SM&CR: The five things everyone’s stuck on

10 October 2019

deadline approaching

The clock is ticking towards the SM&CR deadline, and most firms are well on the way. But it’s not all plain sailing. And the areas people find hardest have a lot in common. Here we look at the top five:

  1. Statements of responsibilities – what, not how
  2. Identification of certified staff – don’t underestimate the complexity
  3. Training and competence – crucial to the Certification Regime
  4. Conduct rule breaches – time to review your disciplinary process?
  5. Firm culture – making it stick after December

If you need help getting over the line, get in touch, or check out our SMCR-in-a-box packages.

 

  1. Statements of responsibilities – what, not how

Every Senior Manager must have a Statement of Responsibilities: a single document that clearly sets out their role and what they are responsible for. The SoR, as it’s known, must be submitted to the FCA via a form on the Connect site.  The early sections of the form are straightforward to complete – they capture details of the individual, the role they perform and their Prescribed Responsibilities under the regime.  Then comes the section of the form called ‘Other Responsibilities’. This is the bespoke section which describes the activities or areas of the business for which the individual is responsible. This is where the difficulty is. Where to start?

We have seen significant variation among our clients in terms of how much detail to write for each responsibility. The FCA is clear that they want SoRs to be succinct – there is guidance suggesting that a maximum of 300 words should be used to describe each responsibility.  Of course, in practice, we found that Senior Managers attempting to draft their own statements of responsibility wrote heavily caveated articulations of how, rather than a succinct outline of what they are responsible for.

Here are Bovill’s three ‘S’s to make sure your SoRs are up to scratch:

  • Straightforward
    The SoR should be clear and easy for anyone to understand: regulators, others in the firm and the Senior Manager themselves. The SoR should contain enough information to clearly describe the Senior Manager’s actual responsibilities and accountabilities, but without unnecessary detail.
  • Self contained
    A SoR needs to be self-contained and not refer to other documents. It should not be drafted as a job description setting out competencies but should exclusively focus on what the Senior Manager is responsible and accountable for – not how they do their job.
  • Senior Manager owned
    Each individual Senior Manager must take ownership for their own SoR; this means they need to be involved in the preparation, and be comfortable with the content, of their statement.
  1. Identification of certified staff – don’t underestimate the complexity

As with banks, many investment firms are finding the Certification regime to be the most challenging component of SMCR to implement. The identification of staff who need to be certified is proving more challenging than the relatively straightforward identification of senior managers. While the senior management functions are clearly defined, many jobs requiring certification can only be identified through careful consideration of the rules.

There are a number of job types posing such a challenge, with the significant management function and client dealing function categories currently causing the most difficulty. In the first instance, significant management functions are not to be confused with senior management functions. The relevant staff are those with significant responsibility for a significant business unit. While the FCA provides examples of such staff, their list is not exhaustive and there is work to be done to define who has this level of responsibility.

For client dealing functions, the criteria will broaden under SMCR. Previously, only those who advise and deal were included. Now, those who deal with clients or client property in relation to such advice and dealing will also be caught. There are staff involved with such activities who are exempt from certification but such exemptions only serve to further complicate the initial task of determining who should be certified.

There is no quick fix – the only solution is to ensure your SMCR project acknowledges the level of complexity that comes with the Certification regime and does not relegate it to the status of secondary concern. In other words, firms need to resist the temptation to unduly focus their resource on the senior managers.

  1. Training and competence – crucial to the Certification Regime

An effective approach to T&C – or training and competence – is critical to complying with SMCR. Ensuring staff qualifications and competencies are aligned with the requirement of the T&C regime will be at the core of the annual certification process envisaged by SMCR. In other words, a well-established T&C regime is key to complying with the new Certification regime.

