals of new products and businesses have been tightened, potentially leading to firms being more risk averse around innovation initiatives; and (b) there is some evidence of recruitment challenges for candidates considering a senior manager or certification role, the FCA does not think that these potentially adverse consequences are of concern.
Not everything is so positive though. The FCA notes that most firms questioned under its review could not demonstrate the effectiveness of their assessment of certification staff and the regime for the ongoing evaluation of certification staff and their managers.
The FCA also observes that the evidence from its review suggests that firms do not always sufficiently tailor their conduct rules training to particular staff’s job roles.
In addition, the FCA notes that further progress in implementing the regime is necessary below manager level – that is, at the level of certification staff and conduct rules staff generally.
The majority of firms interviewed by the FCA felt that the industry had some way to go to improve the quality and timeliness of regulatory references. These are required to try to address the potential issue of "rolling bad apples" and the FCA is likely to watch compliance in this area closely. In particular, the FCA also observed that firms are not always consistent in recording breaches of the Conduct Rules, which is something that could affect the accuracy of regulatory references when they are given.
What happens now?
The FCA intends to increase its supervisory focus on the conduct rules. It expects all SMCR firms to ensure that they are embedding the conduct rules in their businesses, including in building on the links between the SMCR and a firm's culture.
Firms already subject to the SMCR should review their existing practices with a view to making improvements (where necessary) in light of the FCA's findings.
Firms that will be subject to the SMCR from December should take heed of this input. For example, they should ensure that training on the SMCR for staff is sufficiently tailored and enables staff to explain what a conduct breach looks like in the context of their area of that particular business.
Hogan Lovells can help. Our team has experience advising a range of authorised firms on governance matters, including the application of the SMCR to banks and insurers, and on the extension of the SMCR more generally. We can assist with each step, including the preparation of in-house training material and review processes.
For those implementing the regime for the first time, we are able to flexibly support you to reflect your firm’s business needs: from running your entire implementation project using a mix of our legal and consulting offering, providing legal advice on the key requirements for you to implement, or via our SMCR Toolkit to help you implement your own project.
Please contact us for more information on how we can help.
Authored by Michael Thomas, Anahita Patwardhan and Yvonne Clapham