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Conduct, risk and the implications of SMCR for fund managers

Amber light of warning for SMCR

Conduct is currently a hot topic in the financial services sector as implementation of the new Senior Managers and Certification Regime (SMCR) approaches. From December 2019, the SMCR, which has applied to banks and large financial institutions since 2016, will also be applicable to asset and fund managers and the wider financial industry. SMCR introduces new administrative, regulatory and conduct requirements as well as the power to impose unlimited fines if fund managers fail to meet the new standards. The emphasis is on making senior managers accountable and ensuring they apply a duty of responsibility when performing their role.

The basics of SMCR
 

SMCR will apply five basic conduct rules to every individual in a firm, no matter how junior. Senior managers will be responsible for their own conduct as well as that of those they manage. They will be required to present a ‘statement of responsibilities’ to the regulator that sets out exactly what they are responsible for. The FCA has also outlined enhanced requirements for large firms whose annual regulatory income is £35 million or more.

In April the FCA issued a reminder that all FSMA authorised firms need to start preparing for the December deadline. Firms have known it was imminent since July 2017 so there is no doubt the regulator will expect compliance by the December deadline. SMCR will have a huge scope: once extended it will cover around 47,000 additional financial services firms and 200,000 individuals.

Getting serious about SMCR
 

The FCA has already started ‘baring its teeth’, so to speak. The recent reminder makes it clear that firms are expected to be prepared, especially as the regime does not significantly differ from the rules that have been applicable to banks for almost three years. The FCA has also demonstrated its willingness to act over conduct, confirming last August that it has opened 12 investigations against senior managers and seven against certified persons. In a white paper published last year, the regulator said that post-financial crisis regulatory initiatives were not enough and that firms must create a culture that embraces the spirit of regulation. The FCA issued its first fine under the SMCR regime last August, which was £1.1 million for misconduct.

Gaining clarity over the spirit of regulation
 

There are, however, some concerns that it’s not entirely clear how the spirit of regulation should be defined, and that there is a lack of clarity around the way the FCA measures integrity and the capability of an individual to work in a regulated role. For example, Director of Supervision for wholesale and specialist investment at the FCA, Megan Butler, has expressed the view that sexual harassment falls under the scope of the SMCR rules. However, most of the FCA’s current guidance relates to regulatory conduct and activity. Whistleblowing complaints to the FCA regarding sexual misconduct and discrimination had increased by 300% by the end of December 2018, so clearly a cultural shift needs to occur in some parts of the sector, but many firms may struggle with the ambiguity of issues like this in the context of SMCR and would benefit from clear guidance on where it fits under fitness and propriety.

Challenges of SMCR implementation
 

The implementation of SMCR is likely to lead to specific challenges for some firms and there have been concerns about unintended consequences of the new rules. Last year, Schroders and Aviva Investors CEOs publicly expressed worries that the regime could actually enhance the hierarchical structure in asset management and lead to senior management taking on all decision-making, even when they do not have the same specialist knowledge as some of the staff below them. These fears were backed up by a recent survey by Thomson Reuters, which spoke to more than 600 compliance and risk practitioners around the world. It found that 70% of respondents see the regulatory focus on conduct and risk as increasing potential personal liability for senior managers.

Obtaining buy-in from international offices
 

The SMCR, while implemented by the UK regulator, is borderless, so firms that have cross-border business may find it especially challenging to keep up with the demands. It’s about accountability so both UK and international staff who take on risk on behalf of the UK need to be aware of their roles and responsibilities. Mapping the senior management population across jurisdictions, engaging early with overseas staff and securing buy-in from international headquarters are all crucial for obtaining SMCR compliance by the deadline.

Taking steps towards compliance
 

Irrespective of the challenges, objections and occasional lack of clarity, the SMCR deadline is looming and firms need to take some important steps to ensure they are ready. Obtaining senior management buy-in is one of the most important factors so that the desired culture is cultivated and considered when it comes to future recruitment too. Any future recruitment procedures will need to be more robust under SMCR and this needs to be taken into account. While senior managers can delegate tasks under SMCR, they cannot delegate responsibility, so roles and responsibilities must be very clearly defined and knitted together.

A large part of SCMR is about providing robust evidence of decisions, rationale and behaviours, so to be adequately prepared, firms must also ensure they have effective oversight tools in place that provide confidence in judgements. Regulators have stressed the importance of aligning business objectives and execution with SCMR. In practical terms, this means making sure job descriptions, objectives and terms of reference all line up with relevant responsibilities under the regime.

The FCA is expected to be writing to all firms with an indicative assessment of their status based on information that the regulator holds, but ultimately it is still the responsibility of individual firms to ensure the regime is adequately implemented by the December deadline. For many firms, especially those with a more complex management structure or international operations, it could be beneficial to capitalise on specialist regulatory and compliance expertise to avoid fines or penalties when the new regime comes into force.

About Lawson Conner

Part of the IQ-EQ group, Lawson Conner is an award-winning investment manager platform and provider of outsourced regulatory hosting and compliance solutions. To find out how Lawson Conner could help with your firm’s SMCR compliance obligations, please don’t hesitate to get in touch:

T: +44 207 305 5810
E: [email protected]

IQ-EQ’s SMCR Core Firm Toolkit

At IQ-EQ, many of our clients are boutique investment managers and advisory firms subject to the light touch ‘core’ regime. For these clients, we are offering a free tailored toolkit to save time and significantly reduce implementation costs. Click here to find out more.