Blog: Get ready; the Senior Managers and Certification Regime is coming

Gareth Magee, a partner at accountants Scott-Moncrieff, assesses the implications of incoming new Senior Managers and Certification Regime

The financial sector is facing significant transformation.

Changes to the Senior Managers and Certification Regime (SMCR) are coming, and all FCA regulated business will be affected.

While some businesses have already been impacted by the transfer of responsibility, more industries will be affected over the next 12 months; starting with the insurance sector in December 2018. It will become mandatory for all other financial organisations until the end of 2019.

Created in the wake of the 2008 crash, the SMCR accountability framework is already in place for UK banks, building societies, credit unions, branches of foreign banks operating in the UK, and the largest investment firms regulated by the PRA and the FCA.

Until now, the FCA has been responsible for the assessment of approved persons (i.e. an individual who holds responsibility for what the FCA define as a ‘controlled function’). The new regime, however, will mean that much of this work will need to be undertaken by businesses themselves, with the FCA only retaining responsibility for accrediting the most senior leaders in the business. As a result, now is the time to start planning and preparing for the increased assessment burden.

What’s new?

If we remind ourselves of the purpose of the SMCR, it was created to reduce harm to consumers and strengthen market integrity by making individuals more accountable for their conduct and competence. While originally this responsibility fell to the senior leaders previously approved by the FCA (under the Approved Person Regime); the upcoming changes will aim to encourage staff at all levels to take personal responsibility for their actions, as well as make sure firms and staff clearly understand where responsibility lies.

In practice, this will undoubtedly mean a greater administrative burden for businesses which need to assess, provide evidence and retain an audit trail of documentation in relation to all customer facing roles responsible for material risk. However, by the 2019 deadline, all FCA regulated businesses will also need to assume full responsibility for training their staff on compliance issues and responsibilities.

This is likely to put more strain on smaller financial services businesses, which don’t have the resources to oversee this, resulting in significant implications for their internal structure.

How to prepare

Starting at the beginning, the first step will be to establish who in the company will be responsible for overseeing the regime – will it be the business owner, HR or compliance manager? Clarification of this role and what it will entail is vital.

Next on the agenda is to map out the company’s duty of responsibility. Who in the business is responsible for what? Are they customer facing in any way? By clarifying this from the outset, businesses will be able to understand who needs to be reviewed on an annual basis. It’s likely that for the majority, the only employees who will not be impacted will be those on the security, facilities and reception teams.

Once the map has been created, find out who in the organisation has already been approved: they will not need re-approval until the next year. Those who need to be approved will need background checks, training sessions, and their applications submitted for assessment.

Following initial assessments, businesses should establish internal procedures for ongoing training.

For larger organisations, it will likely be cost effective to use the internal training team. For smaller businesses, it may be worth outsourcing the training of staff.

What if the company doesn’t act?

Put simply, an underprepared business puts itself and staff at risk. The new framework will be in place by the end of 2019 and any individual or business that has not prepared will be penalised. While specific ramifications have not been communicated yet, there is no doubt that these will follow.

For those who are ready but do not comply with the regime, the FCA is ready to take that lack of responsibility seriously and has already fined an individual for lack of due diligence.

In May 2018, James Staley of Barclays was fined £642,430 in the first case brought in relation to the SMCR. In its ruling, the FCA noted that Mr Staley didn’t give “due skill, care and diligence in the way he acted in response to an anonymous letter received by Barclays in June 2016”. This has set the standard for non-acceptable behaviour in the future and it is likely that more fines will follow.

With over a year until all FCA regulated businesses will be impacted, the time to act is now. Start taking steps now to review how your business will be impacted, and how best to ensure all staff are prepared. While there will be burden on businesses, especially SMEs, it is vital to address how your business will cope under the new regime to avoid the possibility of significant fines.