Following these three steps will help you comply with the T&C regime

  • Managing from the front line There is always the temptation to delegate all the responsibility to HR, but, in reality, this moves the responsibility away from the managers who have the clearest understanding of their charges’ roles. Frontline management should be responsible for their team’s competence.
  • Running an evidence-based process Firms need to be able to justify the certification of all staff. To do this, the correct evidence needs to be gathered – this is evidence that focuses on employee competence and not more commercial concerns like profitability.
  • Welcoming key stakeholder input
    While the front line need to own the certification process, they also need challenge from other interested parties such as Compliance and Human Resources. After all, it is inevitable that the front line will be interested in commercial criteria and the second line can provide some much-needed balance. 
  1. Conduct rule breaches – time to review your disciplinary process?

The conduct rules prescribe a minimum standard of behaviour for all who work in financial services.  Under SMCR, proven breaches of a conduct rule that result in certain disciplinary actions have specific consequences.

The disciplinary actions are:

  • Issuance of a written warning to the individual involved
  • A reduction or claw-back of their salary or bonus (for the misconduct)
  • The suspension or dismissal of the individual.

And the consequences of those actions are as follows:

  • The breach will be notified to the FCA. In practice, in most cases the likelihood of the FCA investigating / acting on the breach is slim, but…
  • The firm is also required to provide details of the breach in any regulatory references provided for at least the next six years.

So proven misconduct is likely to have a seriously detrimental impact upon an individual’s career.  This still holds true if a breach comes to light after the individual has left the firm. If the firm concludes that they would have taken formal disciplinary actions had the individual still been an employee, then they must notify the regulator and issue an updated regulatory reference to the individual’s current employer.

This can be problematic – employment law considerations also have a part to play.  For example, in the past, some firms have used written warnings for relatively minor misdemeanours. This approach might need to be reconsidered, given the long-term and potentially damaging implications for an individual’s career.

So in preparing to meet the new SM&CR requirements, you should carefully revise your disciplinary process, in particular how you deal with minor misconduct proportionately.

  1. Firm culture – making it stick after December

Fostering a strong culture of integrity and compliance is necessary to satisfy the FCA in the new world of SMCR. Central to preparing for SMCR is the administrative workload that comes with compiling statements of responsibility, organisation charts and the general embarrassment of documents required. But it is the embedding of a good culture that will carry these efforts forward after 9 December 2019. While the ideal of good culture is easy to aspire to, realising the aspiration can be a real challenge.

There are three steps every firm can take to help solve the culture question

  • Define “good culture”
    Different firms have different needs and attract different personalities and customers. Each firm needs to determine for themselves what “good” looks like in practice. You need to have an honest discussion involving people from all parts of the business, from the Board to the front desk, about what your customers and the market can reasonably expect of you and ultimately, where you are falling short. Once you have identified the expectations and the problems, you can start to define where you need to be. But remember, this stage of the process needs to be a genuine exercise in self-criticism – if you are starting with the aim of explaining away your shortcomings then it is a waste of time.
  • Measure your success
    Any efforts to define your firm’s desired culture must be followed by the creation of a system that measures the extent to which staff follow it. Those charged with oversight need access to MI that will tell them where the firm is succeeding and where it is falling short of its own values. Failure to embed a good culture will likely result in failures to meet your obligations to your customers and the FCA. You need to identify where failure in specific areas would show evidence of the firm failing to foster a good culture. Your MI needs to record these failures such that key stakeholders can effectively understand where the firm is and where they need to intervene. Ultimately, while it is difficult to measure something as subjective as good culture, you need to find a way to make the intangible tangible.
  • Reward success
    Ultimately, adopting a new culture is asking your employees to change. And this will be particularly tough when a cultural shift requires an overhaul in how a firm does business. It’s vital that employees who make the effort to embrace the new culture are rewarded. This means considering compliance and conduct when setting salaries and calculating bonuses. Those who live the values need to benefit and those who fail to do so need to realise that rewards will not come regardless. Changing remuneration is always challenging, but it’s a necessary step if you are to embed a new culture.

Ultimately, culture can appear an abstract concept that is impossible to tackle in practice. It is crucial therefore that you bring it to life for your firm. After all, any work on SMCR will only paper over the cracks if it does not involve efforts to embed a healthy and firm-specific culture.

Share this