Individual Accountability – Extending the Senior Managers and Certification Regime to all FCA Firms

By Carl Redfern

My reaction to the ‘Accountability 2’ Consultation Paper (CP17/25) is one of initial relief that it has finally been published and some subsequent frustration that it still leaves some significant gaps.

I have not, as yet, looked closely at the Insurance paper (CP17/26) or the details relevant to EEA and non-EEA firms. Undoubtedly there is more that is deserving of comment which will be highlighted in following articles. I have had a brief look at the linked Cost Benefit Analysis document, mostly because I expect that few people will.

I have deliberately not drafted a summary of the proposals, TC-News have already documented a good general assessment of ‘what’ the CP contains (see here if you have missed it). Instead, this article highlights some initial areas of consideration and focus for people trying to get up to speed with the details and the implications for their firms.

Clear and Concise but beware a few errors

The structure of information presented within the main body of the paper is clear and much better than many previous consultations, but beware that there are a few errors and omissions when compared to the draft handbook text.

For example ‘Table 4: Certification Functions’ in section 5.8, lists 8 x Significant Harm Functions (SHF), However, in the draft handbook text in Appendix 1, in SYSC 27.6.3, it lists 9 x SHF, which is consistent with the Accountability 1 list currently in force for the banking regime.

The point is that, the CP main text is mostly a useful and clear description of the requirements of the new regime but that people reading it should also check key details in the draft rules if for example, you are drafting briefing papers for colleagues.

Proportionality Wins!

Prior to publication, FCA consistently talked about the SMCR extension being just that – the new regime already existed and would be rolled out to wider firms. While this is broadly consistent with the content of the CP, they have introduced significant differences for the vast majority of the new firms it will apply to.

The CP sets out the 3 primary tiers of the regime, ‘Limited Scope’, ‘Core’ and ‘Enhanced’ and defines which elements apply to each.

There also remain differences for Banking and Insurance firms, so we potentially have five different ‘flavours’ of SMCR to contend with!

One area of potential complexity is how these tiers will apply to ‘Groups’. In theory, the SMCR applies at the legal entity level, i.e. separately to each regulated legal entity, regardless of how the Group is managed. For a new (not banking or insurance) firm, and certainly any collection of firms, operating within a Group structure, this is a good place to start your thinking. It seems a little odd if within a Group there are firms subject to Enhanced and separately subject to Core and potentially Banking or Insurance regimes, with the different ‘flavours’ applying to the same senior managers. This was an area of a lot of debate when Accountability 1 was implemented amongst Banks and Insurers and will attract a lot of attention this time as well.

Consider the Costs!

It is easy to be critical of the details when a new consultation is published and even to challenge the validity of the approach to deliver the intended outcomes. I think that this CP is a good attempt at replacing Approved Persons with something which should deliver better results and general improvements across the industry. However, the accompanying Cost Benefit Analysis is not a good attempt at all!

The method adopted for the CBA has some obvious flaws and the results are inaccurate and not helpful. They seem to have sent a questionnaire to about 2000 firms and received responses from 227. They then reviewed the results and discounted a material number of the cost estimates as ‘unlikely’!

Following their revisions, they conclude that the average ‘one off’ cost for a Core firm to implement the new regime is approx. £14000, which is about 20% less than the ‘reported’ estimate calculated from the survey results from firms. The estimate used in the CBA for ongoing costs of complying with SMCR for Core firms is £5500, more than 60% less than reported!

Critically, they do not seem to have interviewed Banking firms at all to capture details of the actual costs they have experienced.

Obviously, the CBA is to some extent less relevant anyway, but anyone who really considers the ‘ongoing’ monitoring and operational implications of Certification, annual FIT assessments, Duty of Responsibility, the Senior Manager Regime, Conduct Rules, Training needs etc. even in a relatively small Core firm, would recognise this figure as extremely unrealistic!

If anyone wants to use the CBA detail to help to ‘guess-timate’ potential programme costs, please be very careful. One may approach that might help is to consider that these are heavily estimated figures based on an ‘average’ Core firm. From other figures in the CBA, you can calculate that the ‘average’ Core firm employs about 22 people in total, only some of whom will be subject to SMR, Cert and Conduct Rules.

Based on my experience of working with Banking firms, these cost estimates are grossly understated but if your firm employees 100 staff in total, even using the FCA’s CBA figures, your annual costs could be £25,000.

