People: First on the Regulatory Agenda

The stakes are higher than ever before for individuals impacted by the Senior Managers and Certification Regime (SMCR) in financial services firms. Since SMCR’s introduction in 2016, we’re observing a trend of increasingly strict enforcement action. In fact, in 2018, fines imposed against individuals under the regulation grew to £785,000, up from £436,000 in 2017. To survive and thrive in this regulatory climate, it’s critical that organisations look beyond the procedural and operational elements of compliance. Instead, they have an opportunity to build sustainable strategies for compliance by starting first with their people and using culture to drive change.

A recent study compounds the increased pressure and visibility surrounding the new regime. Last month, The Financial Conduct Authority (FCA) published the findings of its first review of how the regulation has embedded in the banking sector. The results from this review were mixed, with the FCA concluding that, while the industry has made a concerted effort to implement the regime, there are some immediate areas of concern.

In the audit, several key gaps surfaced, which also illuminate opportunities for focus among impacted firms:

  • Demonstrating effectiveness: The FCA concluded that, in many instances, firms were unable to demonstrate that their assessments of certified staff and ongoing evaluation mechanisms were effective.
  • Tailored training: The FCA indicated that many firms did not sufficiently tailor their SMCR training to individuals’ roles, instead providing generic training which potentially limited its effectiveness given the different expectations and requirements for different roles across the regime.
  • Embedding beyond senior managers: The FCA’s most important observation was arguably that firms had been less successful in embedding key elements of the regime below Senior Manager level, noting "there is potentially more significant weaknesses in the implementation of conduct rules for other staff."
  • Regulatory references: Based on the review, the FCA concluded that additional focus could help to improve the quality and timeliness of regulatory references. In particular, the FCA also observed that firms are not always consistent in recording breaches of the Conduct Rules, which could affect the accuracy of references when they are given and poses a risk when firms use these records to ascertain fitness for individuals applying for senior manager roles.

What does this mean?

The FCA has indicated that it will increase its focus on conduct and expects all SMCR firms to ensure they go beyond a tick-box exercise and look to infuse regime best practices into their wider cultures. In addition, firms should look closely at how they provision SMCR training to impacted individuals to ensure that it’s tailored to impacted roles and scenarios. In other words, training should help individuals to clearly understand what a conduct breach looks like for each business area.

Through these findings, we’ve extracted three key opportunities for firms to assess and enhance their SMCR compliance strategies—all commonly anchored in the role of people:

  1. Conduct a cultural audit: Taking the principles of SMCR, conduct an enterprise-wide study of how well these principles have embedded within the organisation. These audits should focus on awareness, accountability, and behaviours.
  2. Review your SMCR training: If you have a single suite of SMCR training, focus on tailoring your focus to individual roles and functions.
  3. Enhance your ongoing evaluation mechanisms for certified staff: Look at how these mechanisms can be tied to measurable outcomes. In each case, firms should be able to demonstrate that these are effective at ensuring accountability and improving culture

To ensure not only compliance, but also sustained organisational performance in a new regulatory paradigm, it’s critical that leaders start by engaging their people. Zeroing in on people-centric change and transformation helps organisations reset mindsets, behaviours, and assumptions to create alignment, motivation, and commitment – while building from the SMCR frameworks organisations already have in place. 

At the end of the day, the key is that leaders harness the spirit and intent of SMCR regulation to build healthy internal cultures that prioritise individual accountability and standards of personal conduct. In doing so, these cultural changes will improve internal capabilities, positively impact customer perception, and drive business performance.