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Benchmark administrators have undergone a significant shift in their operations as a result of being regulated for the first time under the EU Benchmarks Regulation. There’s now another countdown to consider. In less than eight months’ time, they’ll also all be in scope for the Senior Managers and Certification Regime.
The FCA is likely to be challenging firms who cannot demonstrate effective implementation. So, for benchmark administrators, embedding an understanding of the FCA’s expectations, particularly when it comes to culture, is key. It’s now a few months since SM&CR was extended to all financial services firms. On the 7 December 2020 benchmark administrators that carry out no other regulated activities will also come into scope.
Application of SM&CR for benchmark administrators
On the face of it, the regime for benchmark administrators will be less onerous than for other firms authorised by the FCA. There are four key elements which differentiate it from the wider SM&CR:
- The Certification Regime will not apply due to the overlap with Article 4(7) of the Benchmark Regulation, which already requires these firms to ensure that their employees have the skills, experience and competence to do their job.
- Firms will be required to allocate up to four Senior Manager Functions (SMFs), however they will not be required to allocate the SMF16 (Compliance Oversight) and SMF17 (MLRO) roles, due to the overlap with the BMR.
- They will be required to allocate only three Prescribed Responsibilities, rather than the five that apply to other Core firms.
- The Conduct Rules will apply to employees involved in regulated financial services activities at the firm, although the application of these rules will be tailored for firms who are subject to the Annex II regime of the BMR.
SM&CR – the culture challenge
While the high-level requirements of the new regime are fairly easy to understand, SM&CR is not just about compliance, record-keeping and putting policies and procedures in place, it is about culture and mind-set changes. It’s the application of these cultural changes that can cause the biggest obstacles for firms. This is a particular consideration for those firms that are new to FCA regulation, such as benchmark administrators.
The FCA sees improving culture as a ‘huge priority’ for firms and has stated that they’ll increase their supervisory focus on the conduct rules, having found that firms have not always:
- sufficiently tailored their conduct rules training to staff’s job roles
- mapped the rules to the firm’s values
- been able to explain what a conduct rule breach looks like in the context of their business.
This is a challenge for benchmark administrators, because there’s often a reliance on staff not accustomed to FCA regulation or staff that are employed in entities within a group structure. This is even more difficult given that most administrators only became regulated entities in 2018 and their employees are relatively unfamiliar with FCA regulation.
This may mean that, as part of the implementation programme, there will be a need to work across different business lines and geographies in order to start the process of embedding the FCA regulatory regime. Appointing ‘conduct champions’ across the business can help make sure that the cultural shift can continue beyond December 2020.
We’re expecting to see more instances of the FCA challenging firms who have not properly implemented and embedded the regime firmly within their businesses. They’re clearly looking for opportunities to set some examples, by taking action against firms and – more pertinently – those individuals holding Senior Manager Functions whose arrangements and behaviours fall significantly below what is required under the new regime.
Some questions to help you plan for SM&CR
As you plan for the Senior Managers and Certification Regime, you may find the following questions a useful prompt:
- Who are your Senior Managers and what are their core responsibilities?
- Are these responsibilities properly documented and can you articulate them clearly to the FCA?
- Do your governance arrangements align with the new regime, or do you need to make changes?
- Have you got the necessary policies and procedures in place which underpin some of the more administrative elements of the regime (conduct rule breach investigation and reporting, carrying out background checks on staff, training and competence records, etc.), or do they need to be prepared from scratch?
- Have you started to consider the impact that the regime will have on the mind-set of your staff? Do you think that adapting to the requirements of the Conduct Rules will be a step-change for them? What level of training will they need to comply with the rules?
There are many ways to achieve the above, but ensuring that your firm properly meets all of the relevant FCA rules in relation to the SM&CR is not a simple task – and one that needs a certain amount of formality to provide sufficient assurance to all concerned, that the regulatory requirements are being adhered to.
It’s always wise to get ahead of the game and consider how your current internal governance processes stack up against the requirements. For anyone running a financial services firm who has approved person responsibilities, the implications of non-compliance are severe. Understanding the regulator’s expectations and what this means in practice for your firm is key.
We can help
Our consultants have worked with numerous firms to implement the Senior Managers and Certification Regime – from the first wave of banks to regulated financial services firms of every size. We also have a specialist capital markets team who work internationally with organisations affected by benchmark regulations. Whether you need peace of mind that you’re heading in the right direction or support on your project, we can help.