One interesting extra detail in the CBA though is the estimate of numbers of firms subject to each tier of the regime:

  • Limited Scope: 32,800
  • Core: 13,720
  • Enhanced: 350 (this number is in the main CP)

Spot the Difference and Mind the Gap

Finally, although most elements of the new regime are similar in the detail, to how they were implemented under Accountability 1, the way that some are described has significantly changed. This, coupled with the deliberate separation of key elements between Core and Enhanced Firms suggests that going forward the regulator will be focusing more intensively on some areas.

For example, for Enhanced Firms, the way that ‘Overall Responsibility’ is now described is materially different to how it was positioned in Accountability 1. This was a complex area for many Banks, which was highlighted in FCA Feedback Statement FS16/6 and reinforced in PRA’s updated Supervisory Statement SS28/15. Firms with this obligation will now need to give some quality thought to what it means for them.

For Core firms, although the draft rules are proportionate and have removed a number of key elements from their obligations, these exclusions will not entirely take away the need to consider them. For example:

  • It will remain good practise for all Senior Managers to consider Handover arrangements even if the Handover obligations under the rules don’t apply.
  • Allocating Functions and Responsibilities and managing Statements of Responsibility for Senior Managers will require some of the diligence and record keeping and oversight required for maintaining a Responsibility Map.
  • The Duty of Responsibility and the obligations for Statements mean that in practice many of the requirements for ‘Overall Responsibility’ will be incumbent on all Firms anyway – few would argue that it will be acceptable for important regulated activities within the Firm not to be clearly accountable to a specific senior manager

Missing in Action

It is disappointing that we are missing some key elements of the puzzle. Two obvious areas are the Transitional Arrangements, including any guidance on potential implementation timeline, and the treatment of Appointed Representatives (ARs).

The CP states that FCA will publish a subsequent Consultation Paper to cover Transitional Arrangements, which will include grandfathering, forms, templates and implementation timescales. There will also be a further CP to consider ARs and how SMCR will apply to them and their principles. Given the number of firms and groups that this will be relevant to, how soon this is published is pretty critical. Many firms will find it difficult to respond to this CP by November without some indication of where this is going.

This CP gives no indication of potential dates for these additional consultations.

Also in Section 4.25, they are promising to review the published guidance on Duty of Responsibility, recently published in PS17/9. This will have implications for all Firms because it will directly link to the definitions of Reasonable Steps. This was an area of much debate under Accountability 1. Hopefully, the proposed review will seek to clarify and simplify the requirements, particularly for Core firms but the intended outcome is not specific.

Obviously, we are being subject to the process of ‘complex changing regulation’ and it takes time and requires careful consideration but some guidance, even heavily caveated, would help.

In Conclusion

Even if you can now identify yourself as a ‘Core firm’, don’t underestimate the implications and impact that replacing APER with SMCR will have on your business.

Although we are still waiting for the ‘transitional arrangements’ and details of the timetable it is clear from this CP that your Exec Teams and Senior Managers need to start to mobilise and should expect to spend a good proportion of their time considering this new regime.

Finally, in many of the Accountability 1 firms, Compliance departments held on to the details of the firm’s response to the initiative for many months, pending the resolution of outstanding issues and publication of final rules etc. When the project began in earnest, they most often reached for HR resources to consider Certification. Many of the new firms the extended regime will apply to already have Training and Competence teams, who already do much that is similar to CERT. You could definitely get a leg up by starting there!

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Accountability 2 is Coming!

We’ve recently returned from The Extension of the Senior Managers and Certification Regime conference run by City & Financial and held at the Royal Garden Hotel, London.

The conference was excellent and extremely busy with more than 250 delegates from across numerous sectors of financial services in attendance. Clearly, people are eager to find out more about the extension of SMCR and how it will affect their firms in 2018.

The agenda was certainly packed with one of the highlights being David Blunt’s keynote speech to kick things off. David is the Head of Conduct Specialists at the FCA and he provided some insights into when and how the regime will be extended.

  • The FCA have been running a pre-consultation process and this will continue into 2017 as they get out and about meeting firms and trade associations. The consultation paper will be issued in Q2 this year.

  • Implementation of the extended regime (referred to by David as ‘Accountability 2’ during his speech) will be ‘from’ 2018 and is likely to be phased by type of firm.

  • When SMCR came in for banking in 2016 it applied to approximately 1,000 firms, but with the extension across all FSMA firms, this will grow to 52,000. This is not the sort of thing that can be rolled out ‘over a weekend’.

  • Ultimately, it is The Treasury who will decide on the actual dates for implementation.

  • There are steps firms could be taking now to get ready, for example, conducting a self-assessment of their governance arrangements.

  • Insurers will be subject to SMCR, with the FCA being very keen to avoid having many different regimes for different sectors.

  • The guiding principles of ‘Accountability 2’ will be clarity, simplicity, consistency and proportionality.

Clearly, there’s a lot more detail to come and we’re all very eager to see the first consultation papers published later this year. That doesn’t mean you need to wait until then to kick things off, take a look at our SM&CR – Are you Ready? post to see what you can be doing now to get ready for the regime.

SM&CR – Are You Ready?

In 2018 the three tiers of SM&CR (Senior Managers Regime, Certification Regime and Rules of Conduct) will be extended out to all FSMA firms. Since the consultation process has yet to begin, you may be forgiven for answering “Of course I’m not ready!”. Yet there are things you can be doing right now to prepare your firm for the regime.

In this post, we’ll summarise six steps you should be taking now to help ensure a smooth implementation of SM&CR. Then, over the course of the next few months, we’ll take a more in-depth look at each of these steps.

  1. Gain understanding – familiarise yourself with the current ‘banking’ rules because it will be similar when applied to wider FSMA Firms – Brush up on the details of the existing rules applied to Banking. Don’t be put off by the details, yes, there is complexity down in the weeds but you can gain a good general understanding in a couple of hours.
  2. Form a working group – Planning for SM&CR will be crucial to successfully embedding the regime within your firm. Common feedback from the Banking world was that Senior Managers felt SMR was being ‘done to them’ rather than ‘done by them’. Don’t make the same mistake, form a working group now and engage key stakeholders early.
  3. Identify your Senior Manager, Certification and Conduct populations – Identifying a first draft of these populations early will help to assess the scale of any processes and systems that you will need to implement to support the regime.
  4. Consider Ownership of SM&CR – One of the hottest topics from the Banking sector was around who should own SM&CR. The truth is, there is no right answer to this question. You may want to consider setting up a new department, or it may sit better with HR, or Compliance. What is certainly true is that it will take communication and co-operation across departments to implement the regime successfully.
  5. Review your existing governance arrangements and documentation – Start to review your existing governance arrangements and how they are documented. Remember that the regulator is not necessarily asking you to change your governance arrangements, but they are asking you to confirm them and accept personal responsibility for them and their effectiveness. 
  6. Plan your solution – How are you going to manage SM&CR? What existing processes and systems do you have in place? Perform a gap analysis vs. the requirements of the regime and plan how you will fill any gaps identified. You should expect change – you will have versions of Maps and Statements before ‘live’ but also ongoing change after implementation.

You should also give serious consideration to attending the upcoming Extension of the Senior Managers and Certification Regime event on 31st January 2017. We’ll be there providing advice and demonstrations of our award-winning SMR solution.

Extending SM&CR to all Firms – How to tackle a ‘Super Wicked Problem’ – Carl Redfern writes for TC News Jan 2017

Correctly identifying the nature of a challenge helps us to understand what we need to do and select appropriate strategies to succeed. In this article I will briefly explain what a ‘Super Wicked Problem’ is and why extending SM&CR to all firms falls into this category. I’ll also provide you with some practical advice and tactics for dealing with ‘Super Wicked Problems’.

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Redland have been voted Best Solutions Provider – Senior Managers Regime!

We’re absolutely delighted to announce that we’ve recently been voted Best Solutions Provider – Senior Managers’ Regime by an independent panel of industry professionals at the recent Compliance Register Platinum Awards 2016. We’re very proud of our SMR solution and it’s fantastic that this has been recognised by the industry.

We had a great time receiving the award at the fantastic event held at the Lancaster London hotel last week.

To learn more about our SMR solution, why not give us a call and have a chat, or better yet, book a demo!

Read the press release from the Compliance Register for more information.

 

 

 

 

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Performance Management of Certification – Carl Redfern writes for TC News July 2016

The recent deadline of 7th March for implementation of the Senior Manager and Certification Regimes (SM&CR) has been subject to a lot of focus in the banking community.

By the deadline Firms subject to the new rules were obliged to submit a Responsibilities Map and draft individual Statements of Responsibilities for all Senior Managers, allocate Senior Manager Functions and prescribed Responsibilities and clearly document the Firm’s governance arrangements.

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